By JEFF GOLDSMITH

Years ago, the largest living thing in the world was thought to be the blue whale. Then someone discovered that the largest living thing in the world was actually the 106 acre, 47 thousand tree Pando aspen grove in central Utah, which genetic testing revealed to be a single organism. With its enormous network of underground roots and symbiotic relationship with a vast ecosystem of fungi, that aspen grove is a great metaphor for UnitedHealth Group. United, whose revenues amount to more than 8% of the US health system, is the largest healthcare enterprise in the world. The root system of UHG is a vast and poorly understood subsidiary called Optum.

At $226 billion annual revenues, Optum is the largest healthcare business in the US that no-one knows anything about. Optum by itself has revenues that are a little less than 5% of total US healthcare spending. An ill-starred Optum subsidiary, Change Healthcare, which suffered a catastrophic $100 billion cyberattack on February 21, 2024 that put most of the US health system on life support, put its parent company Optum in the headlines.

But Change Healthcare is a tiny (less than 2%) piece of this vast new (less than twenty years old) healthcare enterprise. If it were freestanding, Optum would be the 12^th largest company in the US: identical in size to Costco and slightly larger than Microsoft. Optum’s topline revenues are almost four times larger than HCA, the nation’s largest hospital company, one third larger than the entirety of Elevance, United’s most significant health plan competitor, and more than double the size of Kaiser Permanente.

If there really were economies of scale in healthcare, they would mean that care was of demonstrably better value provided by vast enterprises like Optum/United than in more fragmented, smaller, or less integrated alternatives. It is not clear that it is. If value does not reach patients and physicians in ways that matter to them—in better, less expensive, and more responsive care, in improved health or in a less hassled and more fulfilling practice—ultimately the care system as well as United will suffer.

What is Optum?

Optum is a diversified health services, financing and business intelligence subsidiary of aptly named UnitedHealth Group. It provides health services, purchases drugs on behalf of United’s health plan, and provides consulting, logistical support (e.g. claims management and IT enablement) and business intelligence services to United’s health plan business, as well as to United’s competitors.

Of Optum’s $226 billion topline, $136.4 billion (or 60% of its total revenues) represent clinical and business services provided to United’s Health Insurance business. Corporate UnitedHealth Group, Optum included, generated $29 billion in cashflow in 23, and $118.3 billion since 2019. United channeled almost $52 billion of that cash into buying health-related businesses, nearly all of which end up housed inside Optum.

For most of the past decade, Optum has been driving force of incremental profit growth for United. Optum’s operating profits grew from $6.7 billion in 2017 (34% of UHG total) to $15.9 billion in 2023 (55% of total). However, the two most profitable pieces of Optum by operating margin—Optum Health and Optum Insight—have seen their operating margins fall by one third in just four years. The slowing of Optum’s profitability is a huge challenge for United.

Gaul Had Three Parts, So Does Optum

The largest and least profitable (by percent margin) piece of Optum is its giant Pharmacy Benefit Manager, Optum Rx, the third largest PBM in the US.

Optum Rx is more than half of Optum by revenue ($116.1 billion) but less than a third of its profits. The core of its profit comes from rebates from drug companies for featuring their drugs on OptumRx’s formulary- which governs which drugs United Healthcare subscribers get access to and how much they pay for them. Optum Rx derives almost 62% of its revenues from managing pharmaceutical spending for United’s health plan, but the remainder for servicing both health plan competitors of United and self-funded employers. It is the most “vertical” piece of Optum—in that it has the highest share of its revenues coming from United out of all of Optum’s major segments.

The accounting for these rebates is, to put it gently, less than transparent. Some of these rebates are returned to UHG customers (such as self-funded employers). Some are returned to insurers other than United for which Optum Rx processes pharmaceutical claims. And some are kept as profit inside either Optum Rx or United’s health insurance business. Optum Rx does not disclose the ultimate destination of many billions in rebates.

This lack of transparency is, understandably, a subject of political controversy. Congress is considering tightening PBM disclosures and possibly redirecting the flow of rebates back to health-plan customers and, gasp, potentially to patients themselves. Given the widening political controversy about whether PBMs actually save consumers money, Optum Rx’s business model is a major strategic vulnerability for UHG.

The second major piece of Optum, OptumInsight, has been in the glare of public controversy since its Change Healthcare subsidiary was hacked by the mysterious Russian hacker collective BlackCat in February. Its main business lines are: business intelligence, consulting, IT enablement, and business process outsourcing to non-UHG health enterprises. OptumInsight is the smallest of Optum’s three pieces at $18.9 billion, but the most profitable—22.5% profit margin—$4.3 billion in operating earnings. I have written extensively about OptumInsight, almost 42% of whose revenues derive from servicing United’s other businesses, but will not repeat that analysis here.

Optum Health

The piece we want to focus on here is the largest generator of profits for Optum, Optum Health, a diversified healthcare services enterprise. Optum Health is a $95.3 billion business, which makes it the second largest care enterprise in the US after Kaiser Permanente. It generates nearly $6.6 billion in operating profit for United. However, Optum Health’s profit margin declined from more than 10% in 2018 to about 6.6% in the third quarter of 2023. If not turned around, Optum Health’s declining profitability is a threat to United’s enterprise valuation and reputation. This is why when Optum reported disappointing 3Q23 earnings, United’s Chairman Steven Hemsley cleaned house at Optum Health, installing new leadership.

