The Thought Process Behind Humana’s Kindred at Home Transactions

In its calculus behind its 2021 Kindred at Home deal, Humana Inc. (NYSE: HUM) had to weigh the potential cost savings and lucrative hospice divestiture against the labor pressures in the space, as well as the complexity of scaling home-based care in a fragmented industry.

Last year, Humana acquired total ownership of Kindred at Home after buying out its two private equity partners for $5.7 billion. The company in 2018 had acquired a 40% stake in the home health, hospice and personal care provider, with the private equity firms Welsh, Carson, Anderson & Stowe (WCAS) and TPG Capital holding the remaining 60%.

The company’s forthcoming divestiture of the hospice segment mirrors the 2018 agreement with the same 60/40 split. Humana last month signed a definitive agreement to sell a 60% stake in Kindred to the private equity firm Clayton, Dubilier & Rice (CDR) for $2.8 billion. Humana will retain the remaining 40%.

While generally perceived as smart moves, these deals were not necessarily easy decisions, according to Humana CFO Susan Diamond, speaking at the Bank of America Securities annual Healthcare Conference in Las Vegas.

“Our interest in Kindred specifically was [from] a belief that more care could, should and would be delivered in the home, [and] that it’s a better site of service for many services,” said Diamond. “What we found is that some of the barriers to doing that at scale historically have been a lack of access to a national home health labor force. The industries were fragmented, so even though the largest home health agency has a single-digit market share, it can be very difficult to scale home-based care delivery models in the absence of having access to a national scale platform.”

For instance, Kindred at Home is the largest provider of home health services by market share in the United States and the second-largest hospice provider, according to LexisNexis. Nevertheless, the Humana subsidiary maintains 6% of the national market share for home health and slightly less than 3% for hospice.

The prime movers behind Humana’s Kindred at Home transactions were anticipation of cost savings from reduced hospitalizations and the recognition that more consumers prefer to receive care in the home. This — coupled with the proceeds of the forthcoming sale of the Kindred hospice segment — promises to be a double victory for the insurance giant.

“Our belief is that if you bring a total cost of care mindset to home health, you can drive significant value to the health plan in terms of savings on total cost of care, while also driving additional penetration into Kindred and benefiting from that margin,” Diamond said.

With the CDR deal waiting in the wings, the company also stands to gain from the record-high valuations in the hospice M&A market, which reached 26x in 2020, reported PwC’s Health Research Institute.

Humana anticipates the sale to value at $3.4 million, with a projected cash payment of roughly $2.8 billion. Post-closing, the company plans to apply the bulk of these funds to debt repayment and share repurchases, executives indicated in a first quarter earnings call.

Across all three of its service lines, Kindred at Home cares for 550,000 patients each year and employs nearly 43,000 clinical staff in locations throughout 40 states.

Those numbers are likely to rise if Humana’s plans come to fruition.

The company expects to see “significant opportunity” in the long-term for scaling its primary and home-care business lines, with further details likely coming in the Fall, said Diamond. This will be particularly key for patients who have complex health care needs and relatively high rates of hospitalization.

“One of the reasons that we were interested in buying Kindred [was] our belief given the patient profile they tend to serve, which tends to be a more complex, comorbid patient who is 5-times more likely to be hospitalized because of the complexities that they’re navigating,” Diamond said. “We have had a strong belief that there is a significant opportunity to deliver home health in a more comprehensive way and more holistically identify and address the needs of the patient.”