Vertical integration and consolidation

Dive Brief:

• Home health and hospice provider Amedisys has agreed to be acquired by UnitedHealth’s Optum for $101 a share in cash, ending a previous merger agreement with Option Care Health, the company announced Monday.
• Earlier this month, Amedisys announced an unsolicited acquisition offer from Optum for $100 a share, leading to exploratory negotiations with the UnitedHealth unit even as Amedisys was in the midst of a merger pact with Option.
• The deal, which comes out to about $3.3 billion and is subject to shareholder and regulatory approval, is likely to face antitrust scrutiny despite minimal geographic overlap between Amedisys and existing UnitedHealth home health business LHC Group, analysts said.

Dive Insight:

Although Monday’s press release provided few details on the merger’s rationale, UnitedHealth has been focused on beefing up its provider capabilities, especially in home and community-based care.

The deal represents UnitedHealth’s second purchase of a home health and hospice company after buying LHC for $5.4 billion, as the integrated healthcare giant looks to capture revenue from medical care increasingly delivered outside of hospitals.

Providing convenient, high-quality care at a lower cost could prove lucrative as the U.S. population ages, which should increase demand for home-based care models. In addition, reimbursement for seniors remains high in programs like Medicare Advantage. UnitedHealth is the biggest MA plan provider in the country.

“Amedisys’ commitment to quality and care innovation within the home, and the patient-first culture of its people, combined with Optum’s deep value-based care expertise can drive meaningful improvement in the health outcomes and experiences of more patients at lower costs, leading to continued growth,” Patrick Conway, CEO of Optum Care Solutions, said in a statement along with its initial offer in early June.

Amedisys’ original all-stock deal with Option valued the company at about $3.6 billion, indicating a roughly $97 per share value for the Louisiana-based provider at the time. After Amedisys received Optum’s offer, Option argued its offer still delivered value due to the combined company’s scale.

However, “given this was the offer with the higher price tag [near-term] (not considering long-term value creation and positive stock movement [with Option]), the final result doesn't come as a surprise,” Jefferies analyst Brian Tanquilut wrote in a note on the deal.

Amedisys will pay Option $106 million to terminate their agreement, according to a Monday filing with the SEC.

Option, a provider of home and alternate site infusion services, is unlikely to enter a bidding war over Amedisys, given UnitedHealth’s deep pockets, according to Tanquilut.

"While we are disappointed in this outcome, Option Care Health has a long track record of delivering value for our shareholders," Option CEO John Rademacher said in a release. "We take a disciplined approach to acquisitions and, as we evaluated our options, we applied this discipline to ensure we continue to create value for all of our key stakeholders."

Antitrust scrutiny in healthcare deals has risen during the Biden administration, as federal and state regulators take a tougher stance on mergers as healthcare prices continue to rise. UnitedHealth has been subject to scrutiny, after regulators asked for more data on its LHC deal and sued to block its 2022 acquisition of Change Healthcare. The deals went through in both cases.

“We think this deal will get a second request given the government's recent focus on UNH's acquisition history,” Tanquilut wrote. “We could see potential divestitures in a few select markets.”

Dive Brief:

• Antitrust regulators are proposing updated rules for merger review that would require companies to provide additional information about proposed deals, likely slowing down the rapid pace of healthcare transactions.
• The Federal Trade Commission and the Department of Justice would ask firms to give more details about reasons for the deal, investment vehicles or other corporate relationships, projected revenue, market conditions, the structure of business entities, earlier acquisitions and workforces.
• The Biden administration and antitrust regulators have been increasingly cracking down on merger and acquisition activity, including in the healthcare space as dealmaking accelerates.

Dive Insight:

Last year, the FTC and DOJ announced they were modernizing merger guidelines for finding and studying potentially anticompetitive deals, which the regulators argued needed review to function in a modern economy. In response, the American Hospital Association said guidelines don’t need “major revisions,” and that significant change could derail beneficial mergers that take years to put together.

Dealmaking between health services companies soared over the past two years. A recent report from PwC found volumes are holding steady even with high interest rates, increased regulatory scrutiny and other macroeconomic concerns.

The FTC argued its latest proposed rule will allow the agency to keep pace with the larger number and increased complexity of mergers.

