I’m thrilled to have a brand new contributor on THCB nowadays. Blake Madden writes a very good well being care trade e-newsletter known as The Wholesome Muse, which I extremely counsel you subscribe to. Lately he gave his tackle Optum’s newest large acquisition and it’s the primary of I am hoping many items of his we’ll run on THCB–Matthew Holt
by way of BLAKE MADDEN
On March 29, UnitedHealthcare’s Optum introduced its acquisition of LHC Team for $170/percentage. The transaction values LHC at about $6.4 billion together with debt.
I do know all of us comic story about running for UnitedHealthcare sooner or later, however it’s terrifying whilst you take into accounts their sheer scale. Even scarier whilst you have a look at Optum’s development:
- Optum Income in 2012: $29.4 billion
- Optum Income in 2021: $155.6 billion. Like. What.
LHC Team is the most important acquisition for Optum. Payors are proceeding to morph into ‘payviders’ and UHG / Optum has an enormous aggressive benefit given its 60k aligned doctor base. Obtaining LHC Team hurries up this payvider pattern but in addition lets in UHG to catch as much as Humana, who now owns all of Kindred, within the post-acute sphere.
In the meantime, Optum is deploying its grand imaginative and prescient of built-in care supply proper earlier than our eyes. It’s taking place whether or not you find it irresistible or no longer.
Although I equipped a first-impressions breakdown on Twitter associated with the deal, I needed to destroy this deal down into extra element and come up with guys my ideas on why the LHC acquisition is so important.
Let’s dive in.
Funding and Deal Thesis.
LHC Team is well-positioned on a couple of fronts within the fast-growing domestic well being sector:
- They’re partnered with 435 well being techniques, giving Optum get right of entry to to masses of health facility joint ventures.
- House well being and at-home care is a MUCH extra fascinating care environment for Medicare beneficiaries. Convenience and affected person enjoy is a big issue.
- Of all post-acute care settings, domestic well being is probably the most cost-effective. House well being prices means lower than expert nursing. Decrease prices = decrease clinical loss ratio for United. Through retaining sufferers out of SNFs and hospitals, those methods may just disrupt facility-based care supply within the coming years.
- From a demographics perspective, domestic well being advantages from an ageing child boomer inhabitants. Medicare will duvet 79 million folks by way of 2030 a big secular pattern for healthcare. I’m positive you’re all WELL conscious about that!
- PDGM and different headwinds for smaller businesses will run out of reduction investment, leading to consolidation. This consolidation will receive advantages greater domestic well being platforms.
In abstract, LHC Team is a smart operator in a high-growth business: House Well being.
First…some context at the House Well being Marketplace.
Given greater affected person want to stick in the house for care, increasing digital care choices from virtual well being avid gamers, the ageing and increasing Medicare inhabitants, the expanding detrimental stigma round nursing properties from COVID, and enhanced choice cost fashions just like the Clinic-at-House (HaH) program, PACE, and different at-home care fashions, domestic well being is simply getting began.
- McKinsey estimates that $265 BILLION value of care services and products carried out in clinics will shift to the house by way of 2025. That’s a four-fold building up over present domestic well being care spending. House well being spending may just double by way of 2030.
Fragmentation. LHC and different domestic well being suppliers are making the most of a fragmented marketplace. Tuck-in acquisitions of smaller businesses are not unusual at the present time.
As of 2022, the highest 5 suppliers account for roughly 21% of the overall domestic well being marketplace percentage. This statistic signifies the numerous alternative for endured roll-up of the sphere.
- Non-public fairness has spotted this pattern, too. Main PE avid gamers have entered each the house well being and hospice markets to create platforms within the areas. One fresh splashy deal that involves thoughts for me used to be Introduction Global’s acquisition of AccentCare in 2019.
Notable Offers in House Well being & Hospice
House well being has been one among the freshest M&A markets in healthcare services and products, each amongst massive and small offers:
- The Ensign Team spun off its domestic well being operations into the Pennant Team in a few $1 billion deal in past due 2019.
- AccentCare merged with Seasons Hospice in November 2020.
- Humana bought Kindred at House for round $5.7 billion in August 2021 (for the rest 60%) along side Curo Well being Products and services in July 2018 for $1.4 billion.
- Optum bought Landmark Well being for round $3.5 billion (extra on that underneath) in February 2021.
- Amedisys bought Contessa Well being – a big hospital-at-home supplier – for $250 million in June 2021. When Amedisys made this acquire, they claimed it expanded their overall addressable marketplace from $44 billion to $73 billion. Do the mathematics there, and that’s how large of a chance hospital-at-home might be! Extra on that underneath.