Since United is not required to disclose acquisitions that are not “material”, there is no way of knowing what United has actually bought and what it presently owns. But Optum Health is home to an enormous collection of physician groups, surgicenters, a large urgent care network, and two of the largest home health agencies in the US. It is a sprawling nationwide roll-up of healthcare assets.

Optum claims 90 thousand physicians in its networks but is cagey on how many are actually employed by Optum and how many are independent physicians in Independent Practice Associations that wrap around the employed groups and are common in the West and Southwest. An educated guess would be that Optum employs from 45 to 60 thousand physicians. If true, this would still be between double and triple the size of Permanente Medical Groups. Optum’s profitability dwarfs that of Kaiser (see below), perhaps a function of Kaiser operating 39 hospitals and Optum not operating a single one.

Optum Health receives $57.7 billion (or 60% of its total revenues) from United’s health plan—the vertical part. But it also claims $21.8 billion in premium income, e.g. capitation, from “non-affiliated” customers, namely health plan competitors of United’s health plans. That capitation represents almost 23% of Optum Health’s total revenues. In addition, Optum Health reports $14.1 billion in services income, almost certainly “fee-for-service” based income from other health plans. What share of Optum Health’s $6.6 billion in profits come from these contracts with United’s competitors is a compelling mystery, since this is not reported in United’s financial disclosures.

Whatever the profit split, Optum Health is very much dependent not merely on the kindness of strangers, but of competitors of United’s core business. An important and unknowable question is whether Optum’s contract renewals with those competitors have enabled it to recover the soaring costs of nursing coverage, temporary physician coverage, turnover and retirements, and other labor factors that have exploded in the wake of the COVID pandemic. Every care delivery enterprise in the US has faced rising people costs, as the largest care delivery enterprise in the US, these forces have not spared Optum.

Optum’s medical group acquisition strategy to date has targeted independent (e.g. non-hospital) medical groups with significant at-risk (e.g. “capitated”) populations, mainly in Medicare Advantage plans. These included the original asset, the Nevada based Sierra Medical Group which United acquired when it purchased the Sierra Health Plan in 2007, but also Healthcare Partners, Monarch and North American Medical Management (based in Los Angeles), WellMed in central Texas, Atrius and Reliant in Massachusetts, Everett and PolyClinic in Seattle and Kelsey Seybold Clinic in Houston Texas. It is a growing presence in Oregon, New York and Connecticut through mainly smaller acquisitions. The map below showed where Optum Health’s assets were as of 2022.

The Vertical Integration Conundrum

Healthcare strategists have touted the idea of vertical integration –pioneered by Kaiser Permanente—which offers a comprehensive healthcare service experience—pretty much soup to nuts—through its health plan. The only way to access Kaiser physicians and hospitals is by enrolling in their health plan. Vertical integration has been viewed as a way of reducing health cost (by eliminating middlemen’s profits) and procuring products and services more efficiently, though actual evidence that it does so is scarce upon the ground.

With United, the health plan preceded the health services. In the first thirty years of its existence, United was a “network” plan, which contracted with independent hospitals and doctors for care. With the Sierra acquisition in 2007, United embarked on an adventure in strategic ambiguity—owning physician clinics which provided care to United customers as well as those of competing health plans. After Sierra and WellMed, a large capitated medical group in central Texas that Optum acquired in 2011, Optum’s medical group acquisitions have been, at best, loosely tied to United’s health plan enrollment. A 2018 analysis showed at best modest overlap between United’s Medicare Advantage market presence and the Optum Health network.

Making United “more vertical” in Optum markets would be complicated. Offering financial incentives to the Optum Health patients presently enrolled in competing plans to switch to United would pose two challenges. One is that this would damage Optum Health’s contracts with competing health plans. And sharing savings (e.g. some of United’s profits) with patients to redirect their care or lowering their rates would reduce health plan profit margins.

Conversely, telling Optum patients that they could only get care if they enrolled in United’s health plan would trigger a firestorm of negative publicity not to mention retaliation and cancelled contracts by United’s health plan competitors. Telling United subscribers they could only get care from Optum physicians and facilities would overwhelm them in volume and trigger longer waiting times and provider burnout. In sum, it does not appear to make business sense for United to make Optum more “vertically aligned” with its health plans. So straddling competitors in local markets seems to be an ambiguity with which United will have to cope going forward.

How much unregulated and invisible profit United’s health plans can generate  “inside” United’s visible and highly regulated medical loss ratio (MLR) by selectively and generously compensating Optum’s physicians, surgical facilities, etc. is the most compelling mystery of this business model. Matthew Holt, a veteran industry observer, has termed this strategy of maximizing enterprise profit through contracting favorably with yourself “provider fracking.” Companies that control both insurance and care delivery have a great deal of flexibility in what the accountants term “transfer pricing”.  This flexibility is valuable and would be lost were Optum to be spun off in a future United restructuring.