The update would mark the first time in 45 years that antitrust regulators have significantly reviewed the Hart-Scott-Rodino Form that companies must complete when pursuing certain transactions. The FTC estimated it would take an additional 107 hours to fill out the new filing, which currently takes about 37 hours to complete. 

In a statement, FTC Chair Lina Khan and Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya wrote the House initially estimated the HSR Act would require advance notice for about 150 mergers each year, but regulators now receive more than 150 filings per month. 

“Against the backdrop of these vast changes, the information currently collected by the HSR form is insufficient for our teams to determine, in the initial 30 days, whether a proposed deal may violate the antitrust laws,” they wrote. “Our staff are put in the position of expending significant time and effort to develop even a basic understanding of key facts.”

The rule could add months to the merger filing process for companies, Bloomberg Intelligence senior analyst Jennifer Rie told Bloomberg.

Regulators have had mixed success in challenging healthcare mergers over the past few years, blocking some hospital mergers but failing to stop more complex tie-ups.

The proposed rule will be published in the Federal Register later this week.

Dive Brief:

• CVS has closed its acquisition of Oak Street Health for $10.6 billion in cash, pushing the retail health giant further into direct care delivery, CVS announced on Tuesday.
• With the deal’s completion, CVS adds a multi-state chain of doctor-staffed medical clinics for seniors to its primary care roster.
• CVS first announced the acquisition, which values Oak Street at $39 a share, in February.

Dive Insight:

CVS has been hustling to expand healthcare services and products offered in its stores and clinics, aiming to capture revenue at every stage of a patient’s healthcare journey by building a vertically integrated healthcare business including doctor’s offices, a health plan and pharmacy.

Finalizing the Oak Street deal is a key step in that direction. The Chicago-based medical group employs roughly 600 primary care providers across 169 medical centers in 21 states.

Oak Street, founded in 2012, expects to have more than 300 centers by 2026. Each of those centers has the potential to contribute $7 million in adjusted earnings at maturity, CVS has said. That represents more than $2 billion in adjusted earnings at that time.

“The acquisition will broaden CVS Health’s value-based primary care platform and significantly benefit patients’ long-term health by improving outcomes and reducing costs — particularly for those in underserved communities,” CVS said in a Tuesday release. “Oak Street Health will continue to operate as a multi-payor primary care provider as part of CVS Health.”

Oak Street has seen rapid growth and results from its value-based clinical strategy, but still operates at a loss. The clinic operator is expected to lose over $200 million in 2023 and not reach profitability until 2025 at the earliest.

That could pressure CVS’ financial targets, along with capital priorities like share buybacks, analysts have said.

CVS has pinpointed Medicare Advantage as a key growth area, which ties into Oak Street’s clinical model. Oak Street specializes in contracting with Medicare payers to manage care for their patients, with any profits tied to quality of outcomes.

The deal faced little regulatory scrutiny, despite opposition from antitrust advocacy groups and political figures like Sen. Elizabeth Warren, D-Mass. Earlier this year, Warren sent a letter to the Federal Trade Commission urging regulators to heavily scrutinize the deal, citing the potential risk that vertical integration could lead to higher healthcare prices.

However, the antitrust waiting period for the deal expired in late March, clearing CVS and Oak Street to consummate the merger.

It’s the latest healthcare acquisition to close this year for CVS. The Rhode Island-based company also completed its $8 billion buy of home care provider Signify Health in March.

Companies have pursued deals in the primary care space as players like CVS, Walgreens and Amazon look to build out their physician networks, following in the footsteps of health insurer UnitedHealth, which has acquired physician practices to build its increasingly lucrative Optum health services business.

The U.S. Department of Justice and parties from New York and Minnesota have filed to drop an appeal to block UnitedHealth Group’s acquisition of Change Healthcare, after a September ruling in U.S. District Court allowed the $13 billion deal to go through.

In a Monday filing with the U.S. Court of Appeals for the District of Columbia Circuit, all parties agreed to voluntarily dismiss the case and assume any costs incurred by the appeal.

The DOJ waited over a month to file its November appeal after the deal between UnitedHealth and Change closed in October, prompting some antitrust experts to wonder if the agency would let the deal go through without further challenge.

During bench trials to block the merger, the DOJ argued that UnitedHealth’s acquisition of Change would disadvantage rivals and result in higher costs and lower quality of commercial health insurance. United Health, one of the largest healthcare insurers in the U.S., proposed to buy Change Healthcare in 2021 in order to incorporate its data-processing capabilities for insurance claims and integrate the business into its Optum arm. 

