Humana Set to Make Bank on Kindred at Home Hospice Spin Off, Sale

Following the close of the Kindred at Home acquisition in the third quarter, Humana Inc. (NYSE: HUM) plans to spin off and sell the company’s hospice business to capitalize on high market valuations. The company also expects to see substantial cost savings through reduced hospitalizations and skilled nursing admissions as more care moves into the home.

Insurance mammoth Humana in April announced plans to acquire the remaining 60% stake in Kindred at Home for $8.1 billion. This includes Humana’s existing equity value of $2.4 billion from its existing 40% ownership of the business. Humana acquired the 40% stake in 2018, with private equity firms Welsh, Carson, Anderson & Stowe and TPG Capital holding the remaining 60%.

“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 at what we anticipate will be an attractive valuation,” Humana CFO Brian Kane said during a Q1 earnings call. “Immediately following the closing of the transaction, significant deleveraging [is] expected post divestiture of the majority stake in hospice and community care.”

Investors and strategic buyers have had a huge appetite for hospices during 2020 and 2021, making it the most active sector in health care M&A. Valuations have skyrocketed. Hospice multiples reached a record 26x in 2020, according to PWC Research Institute. Overall health care sector multiples hovered near 13.9x, up slightly from 13.8x in 2019.

With Kindred’s scale, Humana stands to gain significantly from divesting its hospice segment, likely seeking a substantial price for the asset. Across all three of its service lines, Kindred at Home cares for 550,000 patients in their residences each year, employing nearly 43,000 clinical staff in locations throughout 40 states.

Kindred at Home’s home health operations will be integrated under the CenterWell brand of Humana’s Home Solutions business segment. CenterWell is a payer-agnostic entity, meaning the organization cares for patients even if they are not members of a Humana plan.

Demographic tailwinds and rising demand for hospice care will likely make Kindred at Home an attractive acquisition target, and Humana is likely to see significant gains from the prospective transaction, according to a recent report from the M&A advisory firm Mertz Taggart.

“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,” Cory Mertz, managing partner of Mertz Taggart. “The 11x multiple was negotiated at the time they acquired Kindred back in 2018. Back then, if you looked at the home health and hospice combined, an 11x multiple was considered ‘market’ for an agency of that size. In hindsight, it was a great deal for Humana for both business lines.”

The 2018 deal included a “built-in option” for the two private equity firms to sell their 60% stake to Humana after three years at a multiple of between 10.5x and 11.5x, reported Mertz.

In addition to revenue generated by Kindred at Home or a forthcoming hospice sale, Humana is likely to realize significant cost savings. Better access to home health and hospice services can help reduce expensive, high-acuity care in hospitals or skilled nursing facilities. This was a significant factor in Humana’s decision to pursue the acquisition.

Going forward, Humana has signaled that it prefers to partner with hospices through a preferred provider network rather than offer those services through a subsidiary. This includes the company’s participation in the U.S. Centers for Medicare and Medicaid Services (CMS) Value-Based Insurance Design (VBID) demonstration, which will test coverage of hospice through Medicare Advantage. Stakeholders often refer to the program as the “Medicare Advantage hospice carve-in.”

Humana operates more of the participating health plans than any other insurance company. Those plans are concentrated in five markets that include Atlanta, Cleveland, Denver, the Louisville, Ky., metro area (including southern Indiana), and the Richmond-Tidewater region of Virginia. Kindred at Home’s footprint overlaps with about 65% of Humana’s individual Medicare Advantage membership.

“Our full range of clinical capabilities , which will be even broader now with our recently announced acquisition of Kindred at Home, [will] uniquely position us to help improve the health of our country’s most vulnerable populations,” said Humana President and CEO Bruce Broussard. “The home is highly effective not only in making access to care more convenient for people, but it also allows us to understand their environment and help them address other barriers that limit their ability to improve their health.”