Two Big Risks for the Partially Integrated Optum Health

There are two other major clouds on the horizon for Optum Health. One is the Federal Trade Commission’s proposal to ban of non-compete clauses for corporate employees, including physicians. Non-compete clauses effectively make the patient populations of acquired physician groups the property of Optum. If physicians leave Optum, they are required to move out of the community to practice, surrendering their patients to the company.

Many of the senior physicians who were equity holders in the large practices acquired by Optum departed millionaires with United’s cash, leaving behind junior colleagues to suffer through both Optum system conversions and leadership changes that affected their daily lives as practitioners. Outlawing non-competes would enable disgruntled Optum physicians to remain in their home communities and take their patients with them.

If FTC precedents hold, the non-compete clause prohibition might not apply to non-profit hospitals (80% of all hospitals are non-profit), putting Optum and other corporate employers of physicians at a competitive disadvantage. In my opinion, entities that rely on coercive measures like non-competes to assure physician loyalty need to take a long hard look at their corporate culture.

The FTC’s proposed ban on non-competes is a major enterprise risk for Optum Health’s vast agglomeration of medical groups. If enacted, it would force Optum management directly to address physician working conditions, values, and priorities. United does have the potential for markedly reducing the documentation burden for Optum physicians that take care of United patients by selectively altering its claims review strategies. It will be interesting to see if they do so.

E Pluribus Unum

The other major cloud on the horizon is the unionization of physicians. According to AMA, some 67 thousand practicing physicians (e.g. not interns, residents or fellowship trainees) are members of labor unions. There are been several recent high profile instances where disillusioned hospital-employed physicians elected union representation (Allina in Minneapolis/St Paul, Providence St. Vincent and Legacy Health in Portland OR, are recent examples).

Unionization is often not motivated directly by compensation issues but rather by a sense of powerlessness and a feeling that core issues that affect the employee are not being addressed. Unionization would both increase Optum’s operating costs and reduce its management’s flexibility. Optum Health’s groups are by far the largest and most lucrative target of physician unionization in the United States.

Down in the Valley

The emerging market risks for Optum can be seen in two medium sized cities in Oregon’s Willamette Valley. During the early pandemic, Eugene-based Oregon Clinic encountered terminal operating difficulties and sold to Optum in late 2020. In March of this year, Optum sent letters to patients of departing Oregon Clinic physicians that they would have to find care elsewhere because they were unable to recruit replacements for their physicians. These 32 physicians resigned, apparently, because they were unhappy with working conditions at Oregon Clinic after the Optum takeover. Reading between the lines, due to non-competes, the departing physicians were unable to remain the Eugene area and thus unable to continue seeing long-standing patients.

Meanwhile, up the road forty miles in Corvallis, Optum requested that the State of Oregon expedite review of its proposed acquisition of the Corvallis Clinic due to accelerating cash flow difficulties that made it impossible for the Clinic to meet its payroll. The State ultimately acceded to Optum’s request.   The apparent cause of the cash flow problem: the Change Healthcare cyberattack, which made it impossible for Change, an Optum subsidiary to accept or pay claims from its provider networks, including, most likely Corvallis Clinic. In other words, the catastrophic system failure of one piece of Optum likely accelerated another piece of Optum’s acquisition of the largest physician group in town.

Taken together, these simultaneous problems have not served to enhance Optum’s image as a care provider in the southern Willamette Valley. They make the company appear as a cold and exploitative outsider capitalizing on problems it helped create. These events will not enhance the likelihood of United growing its core insurance business in the area or endear the company to Oregon’s health system regulators, or its state managed Medicaid program, the Oregon Health Plan.

Outgrowing Its Nervous System?

Optum Health has almost quadrupled in size in the past six years, but its profit margin has fallen by a third. Given the explosive pace of acquisitions and the cost pressures on physician practices during and after the COVID pandemic, this margin deterioration is not surprising. However, if Optum Health’s new management does not stabilize its operating performance, margins could deteriorate further, putting pressure on United’s earnings.

There are no evident economies of scale or co-ordination in physician services. How Optum can recruit and retain high quality motivated physicians and advanced practice nurses to its vast care system is a major challenge to the enterprise. They will need a compelling answer to the question: “Why work for Optum?” The answer cannot be: we are huge and you don’t have a choice. How the company creates value for its tens of thousands of physicians and nurses will be the central management facing United, or indeed any large-scale employer of these complex professionals.

There is growing evidence that there are diseconomies both of scale and co-ordination in health services generally. Those diseconomies manifest themselves in the vast empty space between the giant enterprise and the physicians and patients who rely on them. Every denial of care by United’s AI-driven claims management system makes a tiny dent in the company’s consumer image. Patient anger over arbitrary and self-interested health plan meddling in care decisions resulted in first managed care backlash in the late 1990’s. United’s recent Net Promoter Score of -5 suggests that it has a long way to travel to regain customer confidence and loyalty.

The physician-patient relationship remains the bedrock of the health system. If the nerve endings of an enterprise do not reach out and sense the effect it is having on that relationship, it isn’t going to be very long before it either ceases to grow or ceases to be profitable or, likely, both. United and Optum have reached that tipping point right now. Follow Optum’s physicians and their patients and see the future.