Judge Carl Nichols said in a September opinion that the DOJ’s arguments had “serious flaws,” and that they relied on “speculation” rather than real-world evidence to prove the department’s antitrust claims. Nichols served as a law clerk to Supreme Court justice Clarence Thomas, and was appointed to the bench by then-President Donald Trump.

The antitrust challenge coincided with other prominent DOJ challenges, including its suit to block publisher Penguin Random House from taking over publisher Simon & Schuster.

In its fourth-quarter and full-year 2022 results, UnitedHealth said it was currently working to accelerate integrating Change Healthcare and its Optum Insights arm.

The DOJ did not respond to a request for comment.

Walgreens-backed VillageMD snapped up medical practice Summit Health for almost $9 billion earlier this week, with an assist from a big-name minority investor — Evernorth, the health services arm of insurance giant Cigna, which invested $2.5 billion in the combined company.

The deal could have major ramifications on Evernorth’s push to value-based care, according to Cigna executives and analysts.

Evernorth will become a minority owner in the combined company at the deal’s close, with a low-teens percentage ownership stake, Cigna CFO Brian Evanko said at the Credit Suisse healthcare conference on Tuesday. Cigna will also get a mid-single-digit return off $2 billion of the investment each year.

But beyond the financial rationale, the investment should allow Evernorth to significantly accelerate value-based care arrangements in the commercial space, according to Evanko — not in Medicare, a program that hosts the brunt of shared savings arrangements for payers.

“The shared savings through the value-based contracts that we’ll have with Village is far and away the most strategically interesting part of this opportunity for us,” Evanko said.

Unlike many other primary care physician groups, VillageMD is focused on the commercial market, which brings in two-thirds of its revenue. That plays to Cigna’s strength in the employer market, as the majority of its customers are commercial employers, according to Credit Suisse analyst A.J. Rice.

As part of its investment, Evernorth will develop value-based agreements with VillageMD. The two will work together to optimize sites of care and patient outcomes through VillageMD’s physician network and Evernorth’s health services businesses, which include pharmacy benefit manager Express Scripts, specialty pharmacy Accredo and virtual care provider MDLive.

Evernorth does already provide care directly to patients, including primary and specialty care through Evernorth Care Group’s health centers in Arizona and home care through Accredo and Care at Home, Evernorth CEO Eric Palmer told Healthcare Dive via email.

But the VillageMD partnership should allow Evernorth to create closer relationships with high-performing primary care physicians and accelerate its value-based arrangements, Palmer said.

And, marrying VillageMD’s medical network — which, with the addition of Summit, will comprise more than 680 provider locations in 26 markets — with Evernorth’s other health services like chronic condition management and a network of behavioral health providers should make the business more attractive to clients.

The shared savings and risk-based contracts are extensible to Cigna’s provider partners, and will also be extended to the other health plans that Evernorth serves over time, according to Evanko. Evernorth’s health insurer clients include government-focused Centene, insurtech Oscar Health and Kaiser Permanente.

In the near term, the contracts will be focused on healthcare services, as opposed to Evernorth’s pharmacy capabilities. Evernorth also expects to incorporate MDLive into the shared savings arrangements, to try to drive consumers to its lower-cost virtual care options.

But “there’s a possibility over time that some pharmacy assets could make their way into that,” Evanko said.

Cigna already contracts with VillageMD in some of its medical networks. The two share a roughly 30% to 40% geographic overlap, and as the providers expand, that overlap should increase further, according to the CFO.

The relationship expansion reflects how payers have been growing through acquisitions in non-core areas — diversifying overall, instead of entering new states or serving new specialized populations on the plan side, said Nathan Ray, healthcare M&A lead at West Monroe.

For VillageMD, “the overall impact of Evernorth on the brand here is to be in the right place to provide scale and capital, not to complicate,” Ray said. “It’s a little more of a participation play and being around good people moving in the right direction.”

Cigna’s $2.5 billion bid to beef up Evernorth’s value-based offerings comes following concerns from market watchers that the payer could be falling behind in the frenzy of insurer M&A.

Evernorth especially has been a key driver of Cigna’s recent topline growth, with revenue increasing at a faster clip than in Cigna’s health plan business. In the third quarter, Evernorth brought in $35.7 billion in revenue, comprising 79% of Cigna’s revenue overall.