- HCA bought 80% of Brookdale’s domestic well being property in a $400 million deal in July 2021.
- Surround introduced plans to spin off its domestic well being property into its personal publicly-traded corporate. The post-acute company rebranded the phase to Enhabit in Q1 of this 12 months.
Now not discussed above is the plethora of domestic well being, hospice, and residential care offers going down at the back of the scenes amongst personal fairness avid gamers, well being techniques, and publicly-traded operators alike.
It’s a good time to promote a domestic well being and hospice company, however it’s additionally a extremely opportunistic time for greater operators to proceed to roll up the gap. Sector M&A process is best going to boost up from this level as platform avid gamers gobble up property.
Background on LHC Team. Why Them?
LHC Team is likely one of the greatest domestic well being businesses in the USA. After its founding in 1994, LHC Team’s trade grew from a unmarried domestic well being company right into a $6.4 billion undertaking. The company operates in 37 states via an spectacular portfolio of property around the spectrum that Optum can now benefit from:
- 557 House well being businesses
- 170 Hospice places
- 136 House care places
- 12 LTACHs
- Essentially the most underrated asset…30,000 educated scientific workers. Throughout a hard work scarcity, Optum is making a pipeline to out-compete all different healthcare carrier suppliers on staffing and skill.
On the closing test, LHC Team holds about 4-5% of nationwide marketplace percentage. That’s excellent sufficient to be the 3rd biggest nationwide domestic well being supplier at the back of Amedisys and Kindred. Since its inception, LHC has grown via tuck-in acquisitions, JV partnerships, and natural marketplace percentage retention from forged execution.
In 2017, LHC Team merged with fellow public domestic well being operator Virtually Circle of relatives in a $2.4 billion deal at 14x EBITDA.
- For context, LHC offered to United this month for two.4x ahead income and round a 21.4x ahead EBITDA.
Extra just lately, LHC bought 47 places from Brookdale as a part of the deliberate divestitures integrated within the HCA-Brookdale $400 million deal.
Sure, multiples in domestic well being are FROTHY however justified given the approaching development. House well being & hospice boast the very best EBITDA multiples in healthcare. In fact, that excludes the slight nonsense happening in virtual well being.
Whilst LHC has succeeded in its M&A method, its talent to combine and perform the ones property has led to much more good fortune.
LHC’s Technique and Secret Sauce.
As discussed, LHC prioritizes partnerships with hospitals and well being techniques when drawing near markets. Those partnerships hugely building up LHC’s probabilities of marketplace viability and good fortune.
Through partnering with hospitals in native markets, LHC locks in massive marketplace referral resources from affiliated amenities and leverages that captive quantity to out-compete different marketplace avid gamers. The partnership doesn’t repayment harm charges, both – even if maximum domestic well being recipients are on Medicare.
- As of March 2022, LHC held partnerships with 435 hospitals and well being techniques, receiving referrals for services and products from 3,600 hospitals throughout their geographical footprint.
The method ends up in a wholesome final analysis. Final 12 months, LHC generated about $2.2 billion in income and $216 million in EBITDA (10percentish margin).
Prior to the purchase, LHC guided to $2.5 billion and $280 million in EBITDA (margin enlargement to 11.2%). The company is well-positioned and capitalized for development. Given domestic well being’s capital-light style, LHC holds a forged stability sheet slated to conquer temporary hard work and inflation demanding situations.
- On hard work problems, LHC has famous that worker turnover is definitely underneath domestic well being business averages, which speaks volumes (actually) about its operational excellence. Extra personnel = extra census = more money monaaay.
I’m rather stunned they offered to United for an extremely low top rate (~8%) given their bullish rhetoric round temporary demanding situations. When mentioned at the deal name, even though, Optum discussed that the preliminary percentage value top rate used to be round 25% previous to LHC’s fresh surge in pricing. Total, LHC’s percentage value has suffered since July 2021. Facet word – did any individual know one thing beginning in January?
How Optum can unharness LHC Team.
So, we’ve established that domestic well being, domestic care, hospice, and different post-acute services and products that LHC Team provides have a increasing position in healthcare within the coming years. LHC Team used to be already doing a really perfect process executing its growth-through-JVs technique from a long-term standpoint.
