Option Care, Amedisys Deal Reveals a ‘Whole Different Landscape’ for Hospice Providers

The implications of Option Care Health’s (NASDAQ: OPCH) pending $3.6 billion acquisition of Amedisys Inc. (NASDAQ: AMED) reflect rapidly changing market forces that could affect the industry at large.

The rationale behind the transaction rests on four pillars, Option Care executives recently indicated — value-based reimbursement, the importance of scale in payer negotiations, a desire to get ahead of the curve as the industry changes and rising significance of data capabilities.

This deal also comes on the heels of two other huge transactions, Humana Inc.’s (NYSE: HUM) purchase of Kindred at Home and the buy out of LHC Group by the UnitedHealth Group (NYSE: UNH) subsidiary Optum.

A market in flux

These acquisitions signal that the home-based care market is in a period of transformation, according to Mark Kulik, senior managing director for the M&A advisory firm The Braff Group.

“In the last two years, the three largest public providers of home health and hospice will be acquired or have been acquired,” Kulik told Hospice News. “If we go back 10 or 12 years, if you owned a $25 million sized agency, you had a sense of competitiveness and security at that size. Five years ago, I think you had to be a $250 million agency to have that same level of confidence. But a $2 billion home health and hospice provider today is no longer secure.”

A $2 billion home health and hospice provider today is no longer secure.”

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-Mark Kulik, senior managing director, The Braff Group

No cash is expected to change hands in the Amedisys-Option Care acquisition. This is an all-stock transaction that includes the assumption of net debt.

Amedisys stockholders will receive 3.0213 shares of Option Care Health common stock for each share they hold at the closing of the transaction. This is equivalent to $97.38 per Amedisys share, based on Option Care Health’s May 2 closing stock price.

This represents a premium of nearly 26% for Amedisys stockholders. Upon closing, which is expected to occur in the second half of the year, Option Care Health stockholders will own approximately 64.5% of the combined company, and Amedisys stockholders will own approximately 35.5%.

In these conditions, the acquisition appears to be a good deal for Option Care Health, but the jury is still out for Amedisys, according to Mertz Taggart Managing Partner Cory Mertz.

“Amedisys stock price has taken a beating over the past couple of years, which has made it a very attractive target from a pricing standpoint. It’s a great company, a good value for Option Care shareholders,” Mertz told Hospice News. “For Amedisys, It remains to be seen because the deal isn’t done yet. [Amedisys] shares spiked initially, but has since retreated back to pre-announcement values. Investors didn’t reward Option Care when the deal was announced, so the stock took a hit.”

During the past 12 months, Amedisys’ stock prices have see-sawed from a high of $131.32 to a low of $69.37, a 52.45% difference. That volatility has continued in recent weeks. So far this month, the company’s stocks have ranged from $85.81 on the high end and a low of $73.49.

The value of integration

Despite the stock questions, the deal brings clear upsides to both companies in the form of a diversified payer mix, as well as expanded scale and breadth of home-based services.

Taking these facts into account, the companies could fit together like puzzle pieces. And the full picture reveals an organization that will likely check most of the boxes when payers consider provider partnerships.

Combined, the companies will have ties to numerous Medicare Advantage plans, traditional Medicare, Medicaid and private insurance providers.

“We know that the reimbursement model will be changing over time and are thinking about what we need to do to provide broader services with that,” Option Care CEO John Rademacher said at the recent Bank of America Healthcare Conference. “We believe the home is going to be an important center of care, and that the ability to have additional services and additional capabilities to wrap around the patient is going to be a mission-critical success factor.”

Generally, many payers like to contract with providers that cover large geographic regions and that offer a wide range of services, rather than multiple smaller companies that rest on one or two points in the care continuum.

By integrating Amedisys’ current footprint, Option Care Health will operate 674 locations across 46 states.

The expanded scope of services and access to payers creates a “compelling” growth outlook, according to Brian Tanquilut, equity analyst for the investment banking firm Jefferies Financial Group.

“Option Care Health’s proposed acquisition of [Amedisys] in an all-stock deal creates a highly diversified provider of home-based care that will offer services across a broad spectrum of the care continuum,” Tanquilut indicated in a research note. “By acquiring Amedisys we believe [Option Care] brings in a leading home-based care asset with a compelling normalized growth outlook, while the combination of both assets enhances scale and negotiating power with managed care plans.”

The combined organization’s array of services also reflect another key trend — tailwinds driven not only by the complex health needs among aging demographics. The vast majority of the current and incoming Medicare population will likely have multiple chronic or serious conditions and overwhelmingly prefer to receive care in the home rather than facilities.

Consequently, these patients will likely need more than one home-based health care service during the remainder of their lifetimes, and providers can gain an edge by becoming a proverbial one-stop shop.

The terms of the deal represent a “bet on the future,” according to Kulik.

For one, the all-stock transaction preserves Option Care Health’s capital and maintains their low leverage of debt, which hovers around 2x of EBITDA. The promise of shares for Amedisys’ current investors also sends a message that they should hold on to their stocks in order to reap the potential benefits of the acquisition, Kulik indicated.

“Option Care’s debt leverage is relatively low, and that’s a very strong financial position to be in. This is saying, ‘We think we’ve got a great combination and a great unique solution,'” Kulik said. “And this is just implied in the transaction formula: ‘Hold on to your shares. We think this company’s going to be more valuable down the road than it is today on a combined basis.’”

Industry-wide implications

However, the impact of this transaction will extend beyond the individual companies involved.

The recent series of massive deals — Humana-Kindred, Optum-LHC Group and now Option Care-Amedisys — could create a more difficult competitive environment for smaller operators who lack comparable scale and range of services.

“The mom-and-pops and the nonprofits will face an ever more challenging environment to effectively compete in a marketplace that is dominated now by enormous integrated providers and an expanding Medicare Advantage population,” Kulik explained. “I think this is a loud wake up call for all local and regional agency owners to really assess their individual strengths and value propositions and to assess their competition, referral sources and payer mix. Because you’re now competing with companies that are significantly rich in resources and deep with talent, and that’s a whole different landscape.”