The VillageMD investment is essentially neutral to Cigna’s earnings-per-share outlook for 2023 and 2024, Evanko said. In addition, the financial modeling around that EPS impact doesn’t assume any meaningful contribution from any shared savings from value-based contracts with VillageMD — though that could change.

“To the extent that there’s more value there, that does provide some upside to our business case in the coming years,” Evanko said.

Elevance Health, one of the largest insurers in the U.S., will continue to aggressively pursue acquisitions, CEO Gail Boudreaux said Monday at the HLTH conference in Las Vegas.

Boudreaux said that Elevance is targeting early stage companies in an effort to find cost savings and improve the quality of its operations. Her comments come a week after the payer announced its acquisition of specialty pharmacy BioPlus.

“We really are looking for companies that have potential to help us diversity capabilities, but not for diversification’s sake alone. They have to fit into our core,” the CEO said. “We are interested in tuck-ins around the health plan side, but we are doing a lot around Carelon services as we scale that capability.”

Carelon is Elevance’s health services business, which supports its own plans and sells to third-party insurers.

It includes businesses like palliative care provider Aspire, specialty behavioral health company Beacon and home-based nursing management company MyNexus, all of which Elevance acquired in the past few years. Carelon also includes pharmacy benefit manager IngenioRx, which Elevance launched in 2017 to replace its contract with Express Scripts.

Elevance, which built Carelon to complement its health benefits business, wants to continue building out the platform, according to Boudreaux.

The company is growing “very aggressively” into adjacent care services, Boudreaux said.

Most recently, Elevance agreed to acquire BioPlus, a specialty pharmacy that caters to patients with complex conditions like cancer, to bolster IngenioRx. The company said that BioPlus would help it identify patients needing behavioral health support or at-home care in an effort to connect them to the company’s additional services.

Other insurers have also been active in dealmaking to prop up health services businesses that drive a growing portion of their revenue.

Recently, Cigna invested $2.5 billion in VillageMD’s acquisition of Summit Health. The payer also purchased MDLive last year to expand its telemedicine capabilities.

CVS Health, parent company of Aetna, this year agreed to buy primary care and home provider Signify Health for $8 billion, while Humana acquired the remaining stake of Kindred at Home, the nation’s largest home health provider, in a multibillion-dollar deal in 2021.

In October, Elevance beat Wall Street expectations for the third quarter as profit climbed to $1.6 billion, leading the payer to raise its earnings target for the full year. However, the company said it was bracing for a potential recession, which could cut into commercial enrollment.

Dive Brief:

• HCA Healthcare, one of the nation’s largest for-profit health systems, has agreed to acquire 41 urgent care centers in Texas.
• The deal includes 19 FastMed and 22 MedPost clinics in Dallas, Austin, San Antonio, Houston and El Paso, HCA said Thursday.
• Terms of the deal were not disclosed, but the buy is expected to close this summer, according to the operator.

Dive Insight: 

Hospitals have been increasingly investing in outpatient sites as patients seek out cheaper and more convenient care, driving a shift in utilization outside of the inpatient facility.

The purchase will expand the Nashville, Tennessee-based health system’s footprint in Texas, where it already operates 45 hospitals, 395 physician practices and 92 urgent care centers, according to HCA.

The buy executes on HCA’s plan to bolster its urgent care footprint this year. During its fourth quarter earnings call in January, CEO Sam Hazen said HCA could expand to 300 urgent care centers this year. HCA currently operates 268 urgent care clinics, according to the Texas deal press release.

“For M&A, we have been fairly active in the market with outpatient acquisitions, again, when they come available, whether it's urgent care, some freestanding emergency room, some [ambulatory surgical centers], some physician clinics, and so forth,” Hazen said. “And those are very complementary, synergistic to our network acquisitions, and we will continue to pursue those as they develop.”

In its first quarter earnings this year, the health system reported profit of $1.4 billion on revenue of $15.6 billion, compared with $15 billion in the prior-year period. The operator also increased its full-year revenue and net income guidance due to improvements in admissions and contract labor costs.

According to FastMed’s website, the company runs more than 200 walk-in locations, including 41 total clinics in Texas. It also operates urgent care centers in Arizona, North Carolina and Florida, which won’t be affected by the deal.