Optum and UHG can liberate price one step additional by way of integrating LHC’s post-acute services and products into Optum’s continuum of care. That continuum comprises an outstanding portfolio of bought post-acute property. Prior to now few years, Optum has invested HEAVILY in its at-home care methods by way of launching a slew of recent services and products and aggressively obtaining key avid gamers in the house and digital care sector:
- Introduced Optum HouseCall (1.6 million visits in 2020);
- Received Landmark Well being in 2021 for round $3.5 billion, which is an immediate contracting entity and is focused on hospital-at-home and different value-based methods;
- Received naviHealth, a post-acute control services and products and care navigation platform, in an alleged $1 billion + deal;
- Introduced a digital first plan in October 2021 known as NavigateNOW;
- Received AbleTo for simply south of $500 million, a digital treatment supplier
Except for the post-acute vertical, UHG obtaining key property in adjoining markets as nicely. Some fresh, notable offers:
- Purchased Trade Healthcare for ~$13 billion (assuming the deal is going via pending antitrust investigation. It will no longer given fresh rhetoric, however the burden of evidence is at the executive)
- Rumors of the Refresh Psychological Well being deal for most probably $1 billion+
- And now the purchase of LHC Team for $6 billion+
Coupled with the above acquisitions, UnitedHealthcare has many times echoed sure sentiment for Optum. Optum is, in any case, United’s number one car for development within the coming years.
Extra in particular, United has grown increasingly more bullish at the enlargement of domestic well being services and products. Simply check out UHG‘s CEO Andrew Witty concerning Optum’s bullish thesis for at-home care throughout United’s This autumn 2021 income name. We must had been paying consideration!
“I’ve been tremendous inspired with the advance, no longer simply within the hospital, but in addition throughout the at-home methods, the place we’re in a position to proceed to ensure other folks are taken care of correctly. And in truth, in particular as we’ve long gone throughout the pandemic setting, folks’s choice to have care delivered in the house has turn into clearer and clearer.” – Andrew Witty, UHG CEO, This autumn Profits Name
When interviewed for deal feedback after the LHC Team acquisition announcement, Wyatt Decker, the CEO of Optum, doubled down on Andrew Witty’s feedback, touting the call for for at-home care.
“This pattern has actually best simply begun, of the way a lot care can actually be delivered in the house…We will give care in the house, which is a lower-cost environment…than nursing properties or extra complicated care amenities.”
Via Optum, UHG can stay sufferers out of pricey facility-based care settings like SNFs, IRFs, or even hospitals. This care coordination lets in UHG to higher organize clinical prices long-term. UnitedHealthcare can and can proceed to provide aggressive insurance policy and services and products by way of leveraging Optum’s 60k physicians and 2k websites coupled with those new post-acute and new digital care property. Lovely tough synergy, in the event you question me.
Along with the above property at Optum’s disposal for post-acute technique, LHC additionally introduced an enormous partnership with SCP Well being in mid-2021 to hugely building up SNF@ House and HaH methods national. The partnership blended LHC’s domestic well being team of workers with SCP’s 7,500 clinicians to create a common Complex Care at House program.
- Optum can leverage LHC’s current health facility companions to scale hospital-at-home and skilled-nursing-at-home methods – value-based care methods which are simply starting to ripen. If nice, the enormous may just disrupt those historically facility-based services and products considerably. Check out LHC’s current HaH and SaH style.
If LHC can deploy the above footprint with SCP’s 7,500 clinicians, simply assume how LHC Team and Optum can scale Complex Care @ House with 60,000+ physicians and different clinicians.
- Beginning to get it? Methods like those are how Optum will understand unbelievable deal synergy from this acquisition – if completed effectively.
That is only the start of home-based care tasks. Different rising domestic care segments come with domestic infusions, home-based dialysis, and number one domestic care – all of which can be long run avenues of development for Optum.
House Well being is preferred undoubtedly in Congress.
A couple of legislative programs more and more desire at-home care and new value-based methods in the house well being sector. Listed below are only a few methods and expenses that sign strongly in desire of long run development for domestic well being:
Select House Care Act of 2021: The invoice used to be presented in Congress past due closing 12 months and would permit Medicare beneficiaries to be given the choice to make a choice to get better at domestic quite than in a environment like a talented nursing facility (Factsheet)
Public Well being Emergency Provisions: The PHE created a large number of sure externalities for at-home care. Recently, the PHE will expire on April 16 however will be prolonged for every other 90 days, which might handle the next provisions for post-acute care in particular:
- Medicare sequestration suspension (AKA, higher repayment that could be completely behind schedule)
- Comfortable admission laws and behind schedule site-neutral cost implementation for LTACHs
- Curiously, the PHE and related reduction greenbacks from the CARES Act stored suffering businesses afloat throughout the pandemic after they another way would have long gone into bankruptcy or offered. CARES Act reduction bills, sped up bills from Medicare, and paycheck coverage program loans helped bolster small company stability sheets throughout the amount dry spell.
HaH and SNF@H: Clinic and Professional Nursing At-House methods are receiving bipartisan toughen in Congress and can most probably get prolonged every other two years with common well being device backing throughout the Clinic Inpatient Modernization Act or identical regulation.