Acknowledgements: Trevor Goldsmith provided research and technical support for this piece. The author appreciates Ian Morrison, Andrew Mueller  and Jamie Robinson for reading and commenting on this piece.

Jeff Goldsmith is a veteran health care futurist, President of Health Futures Inc and regular THCB Contributor. This comes from his personal substack

I’m delighted to have a new contributor on THCB today. Blake Madden writes an excellent health care business newsletter called The Healthy Muse, which I highly suggest you subscribe to. Recently he gave his take on Optum’s latest big acquisition and it’s the first of I hope many pieces of his we’ll run on THCB–Matthew Holt

by BLAKE MADDEN

On March 29, UnitedHealthcare’s Optum announced its acquisition of LHC Group for $170/share. The transaction values LHC at about $6.4 billion including debt.

I know we all joke about working for UnitedHealthcare one day, but it’s terrifying when you think about their sheer scale. Even scarier when you look at Optum’s growth:

• Optum Revenue in 2012: $29.4 billion
• Optum Revenue in 2021: $155.6 billion. Like. What.

LHC Group is an important acquisition for Optum. Payors are continuing to morph into ‘payviders’ and UHG / Optum has a huge competitive advantage given its 60k aligned physician base. Acquiring LHC Group accelerates this payvider trend but also allows UHG to catch up to Humana, who now owns all of Kindred, in the post-acute sphere.

Meanwhile, Optum is deploying its grand vision of integrated care delivery right before our eyes. It’s happening whether you like it or not.

Even though I provided a first-impressions breakdown on Twitter related to the deal, I had to break this deal down into more detail and give you guys my thoughts on why the LHC acquisition is so significant.

Let’s dive in.

Investment and Deal Thesis.

LHC Group is well-positioned on a few fronts in the fast-growing home health sector:

• They’re partnered with 435 health systems, giving Optum access to hundreds of hospital joint ventures.
• Home health and at-home care is a MUCH more desirable care setting for Medicare beneficiaries. Comfort and patient experience is a huge factor.
• Of all post-acute care settings, home health is the most cost-effective. Home health costs way less than skilled nursing. Lower costs = lower medical loss ratio for United. By keeping patients out of SNFs and hospitals, these programs could disrupt facility-based care delivery in the coming years.
• From a demographics standpoint, home health benefits from an aging baby boomer population. Medicare will cover 79 million people by 2030 a major secular trend for healthcare. I’m sure you’re all WELL aware of that!
• PDGM and other headwinds for smaller agencies will run out of relief funding, resulting in consolidation. This consolidation will benefit larger home health platforms.

In summary, LHC Group is a great operator in a high-growth industry: Home Health.

First…some context on the Home Health Market.

Given increased patient desire to stay in the home for care, growing virtual care options from digital health players, the aging and growing Medicare population, the increasing negative stigma around nursing homes from COVID, and enhanced alternative payment models like the Hospital-at-Home (HaH) program, PACE, and other at-home care models, home health is just getting started.

• McKinsey estimates that $265 BILLION worth of care services conducted in clinics will shift to the home by 2025. That’s a four-fold increase over current home health care spending. Home health spending could double by 2030.

Fragmentation. LHC and other home health providers are benefiting from a fragmented market. Tuck-in acquisitions of smaller agencies are commonplace these days.

As of 2022, the top 5 providers account for about 21% of the total home health market share. This statistic indicates the significant opportunity for continued roll-up of the sector.

• Private equity has noticed this trend, too. Major PE players have entered both the home health and hospice markets to create platforms in the spaces. One recent splashy deal that comes to mind for me was Advent International’s acquisition of AccentCare in 2019.

Notable Deals in Home Health & Hospice

Home health has been one of the hottest M&A markets in healthcare services, both among large and small deals:

• The Ensign Group spun off its home health operations into the Pennant Group in about a $1 billion deal in late 2019.
• AccentCare merged with Seasons Hospice in November 2020.
• Humana purchased Kindred at Home for around $5.7 billion in August 2021 (for the remaining 60%) along with Curo Health Services in July 2018 for $1.4 billion.
• Optum purchased Landmark Health for around $3.5 billion (more on that below) in February 2021.
• Amedisys acquired Contessa Health – a major hospital-at-home provider – for $250 million in June 2021. When Amedisys made this purchase, they claimed it expanded their total addressable market from $44 billion to $73 billion. Do the math there, and that’s how big of an opportunity hospital-at-home could be! More on that below.
• HCA purchased 80% of Brookdale’s home health assets in a $400 million deal in July 2021.
• Encompass announced plans to spin off its home health assets into its own publicly-traded company. The post-acute firm rebranded the segment to Enhabit in Q1 of this year.

Not mentioned above is the plethora of home health, hospice, and home care deals taking place behind the scenes among private equity players, health systems, and publicly-traded operators alike.

It’s a great time to sell a home health and hospice agency, but it’s also a highly opportunistic time for larger operators to continue to roll up the space. Sector M&A activity is only going to accelerate from this point as platform players gobble up assets.

Background on LHC Group. Why Them?

