UnitedHealth-LHC Group Deal ‘Ups The Ante’ For Rest Of Home Health Industry

UnitedHealth Group (NYSE: UNH) – and its subsidiary Optum – completed the $5.4 billion acquisition of LHC Group on Wednesday.

Now, the real work starts. We had to wait nearly a year for the deal to close, and we’ll have to wait longer to see the companies’ desired strategy come to fruition.

But we can still read the tea leaves now, and throughout LHC Group’s integration period.

What UnitedHealth Group looks like with one of the top three home health providers in the country underneath its umbrella is as interesting of a question as any. But, at the same time, I’m also curious how this drastic change will impact the rest of the home health industry.

“For the marketplace overall, this ups the ante,” Mark Kulik, the managing director of M&A advisory firm The Braff Group, told me Thursday. “You’ve got the two dominant Medicare Advantage (MA) providers – Humana Inc. (NYSE: HUM) and UnitedHealth – that have now made major decisions to buy home health and hospice capabilities. And I think that dramatically changes the total marketplace, because this is not just going to be a cottage industry.”

Indeed, the MA space, which home health providers have been at severe odds with, has now swallowed up two of the industry’s biggest standalone players in Kindred at Home – now CenterWell Home Health – and LHC Group.

How that could change things, how M&A will be affected and what LHC Group’s integration into Optum may look like are the topics of this week’s exclusive, members-only HHCN+ Update.

LHC Group is back – sort of

Because of the pending deal, LHC Group has been out of the limelight for many months. Its leaders’ thoughts and any other business updates have been hard to come by.

In between the announcement of the deal in March 2022 and Wednesday’s completion of it Wednesday, LHC Group has only made minor moves – an acquisition here and a joint venture there.

Acquisitions will likely take a backseat as the integration process unfolds. After that, however, it would make sense to acquire home health locations in areas where UnitedHealthcare has a presence but LHC Group does not.

Hospital JVs, however, are arguably an even bigger part of the overall Optum puzzle. After all, LHC Group has hundreds of them, and that gives both Optum and UnitedHealthcare the opportunity to step in and control outcomes up and downstream while keeping cost of care down.

“It is clear that commercial payers are realizing how essential in-home care is to their value-based strategies,” Mertz Taggart Managing Partner Cory Mertz told me.

With LHC Group, its hospital partners, Optum and UnitedHealthcare all in the mix together, a larger value-based care strategy can more easily take hold – and at scale.

“About half of those lives looked after by home and community are in geographies where we have no clinics,” UnitedHealth Group CEO Andrew Witty said in late November at the company’s investor conference. “So the home and community platform itself gives us yet another opportunity to extend the notion, the idea that we believe in – that comprehensive value-based care delivers better medical outcomes, better quality for patients, a better role for providers and crucially better value for money for payers.”

Specifically, LHC Group operates 527 home health locations, 320 of which are fully owned by the company, and 203 of which are majority-owned by it through joint ventures. It also owns 159 hospice locations, 96 of which are fully owned by the company, and 61 that are majority-owned by it through joint ventures.

Additionally, the company operates 11 long-term acute care hospitals at 12 locations. It also has Imperium Health Management, an accountable care organization enablement and management company.

“The other unique factor that [UnitedHealth Group] will take advantage of is all of those relationships that LHC has with hospitals,” Kulik said. “I think we’ll see continued growth with joint venture deals, especially now that you’ve got a hospital looking at a high quality home health and hospice provider, but also looking at the payer behind it when they talk to LHC Group about a joint venture. I think there’s a definite strategic advantage that I would expect them to leverage in the future as the dust settles on the transaction itself.”

In the coming months, there will be more to integration than just operational alignment. There will also be an effort to align culturally between UnitedHealth Group, Optum and LHC Group.

In cases such as these, recruiters will likely be coming for key LHC Group executives, Kulik said.

That is undoubtedly something to keep an eye on – whether LHC Group’s leaders remain at their posts during the integration period. Retaining them, and leveraging their experience to bring the home health and hospice network fully into the fold, will be a tough undertaking.

In the meantime, UnitedHealth Group – and specifically UnitedHealthcare – has its own regulatory headwinds to overcome.

“UnitedHealth Group’s growth strategy for its health benefits business is heavily focused on growing in Medicare and Medicaid. This strategy entails both reimbursement and regulatory risk,” a note from the investment banking company Stephens read. “Increased competition in the Medicare Advantage market represents a risk to UnitedHealth Group’s core business line along with regulatory and reimbursement updates.”

What’s next for home health care

More MA business is an operational burden on home health agencies. It’s harder to see through and it yields less money.

Yet, taking on more of that business is one of the focuses of almost every sizable home health provider in 2023.

The reality, however, is that the companies with the two largest shares of the MA marketplace now have major home health networks in house.

It makes sense, then, that Amedisys (Nasdaq: AMED) and CVS Health’s (NYSE: CVS) Aetna – which has the fourth largest MA share – were so willing to engage on an innovative case-rate model for home health services at the end of last year.

There is still plenty of MA business out there, and there’s even more demand for home health services. But Humana’s and UnitedHealth Group’s home health acquisitions do change things.

“If you can look at Humana and Kindred as an example – because this is kind of the same scenario – Kindred has been quiet on the M&A front,” Kulik said. “I think they’ve been focused internally, rightly so. They’re going to be working on how to redirect referrals internally and capture that synergy.”

Having home health companies within Humana and UnitedHealth Group could improve MA-home health relationships. It also could worsen them, as two of the largest plans now have their own home health and hospice delivery vehicles.

Certainly, the completion of this deal will be upping the ante on that front, as Kulik said.

The deal’s price tag could also further home health interest from the buyer side, particularly among private equity firms.

“When a mature health care services company ultimately sells for over 30 times EBITDA, it certainly draws positive attention from private equity investors,” Mertz said.

There’s a lot of opportunity from that buyer side right now. Home health providers are adjusting their businesses to adapt to a new payer landscape. Infusions of capital can help move those transitions along.

“Private equity recognizes the demand trends are extremely compelling,” Rebecca Springer, senior health care analyst at Pitchbook, told me earlier this month. “There’s a need for capital there. There are a lot of small, independent agencies that aren’t well-positioned to survive in the current climate – to do Medicare Advantage contracts, to do value-based purchasing. So there’s a huge opportunity there. It’s just a matter of a little bit more caution on the private equity side to make sure that the discounted cash flow model shows something that’s workable.”

Ultimately, the takeaways from the deal completed Wednesday are both good and bad for home health industry leaders. The value of home health care is certainly recognized within some of the largest health care companies in the country.

But that is mostly recognizable in the home health companies that can drive value themselves, show that value through data and take on risk.

As of now, those providers are few and far between.

“This is an industry that’s maturing dramatically, and I think the use of data is going to be paramount,” Kulik said. “The integrated care plans, we’ll see more and more of. And if you’re just a standalone, small mom and pop, those are resources you may not have. You’re not plugged into a payer, you don’t have deep analytical capabilities, you don’t have the ability to take on risk.”