House Well being CMS Compensation: For 2022, CMS instituted a basket charge building up of two.5% and no cuts; I’d be expecting even upper basket charges for 2023 and most probably an adjustment to the salary charge calculation to account for inflation developments.
- The 2022 ultimate rule will enlarge the House Well being Price Primarily based Cost demonstration from 9 states to all 50 (!!!)
PDGM: The Affected person-Pushed Groupings Style, AKA, PDGM, used to be meant to shake up the house well being business throughout its implementation in 2020. Right here’s what PDGM modified and why smaller operators will combat post-’Rona:
- PDGM created a 30 day cost length and founded the ones bills on how sufferers have been categorised into 432 distinct cost teams. Those cost teams are additional damaged down into 5 dimensions of care, together with referral supply, length timing, scientific prerequisites, practical standing, and comorbidities.
- What YOU wish to find out about PDGM is that the bills are now not in accordance with volumes, or the selection of in-person treatment visits equipped. In the past, the potential cost device would INCREASE bills because the selection of treatment visits for that affected person greater. However now not.
- Together with the decoupling from discuss with volumes, domestic well being businesses can now not request complicated bills (RAP) from Medicare (AKA, “pay us prematurely and we’ll determine the variations in cost later”). Prior to CMS phased this out, suppliers may just obtain 50-60% of overall bills prematurely by way of filing an RAP. RAPs have been changed by way of Notices of Admissions (NOAs) beginning in 2022.
- So now, as an alternative of receiving that enormous prematurely cost, domestic well being businesses get not anything, which hamstrings money go with the flow somewhat a little. As we are saying in trade college, Money is King.
On account of present inflation headwinds, hard work shortages, and money go with the flow adjustments, I’m anticipating smaller domestic well being businesses to combat post-’Rona. Those dynamics will lead them to promote to larger avid gamers…more or less very similar to how impartial physicians offered to well being techniques and personal fairness given operational struggles throughout the pandemic.
Prior to the pandemic, the sentiment referring to PDGM heading into the most important adjustments used to be that this system would purpose extraordinary ranges of consolidation, echoing my ideas above:
“Mixed with the 2 30-day cost classes beneath PDGM, the removal of the RAP must result in extra consolidation within the business than we’ve skilled within the closing 2 a long time. It is going to hit money flows onerous for the smaller businesses; however for the bigger businesses, corresponding to LHC, we’d be expecting minimum affect.” Keith Myers, Co-Founder, Chairman & CEO, LHC Team Q3 2019 Profits Name
“We consider PDGM has the possible to boost up an business consolidation in contrast to any we’ve observed in fresh reminiscence. We can be able” Keith Myers, Co-Founder, Chairman & CEO, LHC Team Q3 2019 Profits Name
In abstract, we haven’t observed those results but on smaller domestic well being operators on account of the straightforward cash public well being emergency insurance policies. However sooner or later, we’ll in finding out if Keith used to be proper. I wager he’s.
There are WAY too many sure dynamics at play in desire of LHC Team’s portfolio of property so that you can forget about Optum’s acquisition:
- Laws are supporting home-based tasks, and repayment is solid. Lawmaker scrutiny is mounting on SNFs, offering additional discharge alternatives and development for domestic well being.
- LHC has a historical past of operational good fortune in domestic well being and is the lacking hyperlink amongst Optum’s more than a few post-acute and at-home tasks. Optum wanted this acquisition to stay alongside of Humana and others pursuing identical post-acute methods.
- House well being is very fragmented and PDGM creates complications for smaller businesses, which is able to permit Optum to pounce on opportunistic M&A within the house.
- Together with its large doctor base, Optum can leverage LHC’s well being device partnerships to greatly enlarge Complex Care at House methods blended with fresh acquisitions of Landmark and naviHealth.
- Through retaining sufferers out of SNFs and hospitals, those methods may just critically disrupt facility-based care supply within the coming years via the house.
Ultimate ideas on antitrust…You might want to argue that there are antitrust issues associated with this transaction for the reason that UHG is basically making a vertical monopoly, and I am getting that.
- I’d argue that the deal is a win for many events concerned, together with sufferers, well being techniques, and retaining sufferers out of dearer care settings whilst receiving nice remedy at domestic. If Optum doesn’t abuse its place (which is a huge if, thoughts you), I haven’t any downside with the expanding vertical integration in healthcare.
Down the road, I’d no longer be stunned in anyway if regulators compelled United and Optum to separate.
However for now, be careful for this scaled healthcare titan.
Blake Madden is the founding father of The Wholesome Muse and may be a supervisor at VMG Well being