When Humana Inc. (NYSE: HUM) joined forces with TPG Capital and Welsh, Carson, Anderson & Stowe (WCAS) to acquire Kindred Healthcare in July 2018, it saw an opportunity to test out the home health waters.
As a result of that $4.1 billion deal, Humana landed a 40% stake in Kindred at Home, with the aforementioned private equity giants controlling the remainder. After determining those waters were to its liking, the Louisville, Kentucky-based health insurer decided to dive deeper and acquire all of Kindred this April for $5.7 billion.
More than revenue upside or future financial gains, Humana saw the move as a way to keep its members healthy, happy and out of costlier health care settings.
“We continue to invest in assets that allow Humana to better manage the holistic needs of our members and patients by expanding care in the home, including primary care, telehealth and emergency room care, while also addressing social determinants of health,” Humana President and CEO Bruce Broussard said when the deal was first announced. “Since our initial investment in Kindred at Home, in partnership with [TPG and WCAS] and Kindred at Home management, we’ve learned a great deal about the home health space and recognize the significant value we can deliver to members and patients by integrating this asset into our holistic approach to care.”
There’s plenty to like about this move for Kindred shareholders, so let’s take a closer look.
Home health, hospice and home care assets have hit record multiples over the past several months, particularly when those assets are larger in scale. Apart from Kindred at Home’s ability to keep Humana members out of the hospital, a full acquisition made sense from a dollars-and-cents perspective.
Humana is acquiring 100% of Kindred for an all-in financial commitment of roughly $7.1 billion (a $5.7 billion purchase price for the final 60% and an initial weighted investment of $1.4 billion). After doing the math, the transaction EBITDA multiple comes out to roughly 11 times － a relative steal for a home health business of Kindred’s size.
“The market multiple for a home health business with the scale of Kindred is significantly higher than 11x. So Humana is getting a fantastic deal from a valuation perspective,” Mertz Taggart Managing Partner Cory Mertz commented, “But the real value to Humana will be realized in savings across their membership base.”
The 2018 deal between Humana, TPG and WCAS included a built-in option for the PE firms to sell their 60% stake to Humana after three years at a multiple of between 10.5 and 11.5 times.
There’s a chance that Humana’s Kindred play turns out even better, too.
Once Humana acquires all of Kindred at Home, it will rename the business under its “CenterWell” brand. It then plans on separating Kindred’s hospice and personal care capabilities through a sale or spinoff, capitalizing on the sky-high demand for those service lines.
“We expect that we will be able to capitalize on a robust market for hospice assets by divesting a majority stake in that portion of the business in what we anticipate will be an attractive valuation,” Humana CFO Brian Kane said during a Q1 earnings call.
It’s not that Humana doesn’t see the value of end-of-life care. Rather, the company’s leadership team sees ample opportunity to deliver hospice care through partnership models.
Humana is just one of 53 direct-contracting entities under the new value-based care initiative from the U.S. Centers for Medicare & Medicaid Services (CMS), giving it an edge on the partnership front. Within direct-contracting models, providers can assume 100% of the risk associated with eligible patients in the “global” option or 50% of the risk under the “professional” option.
Additionally, Humana will likely be able to find more hospice and palliative care partnerships as those services are progressively carved into Medicare Advantage (MA).