Kindred, RehabCare deal would create largest post-acute healthcare services company in U.S.
Kindred Healthcare executives believe doing better in postacute care means doing more, and they’ve struck a billion-dollar deal to make Kindred the company that does the most. If the deal for Kindred to buy RehabCare Group for $1.3 billion in cash, stock and assumed debt goes through, the combined company will be the No. 1 operator of longterm acute-care hospitals, the No. 1 operator of hospital-based and free-standing inpatient rehabilitation facilities, and the No. 1 skillednursing facility contract rehab manager. The company also would be a major player in the operation of skilled-nursing facilities. Home health and hospice also is a small part of the company’s offerings.
“It’s a huge deal,” said Jason Greis, an attorney for McGuireWoods, Chicago. The companies combined would be the largest post-acute provider in the nation, he said. In addition, “it continues the trend of mergers and acquisitions in the post-acute-care industry,” Greis said.
Officials for the two companies say the deal positions Kindred to benefit from Medicare’s move toward bundled payments and accom- modate a population of patients whose needs are growing more intense and complex.
The combined companies would rank among the largest for-profit healthcare providers. Kindred, based in Louisville, Ky., and RehabCare, based in St. Louis, together would have about $5.8 billion in revenue and operate 465 facilities in 46 states, according to the companies. That amount of revenue would make it larger than acute-care player Health Management Associates, Naples, Fla., which reported revenue of about $4.9 billion for the year ended Sept. 30.
Frank Morgan, a managing director and analyst for RBC Capital Markets in Nashville, was among the deal’s supporters. In a research comment, he wrote that the purchase would be “very attractive strategically” for Kindred, boosting its LTAC hospital business and gaining “a significant contract rehab platform.”
The deal was announced Feb. 8 and calls for Kindred to pay RehabCare shareholders a combination of $26 in cash and 0.471 of a share in Kindred stock for each share of RehabCare stock, which with about $400 million in assumed debt valued the company on the day of the announcement at $1.3 billion. The purchase would be financed with $1.6 billion in new borrowings that would be used in part to retire about $766 million in debt between the two companies. The deal is expected to close on or near June 30, pending various regulatory and procedural approvals, and was approved by both companies’ boards.
For executives at the two companies, the agreement opens the door to offering a more complete set of post-acute offerings as the industry moves to increasing the focus on continuity of care, while better serving patients who are the biggest users of Medicare. “Together with our growing home care and
hospice businesses, the merger offers our patients an expanded continuum of services and the opportunity for us to continue the care through an entire episode of treatment and recovery,” Paul Diaz, president and CEO of Kindred, said during an investor conference call. “We’re seeing greater and greater discharges from one setting to another, from an LTAC (hospital) to a skilled-nursing facility, from a skilled-nursing facility to home health,” he said.
Kindred executives also hope to take advantage of any bundling of Medicare payments that result from projects developed under last year’s Patient Protection and Affordable Care Act. Executives have identified 14 markets, including the Chicago, Indianapolis and Boston areas, in which it can operate what it calls a cluster strategy of meeting a geographic area’s spectrum of post-acute-care needs. “This (deal) absolutely positions us very uniquely within those cluster markets,” Diaz said. In addition, Kindred has targeted four other markets, including the regions around Kansas City, Mo., and St. Louis, as possible market clusters for the merged company.
It’s not certain, though, that a clustered market strategy is necessary for post-acute success, with or without the development of Medicare bundled payments or accountable care organizations.
Morgan said in an interview that he is not sure there is a clear answer as to whether clustering in a geographic market is a good idea. “It’s driven by a market-by-market basis,” he said. Moreover, it may be premature to be jumping on the bundled payment bandwagon given Medicare is just testing the idea, he said.
But Kindred officials said that another advantage to offering a fuller roster of postacute offerings, beyond preparing for new Medicare payment models, is that it will allow Kindred to better serve Medicare’s sickest patients. “There is an explosion of patients, unfortunately, that need multiple sites of service because they have very complex conditions,” Diaz said, noting that 25% of Medicare spending is consumed by 15% of patients, those with five or more chronic conditions. “That is really the sweet spot of the kinds of patients that RehabCare and Kindred together can care for and will care for,” Diaz said on a company webcast.
The addition of RehabCare would significantly boost Kindred’s LTAC hospital business, as well as its contracted rehab business with hospitals and skilled-nursing facilities. In 2010, about $638 million of RehabCare’s $1.3 billion in revenue came from LTAC hospitals, while Kindred had LTAC hospital revenue of about $1.9 billion on total revenue of $4.5 billion, according to pro forma data in an investor presentation by Kindred and RehabCare.
RehabCare, meanwhile, is stronger in contracted rehab, reporting about $518 million in its skilled-nursing rehabilitation services division and about $186 million in revenue in its hospital rehabilitation services division, according to data in the presentation. Kindred in 2010 had $497 million in contracted rehab revenue, according to the presentation. Kindred reports $2.1 billion in skilled-nursing facility revenue.
Kindred still faces stiff competition for leadership in the LTAC hospital arena in terms of numbers of facilities. Select Medical Holdings Corp., Mechanicsburg, Pa., reports it has 110 facilities, lagging the 118 that would be operated by Kindred and RehabCare. In terms of inpatient rehab, the merged company’s 121 facilities would overshadow primary competitor HealthSouth Corp., Birmingham, Ala., which reports it has 97 facilities. Golden Living is the leader in the number of skillednursing facilities, with 305 plus 16 assisted-living facilities. Kindred, which ranks fourth, has 226 skilled-nursing facilities.
Expanding into home health
Some in the industry speculated that the Kindred deal could encourage even more activity. Gary Lieberman, senior analyst for Wells Fargo Securities in San Francisco, wrote in a research note that he believes “the acquisition has increased investor speculation that other transactions may take place in the postacute sector. … One company that we believe may have to consider accelerating its timing for an acquisition is HealthSouth,” which has expressed a desire to expand into home health, skilled nursing or hospice. HealthSouth declined to comment.
If the Kindred offer goes through, Kindred’s rehab business will be renamed RehabCare and will be run by Chris Bird, currently president of Peoplefirst Rehabilitation, which is Kindred’s rehab division. Bird would be president of the merged division as well, according to a Kindred fact sheet. Also from Kindred’s Peoplefirst and keeping their titles in the new division would be Katie Gilchrest, senior vice president of finance, and Mary Van de Kamp, senior vice president of clinical operations.
Officials for the two companies say the deal positions Kindred to accommodate a population of patients whose needs are growing more intense and complex.
The agreement opens the door for offering a more complete
set of post-acute offerings while better serving patients.