LHC Group is one of the biggest home health agencies in the US. After its founding in 1994, LHC Group’s business grew from a single home health agency into a $6.4 billion enterprise. The firm operates in 37 states through an impressive portfolio of assets across the spectrum that Optum can now take advantage of:

• 557 Home health agencies
• 170 Hospice locations
• 136 Home care locations
• 12 LTACHs
• The most underrated asset…30,000 trained clinical employees. During a labor shortage, Optum is creating a pipeline to out-compete all other healthcare service providers on staffing and talent.

At the last check, LHC Group holds about 4-5% of national market share. That’s good enough to be the third largest national home health provider behind Amedisys and Kindred. Since its inception, LHC has grown through tuck-in acquisitions, JV partnerships, and organic market share retention from solid execution.

In 2017, LHC Group merged with fellow public home health operator Almost Family in a $2.4 billion deal at 14x EBITDA.

• For context, LHC sold to United this month for 2.4x forward revenue and around a 21.4x forward EBITDA.

More recently, LHC purchased 47 locations from Brookdale as part of the planned divestitures included in the HCA-Brookdale $400 million deal.

Yes, multiples in home health are FROTHY but justified given the coming growth. Home health & hospice boast the highest EBITDA multiples in healthcare. Of course, that excludes the slight nonsense going on in digital health.

While LHC has succeeded in its M&A strategy, its ability to integrate and operate those assets has resulted in even more success.

LHC’s Strategy and Secret Sauce.

As mentioned, LHC prioritizes partnerships with hospitals and health systems when approaching markets. These partnerships vastly increase LHC’s chances of market viability and success.

By partnering with hospitals in local markets, LHC locks in large market referral sources from affiliated facilities and leverages that captive volume to out-compete other market players. The partnership doesn’t reimbursement hurt rates, either – even though most home health recipients are on Medicare.

• As of March 2022, LHC held partnerships with 435 hospitals and health systems, receiving referrals for services from 3,600 hospitals across their geographical footprint.

The strategy results in a healthy bottom line. Last year, LHC generated about $2.2 billion in revenue and $216 million in EBITDA (10%ish margin).

Before the acquisition, LHC guided to $2.5 billion and $280 million in EBITDA (margin expansion to 11.2%). The firm is well-positioned and capitalized for growth. Given home health’s capital-light model, LHC holds a solid balance sheet slated to overcome short-term labor and inflation challenges.

• On labor issues, LHC has noted that employee turnover is well below home health industry averages, which speaks volumes (literally) about its operational excellence. More staff = more census = more cash monaaay.

I’m somewhat surprised they sold to United for a low premium (~8%) given their bullish rhetoric around short-term challenges. When discussed on the deal call, though, Optum mentioned that the initial share price premium was around 25% prior to LHC’s recent surge in pricing. Overall, LHC’s share price has suffered since July 2021. Side note – did someone know something starting in January?

Fishy.

How Optum can unleash LHC Group.

So, we’ve established that home health, home care, hospice, and other post-acute services that LHC Group offers have a growing place in healthcare in the coming years. LHC Group was already doing a great job executing its growth-through-JVs strategy from a long-term perspective.

Optum and UHG can unlock value one step further by integrating LHC’s post-acute services into Optum’s continuum of care. That continuum includes an impressive portfolio of acquired post-acute assets. In the past few years, Optum has invested HEAVILY in its at-home care programs by launching a slew of new services and aggressively acquiring key players in the home and virtual care sector:

• Launched Optum HouseCall (1.6 million visits in 2020);
• Acquired Landmark Health in 2021 for around $3.5 billion, which is a direct contracting entity and is involved in hospital-at-home and other value-based programs;
• Acquired naviHealth, a post-acute management services and care navigation platform, in an alleged $1 billion + deal;
• Launched a virtual first plan in October 2021 called NavigateNOW;
• Acquired AbleTo for just south of $500 million, a virtual therapy provider

Aside from the post-acute vertical, UHG acquiring key assets in adjacent markets as well. Some recent, notable deals:

• Bought Change Healthcare for ~$13 billion (assuming the deal goes through pending antitrust investigation. It might not given recent rhetoric, but the burden of proof is on the government)
• Rumors of the Refresh Mental Health deal for likely $1 billion+
• And now the acquisition of LHC Group for $6 billion+

Coupled with the above acquisitions, UnitedHealthcare has repeatedly echoed positive sentiment for Optum. Optum is, after all, United’s primary vehicle for growth in the coming years.

More specifically, United has grown more and more bullish on the expansion of home health services. Just take a look at UHG‘s CEO Andrew Witty touching on Optum’s bullish thesis for at-home care during United’s Q4 2021 earnings call. We should have been paying attention!

“I’ve been super impressed with the development, not just in the clinic, but also through the at-home programs, where we’re able to continue to make sure folks are looked after properly. And actually, particularly as we’ve gone through the pandemic environment, people’s preference to have care delivered in the home has become clearer and clearer.” – Andrew Witty, UHG CEO, Q4 Earnings Call

When interviewed for deal comments after the LHC Group acquisition announcement, Wyatt Decker, the CEO of Optum, doubled down on Andrew Witty’s comments, touting the demand for at-home care.

