Negotiations around Amedisys Inc.’s (NASDAQ: AMED) Contessa subsidiary were a significant contributor to the pendulum swing that led to the company’s acquisition by UnitedHealth Group’s (NYSE: UNH) Optum rather than Option Care Health (NASDAQ: OPCH).
Optum in June penned its agreement to acquire Amedisys in an all-cash transaction of $101 per share, or about $3.3 billion. Optum swooped in with this offer after Amedisys began the process of a merger with Option Care in what would have been an all-stock deal amounting to $3.6 billion.
But the seeds of Optum acquisition were planted long before then. Amedisys began receiving calls from suitors as far back as 2020, including UnitedHealth Group . At that time, the Amedisys board believed that remaining independent was the best course, according to an August 10 filing with the U.S. Securities and Exchange Commission (SEC).
However, conversations about potential partnerships continued during the subsequent three years, including a possible collaboration between Option Care Health and Contessa. A possible merger between Option Care and Amedisys first came up at a Dec. 7 dinner attended by executives from both companies.
“As discussions regarding a potential strategic relationship and other collaborative commercial opportunities progressed, the attendees preliminarily discussed the potential for a larger strategic transaction involving the combination of both companies,” the SEC filing indicated. “No specific economic terms of such a transaction were discussed at the dinner and [Amedisys Chairman Paul Kusserow] noted that Amedisys was focused on its business plan but that he would report the discussion to the Amedisys Board.”
As these talks continued, the two companies found the financial sweet spot that revved up their appetites for a deal — an all-stock transaction that would result in Amedisys’ shareholders owning 36% of the combined company.
But by April of this year, accounting practices related to Contessa’s palliative care business threw a monkey wrench into the negotiations.
Despite the limited avenues for reimbursement, the opportunity to expand into palliative care represented a golden goose for Contessa, potentially exceeding Amedisys’ expectations when it acquired the business in 2021 for $250 million.
“I think the opportunity all-in [with Contessa] is larger, largely due to the fact that we’ve discovered palliative care and built that contract … ,” Kusserow told Hospice News in January. “Palliative is interesting because I think we’re the first home health company to take true risk.”
The term “true risk” refers to the reimbursement models that are prevalent in Medicare Advantage (MA) — a per-member, per-month payment married with cost savings through reductions in institutional care.
Expanding its palliative care business was part of the impetus for Amedisys’ acquisition of Contessa in 2021 for $250 million, Kusserow said. Though Contessa’s bread and butter has been high-acuity care in the home, the subsidiary emerged as the spearhead of its parent company’s palliative care business.
In April, after consulting with the SEC, Amedisys revised the way that it recognized revenue from Contessa’s risk-based palliative care contract. This change impacted Amedisys’ projected revenue and cost of service but did not affect projected EBITDA or earnings, according to the SEC filing.
In light of this, Option Care indicated that the infusion company’s board would likely not support a transaction that resulted in 36% ownership by Amedisys shareholders, the filing indicated.
Option Care then proposed terms that would result in Amedisys stockholders owning 33% to 34% of the combined organization on a fully diluted basis, with the ability to appoint two members to its board. Reportedly, Amedisys was not pleased with this counteroffer, resulting in a back-and-forth between the two companies’ financial advisors.
“Later that day on April 30, 2023, in response to a discussion of the potential reduction in ownership that Option Care Health would be willing to offer Amedisys in light of the aforementioned accounting change, representatives of Guggenheim Securities informed representatives of Goldman Sachs that, given that the Contessa related accounting changes did not ultimately impact operating profit, the suggestion of a price reduction was not well received and that the Amedisys Board was not likely to be supportive of a transaction in which its shareholders did not own 36% of the combined company on a fully-diluted basis with proportional board representation,” the SEC filing said.
This led to a revised offer from Option Care that would have given Amedisys shareholders 35.5% ownership of the combined business with the ability to appoint three members to a 10-member board. Amedisys agreed with this revised offer, and the companies proceeded with the merger process. They publicly announced the deal in a May 3 press release.
But days later, on May 22, Kusserow got a phone call from Optum about a competing offer. This proposed all-cash deal ultimately led to the June 26 termination of the merger agreement with Option Care after the Amedisys board determined that Optum’s offer was superior.
The deal reflects UnitedHealth Group’s hunger for assets in the provider space, particularly for services delivered in the home, with Optum running point on those deals.
“[Taking it a] level higher up, it’s no secret that we’re very strong believers in the value of home health,” UnitedHealth Group Andrew Witty said in a second-quarter earnings call. “And no secret that we believe in the value of home health capabilities when combined with other activities in terms of wrapping care around patients. [It] is a really important element of future value-based care — particularly as you speak towards complex patients, many of whom maybe struggled to get out of the home.”