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UnitedHealth Group (NYSE: UNH) and Amedisys Inc. (Nasdaq: AMED) announced merger plans last June that would see home health giant Amedisys become part of Optum.
Amedisys had previously reached an agreement to merge with infusion therapy company Option Care Health (Nasdaq: OPCH), but UnitedHealth Group’s offerings, scale and complementary clinical capabilities were virtually too good to pass up. However, as with any business of this magnitude, there are complications.
Perhaps the biggest hurdle to successfully completing its Amedisys-UnitedHealth Group deal, valued at about $3.3 billion, is the government’s concern about market competition. As recently as March, reports emerged that the U.S. Department of Justice was still reviewing an antitrust case that would block the sale of Amedisys.
Others, including Sen. Elizabeth Warren (D-Mass.), continue to examine UnitedHealth Group’s M&A activities more broadly. Also in March, Warren released a statement strongly criticizing Steward Health Care’s plan to sell its physician group to Optum.
“Optum, a subsidiary of UnitedHealth Group, is already the largest employer of physicians in the country and controls over 10% of America’s physicians – meaning this deal raises significant antitrust concerns in Massachusetts and nationally,” the senator said.
In the case of Amedisys, regulators are likely to spend more time assessing the impact on industry competition since UnitedHealth Group and Optum acquired one of Amedisys’ largest competitors, LHC Group, in early 2023. A combined Amedisys and LHC Group venture would mean Optum owns a significant portion of the historically fragmented home health care market.
To pave the way for the sale, I expect Baton Rouge, Louisiana-based Amedisys to explore a diverse divestiture strategy that could include selling portions of its core home health care business and other measures.
As part of this week’s exclusive members-only HHCN+ update, I explore what a divestment might look like – and outline some key questions Amedisys will likely need to consider.
The core business of home nursing
According to Jefferies, Amedisys’ leadership team is already considering a divestiture. In a recent note, analysts at the investment banking and financial services firm wrote that they believe Amedisys management is “working on divestitures” that they believe are “necessary” to receive regulatory approval of their deal.
Jefferies analysts also said in their note that they expect the Amedisys-Optum deal to close in the next few months.
The most important aspect of a potential divestiture strategy would be deciding how to divide the core home health care business.
As of February, Amedisys offers home health, hospice and nursing care services at 521 care centers in 37 states and the District of Columbia. This network included more than 200 home health care locations in states that are difficult to enter and require Certificates of Need (CONs), Authorizations of Authorization (POAs), and/or Facility Need Reviews (FNRs).
Notably, according to its annual report filed with the Securities and Exchange Commission (SEC), Amedisys had 233 home health centers in 14 of these states and in Washington, DC, with a particularly high density (over 20 locations) in Alabama, Georgia, South Carolina and Tennessee.
At the end of last year, Amedisys had a total of 346 Medicare-certified home health centers in nearly three dozen states, according to its annual report.
I expect geography to be a critical factor in any divestiture strategy surrounding the core home healthcare business. If regulators fear that a combined Amedisys-LHC group under Optum will have too much market share, Amedisys could look to spin off centers where there is plenty of overlap with the LHC group’s old sites.
However, that is easier said than done as Amedisys and LHC Group have similar footprints.
As of March 2022, LHC Group had 557 home health locations, with a density in many of the same states as Amedisys, including Alabama and Tennessee.
Because footprints are comparable, Amedisys may need to take a center-by-center approach to divestment while considering factors beyond geography. One option could be to examine Medicare Advantage (MA) payer mix or market penetration as part of a divestiture strategy.
Although most Medicare beneficiaries had access to plans from various insurance companies, MA enrollment in 2023 was concentrated in plans from UnitedHealthcare and Humana (NYSE: HUM), according to the Kaiser Family Foundation. These two institutions alone accounted for almost half of all MA enrollments in 2023.
I could imagine a scenario where Amedisys’ home health locations are prioritized with a higher share of MA business.
Amedisys has managed to grow its non-fee-for-service Medicare revenue over the years.
For full-year 2023, Amedisys’ home health business generated net services revenue of approximately $1.4 billion. Medicare revenue that year was $874.2 million, while non-Medicare revenue was $529.4 million.