“This trend has really only just begun, of how much care can truly be delivered in the home…We can give care in the home, which is a lower-cost setting…than nursing homes or more advanced care facilities.”

Through Optum, UHG can keep patients out of costly facility-based care settings like SNFs, IRFs, and even hospitals. This care coordination allows UHG to better manage medical costs long-term. UnitedHealthcare can and will continue to offer competitive insurance plans and services by leveraging Optum’s 60k physicians and 2k sites coupled with these new post-acute and new virtual care assets. Pretty powerful synergy, if you ask me.

In addition to the above assets at Optum’s disposal for post-acute strategy, LHC also announced a huge partnership with SCP Health in mid-2021 to vastly increase SNF@ Home and HaH programs nationwide. The partnership combined LHC’s home health workforce with SCP’s 7,500 clinicians to create a widespread Advanced Care at Home program.

• Optum can leverage LHC’s existing hospital partners to scale hospital-at-home and skilled-nursing-at-home programs – value-based care programs that are just beginning to ripen. If effective, the giant could disrupt these traditionally facility-based services significantly. Take a look at LHC’s existing HaH and SaH model.

If LHC can deploy the above footprint with SCP’s 7,500 clinicians, just think how LHC Group and Optum can scale Advanced Care @ Home with 60,000+ physicians and other clinicians.

• Starting to get it? Strategies like these are how Optum will realize incredible deal synergy from this acquisition – if executed successfully.

This is just the beginning of home-based care initiatives. Other emerging home care segments include home infusions, home-based dialysis, and primary home care – all of which are future avenues of growth for Optum.

Home Health is favored positively in Congress.

Multiple legislative packages increasingly favor at-home care and new value-based programs in the home health sector. Here are just a few programs and bills that signal strongly in favor of future growth for home health:

Choose Home Care Act of 2021: The bill was introduced in Congress late last year and would allow Medicare beneficiaries to be given the option to choose to recover at home rather than in a setting like a skilled nursing facility (Factsheet)

Public Health Emergency Provisions: The PHE created a lot of positive externalities for at-home care. Currently, the PHE will expire on April 16 but will likely be extended for another 90 days, which would maintain the following provisions for post-acute care specifically:

• Medicare sequestration suspension (AKA, better reimbursement that might be permanently delayed)
• Relaxed admission rules and delayed site-neutral payment implementation for LTACHs
• Interestingly, the PHE and associated relief dollars from the CARES Act kept struggling agencies afloat during the pandemic when they otherwise would have gone out of business or sold. CARES Act relief payments, accelerated payments from Medicare, and paycheck protection program loans helped bolster small agency balance sheets during the volume dry spell.

HaH and SNF@H: Hospital and Skilled Nursing At-Home programs are receiving bipartisan support in Congress and will likely get extended another two years with widespread health system backing through the Hospital Inpatient Modernization Act or similar legislation.

• Skilled nursing may soon be on the hook for reimbursement cuts from Medicare, which would result in a double whammy for home health.

Home Health CMS Reimbursement: For 2022, CMS instituted a basket rate increase of 2.5% and no cuts; I would expect even higher basket rates for 2023 and likely an adjustment to the wage rate calculation to account for inflation trends.

• The 2022 final rule will expand the Home Health Value Based Payment demonstration from 9 states to all 50 (!!!)

PDGM: The Patient-Driven Groupings Model, AKA, PDGM, was supposed to shake up the home health industry during its implementation in 2020. Here’s what PDGM changed and why smaller operators will struggle post-’Rona:

• PDGM created a 30 day payment period and based those payments on how patients were classified into 432 distinct payment groups. These payment groups are further broken down into 5 dimensions of care, including referral source, period timing, clinical conditions, functional status, and comorbidities.
• What YOU need to know about PDGM is that the payments are no longer based on volumes, or the number of in-person therapy visits provided. Previously, the prospective payment system would INCREASE payments as the number of therapy visits for that patient increased. But no longer.
• Along with the decoupling from visit volumes, home health agencies can no longer request advanced payments (RAP) from Medicare (AKA, “pay us upfront and we’ll figure out the differences in payment later”). Before CMS phased this out, providers could receive 50-60% of total payments upfront by submitting an RAP. RAPs were replaced by Notices of Admissions (NOAs) starting in 2022.
• So now, instead of receiving that large upfront payment, home health agencies get nothing, which hamstrings cash flow quite a bit. As we say in business school, Cash is King.

As a result of current inflation headwinds, labor shortages, and cash flow changes, I’m expecting smaller home health agencies to struggle post-’Rona. These dynamics will cause them to sell to bigger players…kind of similar to how independent physicians sold to health systems and private equity given operational struggles during the pandemic.

Before the pandemic, the sentiment regarding PDGM heading into the major changes was that the program would cause unprecedented levels of consolidation, echoing my thoughts above:

“Combined with the two 30-day payment periods under PDGM, the elimination of the RAP should lead to more consolidation in the industry than we’ve experienced in the last 2 decades. It will hit cash flows hard for the smaller agencies; but for the larger agencies, such as LHC, we would expect minimal impact.” Keith Myers, Co-Founder, Chairman & CEO, LHC Group Q3 2019 Earnings Call

“We believe PDGM has the potential to accelerate an industry consolidation unlike any we’ve seen in recent memory. We will be ready” Keith Myers, Co-Founder, Chairman & CEO, LHC Group Q3 2019 Earnings Call

In summary, we haven’t seen these effects yet on smaller home health operators because of the easy money public health emergency policies. But eventually, we’ll find out if Keith was right. I bet he is.

