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On May 3, Amedisys Inc. (Nasdaq: AMED) and Option Care Health (Nasdaq: OPCH) issued a joint press release announcing their intent to merge.
By June 5, those plans were complicated, with Amedisys revealing it had received a competing bid from UnitedHealth Group’s (NYSE: UNH) Optum. They were then scrapped entirely when, on the morning of June 26, Amedisys and UnitedHealth Group executed a transaction agreement of their own.
“The combination of Amedisys with Optum unites two organizations dedicated to providing compassionate, value-based comprehensive care to patients and their families,” Amedisys wrote in an announcement.
The Optum-Amedisys deal is now under regulatory review, with the pair anticipating a 2024 closing date. When that time comes, it will mark a new chapter for the home health industry, with two of the largest providers owned by UnitedHealth Group’s health care services subsidiary.
For many industry insiders, I’m sure all this change feels fast and furious. In reality, though, it’s been happening gradually since the shift to the Patient-Driven Groupings Model (PDGM) and the onset of the COVID-19 pandemic in 2020.
The Amedisys, Optum, Option Care Health saga reflects that idea.
Between 2020 and April 2023, members of Amedisys senior management and its representatives were contacted by a number of potential transaction counterparties. Those parties included Option Care Health, UnitedHealth Group and multiple other suitors, which typically fell into three categories: payers, strategics and financial sponsors.
Generally, Amedisys and its leaders historically felt the best path forward was to operate as a standalone company. By last fall, in part due to emerging headwinds in the industries Amedisys operates in and various forecasts, that tune started to change, filings with the U.S. Securities and Exchange Commission (SEC) suggest.
“Between October 2022 and March 2023, members of Amedisys’ senior management contacted or were contacted by a number of potential transaction counterparties,” an Aug. 10 filing states. “In five instances, Amedisys entered into confidentiality agreements with such counterparties, provided limited confidential information to such counterparties … and had engaged in preliminary exploratory meetings with such parties.”
I revisit the Amedisys-Optum news, highlighting previously unreported details documented in that SEC filing, as part of this week’s exclusive, members-only HHCN+ Update. Read on for my four key takeaways.
1. UnitedHealth Group’s interest in Amedisys goes back to at least 2020
UnitedHealth Group and Amedisys had previously discussed a possible acquisition – more than once. Conversations, in fact, go back as early as 2020.
The two companies had plenty of opportunities to discuss collaborations and strategic initiatives, with UnitedHealth Group being one of Amedisys’ most significant customers.
“In the course of these discussions in 2020, and continuing into early 2022, Amedisys management and [UnitedHealth Group] management engaged, from time to time, in various preliminary discussions regarding a potential acquisition of Amedisys … ,” the Aug. 10 filing notes.
Near the end of 2021, for example, UnitedHealth Group floated an all-cash transaction at a price representing a premium of approximately 28% of Amedisys’ closing trading price on Oct. 15. The health care giant also made a verbal indication in January 2022 that it’d be interested in possibly making an offer at a valuation range representing a premium of approximately 48% to the closing trading price of Amedisys stock on Jan. 7, according to the SEC filing.
But Amedisys was bullish on the home health industry’s long-term tailwinds and its ability to bounce back from COVID-19 disruptions. The Baton Rouge, Louisiana-based company was also high on its Contessa business, which it acquired in June 2021 for $250 million.
In turn, Amedisys determined the proposals did not represent “superior value” compared to its value as a standalone company. The Amedisys board told UnitedHealth Group that the company was focused on its fourth quarter financial results and operating performance, but it would “remain open to considering acquisition offers” in the future.
In December 2021, Amedisys began making preparations for that possibility.
“To ensure that it was sufficiently prepared for any potential offer, the Amedisys board further determined that Amedisys management should explore the engagement of an outside strategy consultant to conduct a market evaluation, as well as one or more outside financial advisors,” the financial filing states.
Between February 2022 and March 2023, representatives from Amedisys and UnitedHealth Group engaged in “a number of discussions regarding commercial transactions and arrangements between the two companies” in the ordinary course of their businesses. The concept of a strategic transaction occasionally popped up, but didn’t get to the point where confidentiality agreements were enacted.
2. Option Care was competing in a crowded field from the start
Leaders from Option Care Health and Amedisys met in May 2022 at the Bank of America Merrill Lynch Global Healthcare Conference in Las Vegas, Nevada, to talk about preliminary results of a pilot program related to antibody infusion COVID-19 treatment. Key executives also discussed strategic partnerships at that time, though no economic terms were discussed.
A group from Amedisys then visited Option Care at its Itasca, Illinois, facility on Aug. 15 last year, with conversations also touching on Contessa. Again, no economic terms were discussed, according to the SEC filing.
Interest in a more formal partnership arrangement picked up in following weeks and months. Finally, in December, Amedisys and Option Care leaders brought up the idea of a transaction. The group included Amedisys Chairman and Interim CEO Paul Kusserow, along with Option Care CEO John Rademacher.
“As discussions regarding a potential strategic relationship and other collaborative commercial opportunities progressed, the attendees preliminarily discussed the potential for a larger strategic transaction involving the combination of both companies,” the financial filing details.
