[UPDATED] Humana to Sell 60% of Kindred at Home Hospice to CDR for $2.8B

Humana Inc. (NYSE: HUM) has signed a definitive agreement to sell a 60% stake in Kindred at Home’s (KAH) hospice and personal care business to the private equity firm Clayton, Dubilier & Rice (CDR) for $2.8 billion. Humana will retain the remaining 40%.

Kindred at Home has been on a circuitous journey with Humana.

The insurance giant acquired 40% ownership of the home health, hospice and personal care provider in 2018, with the private equity firms Welsh, Carson, Anderson & Stowe (WCAS) and TPG Capital holding the remaining 60%. Last year, Humana bought out the two firms’ shares for $5.7 billion — and quickly announced plans to divest the hospice segment.

“With CD&R’s established physician relationships, value-based care expertise, and record of providing strategic capital to a wide range of businesses, we are certain that these divisions are well-positioned for success under the joint ownership of Humana and CD&R,” Humana CFO Susan Diamond said in a statement.

Humana will apply the proceeds of the transaction, expected to close in the third quarter, for debt repayment and share repurchases.

Kindred is the largest provider of home health services by market share in the United States and the second-largest hospice provider, according to LexisNexis. 

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.

Value-Based care a prime mover

The company’s strategy for the Kindred at Home assets has several advantages.

Operating the home health business allows the company to better manage the financial risk that comes with value-based payment models gaining prominence in that setting.

Case in point, Humana’s health care services segment, which includes Kindred at Home, saw a 10% jump in revenues for full-year 2021 over the prior year. The company attributed this primarily to growth in its Medicare Advantage business and state contracts membership.

Humana also expects to see substantial cost savings through reduced hospitalizations and skilled nursing admissions as more care moves into the home.

By selling the hospice segment, Humana is able to capitalize on the record-high valuations in the space. Hospice multiples hit a record 26x in 2020, according to a report by PwC’s Health Research Institute. Last year also saw hospice assets trading at high multiples.

The divested segment has an enterprise value of $3.4 million, according to Humana. The $2.8 billion sale price reflects a multiple of 12x the company’s projected 2022 adjusted EBITDA.

While this is not in the top tier of hospice transaction multiples, it nevertheless represents a substantial return.

Hospice partnership vs.ownership

The insurance company has signaled that it prefers to partner with hospices through a preferred provider network rather than offer those services itself through a subsidiary.

“While palliative and hospice services are important components in the continuum of care that Humana offers patients, we are confident that we can deliver desired patient outcomes and improved customer experiences through partnership models rather than fully owning KAH Hospice,” Diamond said.

The need to manage financial risk is less pressing with hospice than home health, because nearly all of the hospice care delivered in the United States is reimbursed through the dedicated Medicare benefit.

Hospice is likely years away from any sort of dependence on risk-bearing value-based models, though Humana has watched closely as the industry takes its few first steps in that direction.

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. Humana operates more of the participating health plans than any other payer.

“We really think that there’s a great deal of opportunity to evolve the hospice provider/payer relationships, and to be able to test these end-of-life, value-based care models,” Kirk Allen, senior vice president of the home care segment at Humana, told Hospice News last November. “It’s going to be a data-driven approach to really learning what’s working well over time.”

This may have been a key factor in Humana’s decision to focus on a private equity buyer for this transaction while retaining a minority stake.

PE firms by nature buy into assets, foster their growth, then divest to maximize their returns. Though Humana has not voiced any future plans beyond the current sale, theoretically the door remains open to buy back the 60% stake if hospice becomes more integrated into risk-bearing payment models like Medicare Advantage.

“Humana stepped into the home health and hospice arena with the same kind of arrangement with two other private equity firms, the same 60/40 split,” Mark Kulik, managing director of M&A advisory firm The Braff Group, told Hospice News. “That private equity firm is going to exit at some point in time. I don’t know the specifics of what’s in their contract, but I’m confident that Humana probably has the first right of refusal when that time comes.”

Who is Clayton, Dubilier & Rice?

While the New York- and London-based firm has a significant presence in health care, it has been relative strangers to the hospice space.

The firm’s portfolio is diverse, with assets in the consumer retail, health care, industrial, technology and business services sectors, primarily in North America and Europe. CDR also has “strategic relationships” with similar firms operating in India and China, according to the firm’s website.

“They’ve not been active to my knowledge in the post-acute care services space, but they are active in health care,” Kulik said. “They’re definitely well networked and connected with larger players in the country. From that perspective, this is familiar ground for them.”

Acquiring a partial stake in Kindred at Home is consistent with the firm’s usual approach, in which sellers maintain a significant portion of the asset and partner with CDR to pursue growth.

The trajectory that Kindred Hospice will take under CDR will be interesting to watch. The firm has become increasingly interested in value-based payment arrangements as well as the marriage between technology and health care delivery,

This is evidenced by the recent $370 million acquisition of the data-driven care navigation company Castlight Health by CDR’s primary care asset Vera Whole Health, in which Anthem Inc. and JPMorgan Chase also own a stake.

In comments on its various health care deals, CDR speaks the language of value-based care, frequently invoking reductions in the total cost of care and a focus on outcomes versus utilization.

“We’re trying to innovate across that ecosystem and we’re trying to get hospice more connected into primary care,” CDR partner Ravi Sachdev told Axios. “Home health providers, hospice providers, nephrologists, oncologists — they have a meaningful role to play in the acceleration to value.”

The Humana deal could be a signal that CDR — like many other health care stakeholders — is looking increasingly towards the home setting.

“Capabilities that we could leverage across our ecosystem is something we’re going to think about, and the home could be an interesting part of that,” Sachdev told Axios earlier this month.

The firm’s involvement in the Humana transaction gives further evidence to the growing influence of private equity in health care, particularly when it comes to hospice.

Regulators are watching

As private equity moves deeper into the hospice space, firms are coming under tighter scrutiny by regulators and lawmakers.

Though none of the companies involved have been accused of any wrongdoing, members of the U.S. Senate Finance Committee announced last year that they would investigate the relationship between Kindred and Home and its former private equity backers Welsh, Carson, Anderson & Stowe and TPG Capital.

Ron Wyden (D-Ore.) and Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio) wrote to those firms last August, requesting information about the role they may have played in Kindred at Home’s operations.

“We are concerned that when applied to hospice care, the private equity model of generating profit on a rapid turnaround can occur at the expense of dying patients and their families,” the senators wrote in the letter.