Cigna CEO David Cordani faced analysts’ questions Thursday about whether the company is falling behind in the frenzy of merger and acquisition activity among its competitors. 

“Do you not see this as an arms race?” Bank of America Merill Lynch Analyst Kevin Fischbeck asked executives during Cigna’s third-quarter earnings call Thursday.

Without naming the companies, Fischbeck said some competitors are “constantly buying things and adding capabilities” while others focus on share repurchases and selective smaller acquisitions.

Cigna said Thursday it has repurchased $5.8 billion worth of shares. 

“Do you feel ... that potentially ... not pursuing M&A will be a disadvantage over the next three to five years if you're not doing deals today?” Fischbeck asked. 

Cordani said the marketplace’s demand for “value creation” from health insurers will remain aggressive. Cordani said the first focus will be to continue to invest in organic opportunities and lean on partnerships to innovate.  

“We remain quite open to M&A, we do not deem it to be a silver bullet,” Cordani said.

Recently, insurers have inked sizable M&A deals with a focus on care at home and primary care.

Humana purchased the remaining stake of Kindred at Home, the nation’s largest home health provider, in a multibillion-dollar deal last year.

CVS Health, which operates Aetna, said it inked an $8 billion deal to acquire Signify Health, which focuses on primary care and home visits.

UnitedHealth Group, parent company of the insurer UnitedHealthcare, closed its $13 billion acquisition of health technology company Change Healthcare in October after surviving a challenge from the Department of Justice. 

As the demand for telehealth has grown, Cigna’s health services arm purchased MDLive last year, expanding the payer’s telemedicine offerings.

Cigna’s last blockbuster acquisition deal was in 2018 when it acquired standalone pharmacy benefit manager Express Scripts for $67 billion, furthering the trend of insurers bringing PBMs in house. 

The insurer reported a $2.8 billion profit for the third quarter, a 70% increase over the prior-year period thanks to the sale of its international life, accident and supplement benefits business to Chubb. Revenue increased 2% to $45.3 billion on higher enrollment and lower medical costs.

Dive Brief:

• Humana expects to pay between $450 million and $550 million to acquire the first group of senior-focused primary care centers that it developed through a joint venture with Welsh, Carson, Anderson & Stowe, Chief Financial Officer Susan Diamond said Friday during the insurer’s investor day.
• The agreement inked with Welsh Carson in 2020 included options for Humana to acquire the private equity firm's interest in the joint venture in stages over the next five to 10 years. The venture was expected to open 67 clinics by early 2023. “We are planning for the full acquisition of centers built in partnership with Welsh Carson through our put and call options beginning in 2025,” Diamond said.
• In mid-May, Humana and Welsh Carson announced a second joint venture that will spend up to $1.2 billion to open about 100 new value-based primary care clinics for Medicare patients between 2023 and 2025 under the CenterWell Senior Primary Care brand.

Dive Insight:

Humana is accelerating into primary care by expanding its chain of clinics serving Medicare patients into more markets.

The payer in May said it expected to operate about 250 clinics, under the CenterWell and Conviva Care Solutions brands, by the end of 2022. The total is up from 214 as of March, including 37 through its partnership with Welsh Carson and 177 wholly owned centers.

Humana expects to boost its total number of clinics by 30 to 50 per year through 2025, with up to 15 to 25 being added through acquisitions, Diamond said. The remaining about 30 per year will be added through joint ventures with Welsh Carson.

“We will continue to be focused and strategic in considering M&A opportunities as we look to extend our CenterWell capabilities with a particular focus on growing our primary care and home businesses,” Diamond said.

Longer term, Humana plans to spend a total of $2.5 billion to $3.5 billion from 2026 to 2030 on clinic expansion as it accelerates its level of annual builds, she said.

Humana currently has CenterWell clinics in Georgia, South Carolina, Florida, North Carolina, Texas, Kansas, Missouri, Nevada and Louisiana, according to the company's website.

Like the first joint venture, Humana’s second collaboration with Welsh Carson includes a series of put and call options through which Humana may acquire the PE firm's interest in the partnership. Under the agreement, Humana could acquire Welsh Carson’s stake in the second joint venture beginning in 2028, or five years after the opening of each set of clinics, or the firm could require Humana to buy its interest beginning in 2030, or seven years after each group of clinics opens.

In addition to the primary care centers, the CenterWell brand includes Humana’s home health and pharmacy businesses.