Conclusion

There are WAY too many positive dynamics at play in favor of LHC Group’s portfolio of assets for you to ignore Optum’s acquisition:

• Regulations are supporting home-based initiatives, and reimbursement is stable. Lawmaker scrutiny is mounting on SNFs, providing further discharge opportunities and advancement for home health.
• LHC has a history of operational success in home health and is the missing link among Optum’s various post-acute and at-home initiatives. Optum needed this acquisition to keep up with Humana and others pursuing similar post-acute strategies.
• Home health is highly fragmented and PDGM creates headaches for smaller agencies, which will allow Optum to pounce on opportunistic M&A in the space.
• Along with its huge physician base, Optum can leverage LHC’s health system partnerships to drastically expand Advanced Care at Home programs combined with recent acquisitions of Landmark and naviHealth.
• By keeping patients out of SNFs and hospitals, these programs could severely disrupt facility-based care delivery in the coming years through the home.

Final thoughts on antitrust…You could argue that there are antitrust concerns related to this transaction given that UHG is essentially creating a vertical monopoly, and I get that.

• I would argue that the deal is a win for most parties involved, including patients, health systems, and keeping patients out of costlier care settings while receiving effective treatment at home. If Optum doesn’t abuse its position (which is a big if, mind you), I have no problem with the increasing vertical integration in healthcare.

Down the line, I would not be surprised whatsoever if regulators forced United and Optum to split.

But for now, watch out for this scaled healthcare titan.

Blake Madden is the founder of The Healthy Muse and is also a manager at VMG Health

By KIM BELLARD

Last week General Electric announced it was breaking itself up. GE is an American icon, part of America’s industrial landscape for the last 129 years, but the 21^st century has not been kind to it. The breakup didn’t come as a complete surprise. Then later in the week Johnson and Johnson, another longtime American icon, also announced it would split itself up, and I thought, well, that’s interesting. When on the same day Toshiba said it was splitting itself up, I thought, hmm, I may have to write about this.

Healthcare is still in the consolidation phase, but there may be some lessons here for it.

For most of its existence, GE was an acquirer, gobbling up companies with the belief that its vaunted management structure could provide value no matter what the industry. This was most famously true in the Jack Welch days, but since those days it has been gradually shrinking itself, spinning off some of its more problematic divisions, like appliances, locomotives, and much of its once-huge financial services business. It will spin off its healthcare business in early 2023 and its renewable energy and power business in early 2024; its aviation business will keep the GE name. 

“A healthcare investor wants to invest in healthcare,” CEO Larry Culp explained. “We know we are under-owned in each of those three sectors, in part because of our structure.”

Mr. Culp told The Wall Street Journal, “It was not necessarily a time for grand plans. We needed to get the balance sheet squared away and get back to basics operationally.” Scott Davis, chief executive of Melius Research, was not so kind, telling The New York Times: “G.E. got caught in the past — and now it’s the end, it’s over.” In The Washington Post, Dan Ives of Wedbush Securities called it “a sign of the times in this new digital world.”

J&J had a different challenge: selling pharmaceuticals and medical devices is just much more profitable than selling Band-Aids and Tylenol. To reflect that, it is splitting into one company to sell the former two types of products and a consumer products company for the rest. The former company will retain the Johnson & Johnson name. 

“Doctors and hospitals just want hips and knees, and drugs that work, at a cheap price. They’re not really thinking of Band-Aids,” investor/analyst Les Funtleyder told The New York Times. 

Toshiba’s story is perhaps somewhat different. It had been dealing with the fallout from a major accounting scandal for several years, some failed takeover bids, and (separate) ousters of its CEO and its Chairman. It is spinning off its energy and infrastructure unit and its device and storage operation, and will retain the Toshiba name for its 40% stake in Kioxia, the flash memory company it spun off in 2018, as well as some other assets.  

The Toshiba breakup is believed to be the first such split by a Japanese company. Toshiba had often been compared to GE and was even older than GE, but CEO Satoshi Tsunakawa now stresses: “We are no longer an industrial conglomerate. Our strength is in infrastructure, energy, and semiconductors. The reorganization is an evolution toward the future.”

As unique as each of their stories is, the thing that each breakup has in common is that the hope is that investors will see greater value as a result. It’s not about the products or the customers; it’s about the returns. 

Healthcare knows about that. 

Healthcare has been a hotbed of acquisition and consolidation. Hospitals buy hospitals; health insurers buy health insurers, pharmaceutical companies buy pharmaceutical companies, digital health companies buy digital health companies, private equity firms buy physician practices. But we’re also seeing things like CVS buying Aetna or UnitedHealth Group buying DaVita Medical Group (and trying to buy Change Healthcare).  

