Get­ting Stronger

Kin­dred, Re­habCare deal would cre­ate largest post-acute health­care ser­vices com­pany in U.S.

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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.

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