Those conversations picked up steam through the end of the year and in early 2023, with Rademacher outlining key terms during a Feb. 26 phone call with Kusserow, with a formal letter following soon thereafter.
Ultimately, after engaging in some back-and-forth negotiations, carrying out the usual due diligence and conducting board meetings, Amedisys and Option Care executed a merger agreement on May 3.
Of course, UnitedHealth Group’s Optum came into the picture about a month later.
But a transaction involving Amedisys was never a two-horse race, the financial document explains.
In November 2022, Amedisys and “representatives of a financial sponsor with a portfolio company in the hospice industry” entered into a mutual confidentiality agreement to facilitate exploratory discussions. This entity is referred to as “Party A.”
As those talks progressed, Amedisys’ suitor attempted to also loop in “a partner in the home health industry,” referred to as “Party B.”
By the end of January 2023, at least one other prospective buyer – known as “Party C” – became involved in the action. Amedisys had conversations with all three during the JP Morgan Healthcare Conference in San Francisco.
“During the JP Morgan Healthcare Conference, members of Amedisys’ senior management had business development discussions with various parties, including representatives of Party A and Party B, as well as representatives of a financial sponsor, which we refer to as ‘Party C,’ that indicated an interest in engaging in exploratory discussions regarding a potential acquisition of Amedisys,” the SEC document states.
Amedisys told the parties to follow up with Amedisys after the conference, but only Party C did so. Conversations with Party A and Party B effectively ended.
Yet another possible buyer – known as “Party D” – threw its hat into the ring shortly after that, but those talks ended after a “few weeks,” which included at least one in-person meeting. Conversations with Party C ended before the end of February.
“On Feb. 9, 2023, Amedisys and Party C entered into a mutual confidentiality agreement to facilitate discussions with respect to Party C’s interest in pursuing an acquisition of Amedisys,” the SEC document reads. “Following delivery of limited confidential information, Amedisys determined that Party C was no longer interested in pursuing further discussions and no further discussions were had with Party C regarding a potential transaction.”
3. Other payers were involved
The concept of the “payvider” isn’t new in health care – or home health, specifically. In many ways, Humana Inc. (NYSE: HUM) became the prime example of the home health payvider after it acquired Kindred at Home with a consortium of private equity firms.
UnitedHealth Group, the parent company of UnitedHealthcare and Optum, also became a major home health payvider when it closed its deal to acquire LHC Group.
In reading through the Aug. 10 SEC filing, I learned that at least two other payers were actively interested in buying Amedisys.
The partner in the home health industry that the hospice financial sponsor attempted to loop in – Party B – was actually a health care insurance party, the financial filing notes.
The prospective buyer known as Party D was another health insurance company.
It’s impossible for me to say without a shadow of a doubt which insurance companies were behind Party B and Party D, but the list of suspects isn’t very long. In the case of Party B, the list of insurance companies with close ties to PE-backed hospice organizations is even shorter.
4. The impact of CMS can’t be overlooked
For the U.S. health care system, the COVID-19 pandemic accelerated a shift toward the home that had already started. Prior to 2020, older adults increasingly preferred to age in place – a trend picking up further as baby boomers aged.
But the pandemic – out of necessity – showcased how many services can be seamlessly provided outside the walls of traditional medical facilities. This showcase included the rise of hospital-at-home programs and models that replicated what skilled nursing facilities (SNFs) do. Often, such models involve home health providers.
At the same time, as care has shifted into the home, there’s been a growing appreciation among many health care stakeholders that the home is the lowest-cost care setting.
These three ideas are just three of the long-term tailwinds behind the home health industry. In light of them, it was widely expected that the U.S. Centers for Medicare & Medicaid Services (CMS) would invest in the Medicare Home Health Benefit.
This expectation factored into Amedisys’ calculus when the company stood behind its future as a standalone company amid acquisition interest multiple times in 2021 and 2022. As of Feb. 28, 2022, Amedisys internal forecasts foresaw an increase in reimbursement and payment rates under applicable CMS rules, the SEC filing notes.
That hasn’t played out as expected.
CMS began phasing in a permanent downward payment adjustment to PDGM in 2023 because the agency believes it has been overpaying providers. Looking ahead to 2024, CMS is proposing further cuts.
These CMS actions changed how Amedisys saw the future.
“On June 17, 2022, and Oct. 31, 2022, CMS released the CY 2023 Proposed and Final rule, which reflected a -4.2% (proposed) and 0.0% (final) Amedisys specific impact, which significantly departed from the expectations and forecasts for the contents of upcoming CMS rule changes held by the Amedisys Board and Amedisys senior management team during October 2021-March 2022,” the SEC filing states. “The change in CMS rules resulted in a reduction of $30,000,000 to the 2023 EBITDA presented in the preliminary Amedisys 2022 LRP.”
In the three months following the first of the CMS proposed rules on March 30, 2022, the price of Amedisys common stock declined from over $172 per share to $105.12 per share, as of June 30, 2022.
That reflected, in Amedisys senior management’s viewpoint, the “perspective of the market with respect to the impact of CMS’ proposed rules and the clawback on Amedisys’ long-term prospects.”
The CMS rate cuts and approach to PDGM aren’t the only factors that led Amedisys to seriously consider an acquisition. But after reading through the company’s Aug. 10 filing, it’s clear to me that they played a role in opening that door.