The thought process behind Humana’s Kindred at Home transactions

In its math behind its 2021 Kindred at Home deal, Humana Inc. (NYSE:HUM) had to weigh the potential cost savings and lucrative divestment of palliative care against labor pressures in the space, as well than the complexity of scaling home care in a fragmented industry.
Last year, Humana acquired full ownership of Kindred at Home after buying out its two private equity partners for $5.7 billion. In 2018, the company acquired a 40% stake in the home healthcare, hospice and personal care provider, with private equity firms Welsh, Carson, Anderson & Stowe (WCAS) and TPG Capital owning the remaining 60%.
The company’s upcoming divestiture of the palliative care segment mirrors the 2018 deal with the same 60/40 split. Humana signed a definitive agreement last month to sell a 60% stake in Kindred to private equity firm Clayton, Dubilier & Rice (CDR) for $2.8 billion. Humana will retain the remaining 40%.
While generally seen as smart moves, these deals weren’t necessarily easy decisions, according to Humana Chief Financial Officer Susan Diamond, speaking at Bank of America Securities’ annual healthcare conference in Las Vegas. .
“Our interest in Kindred was specifically [from] the belief that more care could, should and would be provided at home [and] that it’s a better service site for many services,” Diamond said. “What we have found is that some of the barriers to this large-scale action have always been the lack of access to a national home health workforce. Industries were fragmented, so even if the largest home health agency has a single-digit market share, it can be very difficult to scale home care delivery models without access to a nationwide platform.
For example, Kindred at Home is the largest provider of home health services by market share in the United States and the second largest provider of palliative care, according to LexisNexis. Nevertheless, the Humana subsidiary retains 6% of the national market share for home healthcare and just under 3% for hospice.
The main motivations behind Humana’s Kindred at Home transactions were the anticipation of cost savings resulting from reduced hospitalizations and the recognition that more consumers prefer to receive care at home. This, coupled with proceeds from the upcoming sale of the Kindred palliative care segment, promises to be a double win for the insurance giant.
“Our belief is that if you adopt a total cost of care mentality for home health, you can bring significant value to the health plan in terms of total cost of care savings, while driving additional penetration into Kindred and benefiting from this margin” says Diamant.
With the CDR deal waiting in the wings, the company also stands to gain from record valuations in the palliative care M&A market, which reached 26 times in 2020, the Health Research Institute of China reported. PwC.
Humana expects the sale at a value of $3.4 million, with an expected cash payment of approximately $2.8 billion. After the close, the company plans to use most of those funds for debt repayment and share buybacks, executives said in a first-quarter earnings call.
Across its three service lines, Kindred at Home serves 550,000 patients each year and employs nearly 43,000 clinical staff in 40 states.
These numbers are likely to increase if Humana’s plans come to fruition.
The company expects to see “significant opportunity” over the long term to scale its primary and homecare business lines, with further details likely to come in the fall, Diamond said. This will be particularly important for patients who have complex healthcare needs and relatively high hospitalization rates.
“One of the reasons we were interested in purchasing Kindred [was] our belief given the profile of patients they tend to serve, which tends to be a more complex comorbid patient who is 5 times more likely to be hospitalized due to the complexities they navigate,” Diamond said. “We believe there is a significant opportunity to provide home health care more comprehensively and to more holistically identify and respond to patient needs.”