This is not really for “our” benefit. I mean, does anyone really think either their pharmacy or their health insurance experiences are better since CVS took over Aetna? Can anyone really explain all the things Optum now does? Are ever-bigger pharmaceutical companies really going to produce more innovation or lower drug prices?

Still, though, when I see conglomerates like GE, J&J, or Toshiba breaking up, what I think about most are not those kinds of healthcare conglomerates, but, rather, hospitals.

Hospital systems are big. It probably won’t come as much surprise that a for-profit chain like HCA has annual revenues of $59b, but it might that “non-profit” UPMC has annual revenues of $23b.  Mayo Clinic and Cleveland Clinic also report double-digit billion-dollar revenues. We’re talking about big businesses. 

But are hospitals anything other than healthcare conglomerates? They fix your heart over here, they implant a new hip over there, they deliver your babies, they attack a variety of your cancers in a variety of ways, they put various kinds of scopes inside you, they take detailed images of you, and, Lord knows, they do all sorts of lab tests, all while running the meter on you to ensure they can charge you as much as they are allowed. 

I can see the argument that you’ll need imaging and lab tests whether you are getting a bypass or having a baby, but it is not at all clear that doing bypasses makes a hospital a better place to deliver babies. Being the best cancer hospital, or even just a good cancer hospital, doesn’t mean it is good at doing a cholecystectomy. Service lines are businesses; it’s hard enough to ensure quality within a service line, much less across them. More isn’t necessarily better.

Michael Farr, head of Farr, Miller & Washington, told WaPo: “More effective CEOs said, ‘Wait a minute, I need to make sure this is strategically and logically integrated with everything our core business is doing.’”  He was speaking of the GE divestiture, but how many hospital CEOs are having that same examination? How many of them could truly define their “core business,” other than offering a bland “patient care”? Which patients, which care, in what places using what services?

Increasingly, hospitals want to be all things to all patients in all places, just as industrial conglomerates wanted to serve all customers in all industries. That worked well for a long time, but no longer. That time is coming in healthcare too. Hospitals, and all healthcare companies, need to truly define, and focus on, their core business.

Healthcare has too many conglomerates. Time for them to break up. 

Kim is a former emarketing exec at a major Blues plan, editor of the late & lamented Tincture.io, and now regular THCB contributor.

It’s interesting enough that Optum’s Vice President for Direct-to-Consumer is not only a serial digital health entrepreneur, but she’s also a behavior change scientist. Dr. Kate Wolin stops by to share some background on behavior change science, and how healthcare companies large and small are looking to drive health and wellness outcomes by integrating its principles and techniques into product design strategy.

Behavior change science appears to be having a “moment” here in healthcare, peppering conversations about everything from business models and consumer engagement strategies to product design, particularly in the chronic care and mental health spaces. Optum obviously has an interest in the discipline, with Kate in such a critical leadership role. And, our friends at life sciences giant, Bayer, also seem keen on exploring the approach, as it’s both the focus of one of the sessions of Bayer G4A’s free digital health forum, Health for All, on September 9, AND the reason Kate’s here to provide a deep-dive into the subject as a special prequel to the event.

So, what are the key takeaways? Well, it turns out there are a lot of misconceptions about behavior change science. Kate sets us straight, explains why she’s NOT a fan of the term “nudges,” and talks about what digital health companies usually get wrong (and right) about incorporating behavior change techniques into their products and services. Does behavior change require human intervention in order to make it sticky? Or, can technology be just as effective in achieving the right levels of personalization needed to make an ongoing impact on a person’s behavior? We get smart on this trending approach, and Kate gives us her prediction for how healthcare will be looking to increasingly incorporate this science into its future.

Special Note: To hear more from Kate and a host of other healthcare experts during Bayer G4A’s special global event “Health for All – A Digital Health Forum” on September 9, 2021, register at www.g4a.health.

Our friends over at American Well have two announcements today. First, they’re releasing what they call Online Care Insight, which is essentially the integration of care guidelines into their online care system. We saw a glimpse into this at the Health 2.0 Hawaii chapter meeting last March (sorry if you weren’t there!). Essentially this is a decision support service that helps physicians figure out if the online visit in front of them is appropriate for online care, and then offers clinical decision support during the visit (such as medication reminders, gaps in care, and other alerts)

The second piece of news is that American Well and Optum Health will be combining the American Well online visit service with Optum’s eSync care management platform. eSync basically integrates the data analytics portion with care management, so that a plan or employer can figure out who’s got what dread disease and reach out to them using a series of different contacts. Usually this means email, or nurse or health coach call. Now an online physician visit is part of that continuum.

(Optum Health is a subsidiary of United HealthGroup, and eSync was introduced at a sponsored Deep Dive at the recent Health 2.0 Meets Ix conference. FD Both American Well and Optum have sponsored the Health 2.0 Conference).

Obviously given United’s scale & Optum’s reach into the self-funded employer market this is big news for American Well and online care. The press release also says that the service will be available to individual consumers. I assume that this means that some part of United’s multi-state physician network will be on the system, and that there’ll be an option for consumers who are not in a United plan to access it. If it does mean that, then when this is launched the American Well service will essentially be available nationwide. But that’s my early morning speculation. I’ll try to track down someone from American Well to get more accurate details.