Inside Clayton Dubilier's $3.4 billion hospice deal

Clayton, Dubilier & Rice is acquiring a majority stake in Humana's (NYSE: HUM) hospice arm in a deal valued at $3.4 billion.

Why it matters: The deal comes just weeks after Optum’s $5.4 billion wager for LHC Group, providing further proof that at-home health care as an end-market, and its providers, play a crucial role in the push towards value-based care, beyond being patients’ preferred setting.

What they're saying: CD&R’s Ravi Sachdev tells Axios that the partnership presents an opportunity to think creatively about how to leverage both Humana’s vast network of managed lives and CD&R's primary care portfolio (agilon health and Millennium Physician Group).

• “We’re trying to innovate across that ecosystem and we're trying to get hospice more connected into primary care," Sachdev says. "Home health providers, hospice providers, nephrologists, oncologists — they have a meaningful role to play in the acceleration to value."
• Value-based care tends to be siloed, CD&R operating partner Dr. Anand Shah adds: “This really speaks to integration and really being able to provide much more coordinated care for patients across the country.”

Details: Humana will divest a 60% stake in what is the nation’s largest hospice platform (retaining 40%), raking in about $2.8 billion in cash proceeds.

• The $3.4 billion enterprise value represents 12x the division's forecasted adjusted EBITDA for 2022. That implies about $283 million in estimated EBITDA for the year.

Be smart: Hospice benefits are currently only covered by FFS Medicare, but CMS is also formally testing a Medicare Advantage pilot program known as the Value-Based Insurance Design (VBID) model.

• Through the VBID model, the agency today is actively collecting data and monitoring opportunities to improve care in MA. That could directionally point to the agency ultimately expanding hospice benefits for MA beneficiaries.
• The U.S. has arguably reached a tipping point in terms of MA adoption, which is now approaching 50% for eligible seniors.

Catch up fast: Axios wrote in January that the health insurance giant had kicked off a private equity-focused divestiture process for the unit via Goldman Sachs after discussions with strategics did not lead to a deal last year.

• Humana in 2021 bought the 60% of Kindred at Home it didn't already own, which included Kindred’s home health, hospice and community care businesses.
• The deal put an $8.1 billion valuation on Kindred at Home and provided an exit for its former JV partners — TPG and Welsh, Carson, Anderson & Stowe.
• Humana at that time declared its intentions to ultimately divest the hospice and community care businesses.

What’s next: Upon completion, CD&R and Humana have an opportunity to expand the platform's offerings around clinical programs that improve hospice care for patients.

• More broadly, expect more M&A and incumbent participation around in-home care, including both the large insurance companies and retail pharmacies.
• Amid the maturation of the home care industry, including a better ability to manage patients with technology in the home, “demands on the [home care] provider are going to continue to go up, and that’s going to drive continued consolidation,” Sachdev says.