If Amedisys sells parts of its core home health care business, there will likely be plenty of takers. In fact, Amedisys has attracted M&A interest from other paying buyers over the past year, alongside Option Care and Optum.
Establish a hospice
For Amedisys, identifying divestiture opportunities in its home health business is the first step. Once the transaction between Amedisys and UnitedHealth Group is complete, Step 2 will be figuring out what to do with Amedisys’ hospice line.
Combining LHC Group and Amedisys under Optum would not only give UnitedHealth Group a large share of the home health market. It would also make Optum a hospice leader — and I wonder how valuable that is to UnitedHealth Group.
As of December 2023, Amedisys had 165 Medicare-certified hospice centers in over 30 states. For full-year 2023, the Hospice division generated net services revenue of $798.8 million.
Expanding into hospice has been a key focus for Amedisys in its first year of implementing the Patient-Driven Groupings Model (PDGM) with its industry-defining end-of-life care contracts, including the $340 million purchase of Compassionate Care Hospice in 2018.
“We wanted to offset any negative impacts that may or may not exist with PDGM,” Paul Kusserow, chairman and former CEO of Amedisys, told HHCN at the time. “We wanted to add to the hospice business, which has a very near-term, bright regulatory future, so we believe this should offset any PDGM losses that may occur.”
Meanwhile, LHC Group has also worked to systematically expand its hospice division, seeking to co-locate or even triplicate its home health, hospice and personal care services divisions.
As of December 2022, the LHC Group operated 159 hospice sites, of which 96 were wholly owned and 61 were majority owned by joint ventures. Two of these were license leasing agreements.
According to its most recent annual report filed with the SEC, LHC Group’s full-year 2022 net revenue from hospice services was approximately $407.5 million.
Since LHC Group became part of Optum, I have wondered exactly how the hospice fits. Home health care has shifted toward MA and value-based care, but hospice is still predominantly paid for by traditional Medicare insurance.
That’s not likely to change any time soon, as the U.S. Centers for Medicare & Medicaid Services announced in March that the agency will discontinue the hospice component of the Value-Based Insurance Design (VBID) model at the end of the year. In fact, the hospice is being separated from MA again.
Hospice is an incredibly valuable service, but I don’t think there is the same level of synergy with the broader UnitedHealth Group.
So what will happen? Well, I can imagine UnitedHealth Group taking a page from the Humana playbook at some point. An Amedisys-LHC Group hospice venture would be extremely valuable, and UnitedHealth Group could sell a majority stake in that combined company, similar to what Humana did with the legacy Kindred/Curo platform.
Humana completed the $2.8 billion sale of Kindred at Home’s hospice and personal care segments in August 2022, selling a 60% stake to private equity firm Clayton, Dubilier & Rice.
“Humana will continue to support the long-term success of these operations through our minority investment and ongoing strategic partnership,” Humana CFO Susan Diamond said at the time. “Hospice and palliative services play an important role across the continuum of care, and we are confident that this new standalone company will continue to provide patients and their families with the resources and quality care they need.”
Contessa questions
Contessa is Amedisys’ high-acute care engine, acquired in 2021 for $250 million. Contessa was once a standalone company – and there’s always a chance it could be that way again in a post-Optum future.
But I see Optum and Amedisys wanting to retain Contessa and all of its higher care capabilities, which include hospital-level home care, palliative home care, and SNF-level home care.
Strategically, Contessa’s expertise in higher level care would enhance some of Optum’s other care delivery capabilities. It’s important to note that Optum also acquired Landmark in 2021 and Prospero Health in 2023.
However, Contessa has largely been successful with its joint venture strategy. Owning Optum could complicate existing JV arrangements or make some potential health systems or payers hesitant.
It’s happened before
This week’s HHCN+ update is simply an exercise in how Amedisys might think about a divestiture if it sees it as beneficial to working on a completed Optum deal.
However, in this exercise it is useful to remember that Amedisys has a recent track record of strategic separation of business units. That’s exactly what the company just did with its personal care business, which at the time of the divestiture included 13 care centers in three states.