Humana to Buy Home Care Unit Amid Year-End ‘Vertical’ Deals

Undaunted by a year that began with federal regulators nixing mega-mergers between Anthem Inc. and Cigna Corp., and Aetna Inc. and Humana Inc., over anticompetitive concerns, the nation’s major health insurers continue to pursue multi-billion-dollar deals at the end of 2017. Humana, in the latest example of the health care industry’s rapid push toward vertical integration, said Dec. 19 it will acquire a 40% minority interest in Kindred Healthcare, Inc.’s home care division for about $800 million through a joint venture with two private equity firms. Total value of the complicated, broad transaction, which includes a specialty hospital business, is estimated at $4.1 billion; it is expected to close in summer 2018, subject to regulatory approval.

Kindred is the nation’s largest home health provider, and Louisville, Ky.-based Humana said it believes a key component of the next generation of its integrated care delivery model “is the ability to provide care to consumers, including Humana members, in their home, meeting them where they want to be, in a preferred lower cost setting.” The insurer said theA transaction will give it extensive geographic coverage, with approximately 65% overlap between Kindred and Humana’s individual Medicare Advantage (MA) membership. Humana asserted that the deal will drive its business transformation and maximize its “platform agility.”

“This is the latest in what has become the essential strategic move for health insurers: combining forces with providers,” Joe Paduda, principal with Health Strategy Associates, LLC, tells AIS Health. Humana’s deal with Kindred “will cut Humana’s home health care costs, a big chunk of insurer’s medical expenses,” he says. “Shifting patient care from inpatient to home settings is a critical part of Humana’s strategy, and one that will become increasingly important as pressure increases on Medicare Advantage plans.”

Over the longer term, Paduda says, “expect Humana to leverage Kindred’s care delivery data to better manage patients with chronic conditions, thereby reducing admissions and medical costs.”

Two weeks prior to the Humana/Kindred announcement, UnitedHealth Group’s Optum unit said it had reached an agreement to buy multistate DaVita Medical Group for $4.9 billion in cash. That deal, too, is anticipated to close in 2018, subject to regulatory approval, as is CVS Health Corp.’s $69 billion acquisition of Aetna announced Dec.
Amid this December flurry of health care industry M&A activity, some Wall Street analysts describe the Humana/Kindred transaction as making strategic — and financial — sense. Among them:

Oppenheimer & Co. analyst Michael Wiederhorn said that, overall, the transaction “gives Humana a platform to move into the home at a manageable cost.” He said his firm continues to believe that health insurers “will benefit from vertical integration as a way to lower costs and gain information.” Wiederhorn noted the deal is structured so that Humana will own the Kindred at Home business outright in three to five years. He said this is “consistent with [Humana’s] desire to be in the home, and also similar to vertical integration strategies seen across the healthcare continuum.”

“Following the breakdown of its transaction with Aetna, Humana has continued to discuss potential acquisitions, and home health has been at the top of the list. Similarly, vertical integration has continued to be a key strategy across healthcare, with [UnitedHealth] continuing to gobble up provider businesses and Aetna and CVS [Health Corp.] looking to merge,” Wiederhorn said in a Dec. 19 note to investors.

Cowen & Co. analyst Christine Arnold said Humana has indicated for some time “that building out its healthcare services platform organically and through M&A was top priority, with a particular focus on acquiring primary care and home health assets.”

Arnold also told investors in a Dec. 19 note that her firm believes Humana “remains open to a potential acquisition” — but the Kindred deal, coupled with Humana’s recently announced share repurchase, would indicate that a near-term offer is likely not in the offing. She said Humana “still represents an attractive asset for managed care competitors or other industry players contemplating vertical integration” — and adding care delivery assets likely enhances the company’s long-term attractiveness.

According to Arnold, Humana will give Kindred the capabilities to transform the home health model into a value-based care platform. “Furthermore, the data sharing between the two companies will likely improve [Humana’s] analytics and predictive modeling capabilities, allowing the company to develop deeper insights in order to better care for its members,” she said.

by Judy Packer-Tursman

Adapted from the 12/25/17 issue of AIS’s Health Plan Week