Court Decision on UnitedHealth Group, Change Healthcare Deal Smooths Path for LHC Group Transaction

A recent federal court decision that cleared the way for UnitedHealth Group’s (NYSE: UNH) forthcoming purchase of Change Healthcare (NASDAQ: CHNG) is a positive sign for the insurance company’s pending acquisition of LHC Group (NASDAQ: LHCG).

The U.S. Department of Justice sought to block the $13 billion Change Healthcare transaction on anti-trust grounds, alleging that the deal would give UnitedHealth Group access to sensitive information about its competitors in the payer space.

“Quality health insurance should be accessible to all Americans,” Attorney General Merrick B. Garland said in a statement when DOJ filed the suit in February. “If America’s largest health insurer is permitted to acquire a major rival for critical health care claims technologies, it will undermine competition for health insurance and stifle innovation in the employer health insurance markets.”

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The Change transaction would merge the Nashville, Tennessee-based tech and data company with UnitedHealth Group’s Optum subsidiary.

UnitedHealth Group indicated in press releases that they believe the combination would streamline clinical, administrative, and payment processes for health care providers and payers, resulting in cost savings and greater efficiency.

The company has argued that the DOJ’s lawsuit was “without merit,” according to statements by the company, and that adjudication would ultimately delay system improvements for their beneficiaries.

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Following the court’s decision, Assistant Attorney General Jonathan Kanter indicated in a statement that DOJ “respectfully disagrees” with the ruling and would evaluate next steps, raising the possibility of an appeal.

Judge Carl J. Nichols also ordered the insurance company to proceed with its planned divestiture of the payment integrity firm ClaimsXten to private equity firm TPG Capital for a cash price of $2.2 billion.

The DOJ action raised questions about possible regulatory hurdles or delays for Optum’s forthcoming $5.5 billion purchase of LHC Group. The Federal Trade Commission has also requested further information from the companies as it reviews the deal.

Industry observers have opined that the Change Healthcare decision could make for smoother sailing on the LHC Group transaction.

“The Judge’s decision in the Change Healthcare case may potentially influence the DOJ to consider moderating, at least to some degree, the more aggressive and activist posture it has considered, under the Biden administration, towards health care M&A,” Scott Fidel, an analyst for Stephens, indicated in a note. “As a result, in near-term trading, we would anticipate seeing a tightening of the current deal spread on UnitedHealth Group’s pending acquisition of LHC Group, as a direct implication of Judge Nichol’s ruling allowing the Change Healthcare acquisition to move forward.”

Optum announced the LHC Group deal in April. The purchase agreement stipulates that UnitedHealth Group will acquire LHC Group’s common stock for $170 per share. The companies expect the transaction to close before year’s end.

LHC Group’s board and executives began discussions of a possible sale beginning in November 2021. The conversations included several potential buyers, including UnitedHealth Group. Soon after, the company engaged investment banks SVB Securities and Jeffries to lay the groundwork for a deal, according to a May filing with the U.S. Securities and Exchange Commission.

The acquisition is part of the insurance company’s larger strategy to grow its home-based care businesses.

“We really believe that enhancing and building high-quality care provision in the home is going to be a key feature of the future,” UnitedHealth Group CEO Andrew Witty said in a second-quarter earnings call. “And the more that can be linked to other aspects of care, so for example, physician clinic, virtual and the rest, it’s very much a central focus of our Optum Health development.”

The two companies have been mum so far on the future of LHC Group’s hospice segment.

When its competitor Humana, Inc. (NYSE: HUM) finalized its recent acquisition of home health and hospice provider Kindred at Home, the company was quick to announce that it would retain the home health asset and divest the hospice business with a spin-off and sale.

Humana subsequently sold a 60% stake in the hospice assets to the private equity firm Clayton, Dubilier & Rice, retaining the 40% minority share.

It remains to be seen whether Optum would follow suit with its new hospice business. With the deal still pending, neither company is free to discuss what the future may hold post-closing.

“The bringing together of LHC within the overall Optum organization is really important to us, and we’re very committed to that transaction,” Witty said in the earnings call. “We believe it really is going to be a significant enhancement of the quality of care that can be delivered. And we think it can really contribute toward improved value-based delivery for patients.”

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