Humana Inc. (NYSE: HUM) expects earnings to decrease by $400 million immediately following the divestment of its Kindred at Home hospice division, but expects that to be offset by lower operating costs and revenue from sales over time.
In April, the company signed an agreement to sell a 60% stake in Kindred to private equity firm Clayton, Dubilier & Rice ( CDR ). Humana holds the remaining 40%. The sale is expected to close in the third quarter of this year, which will have an impact on Humana’s overall bottom line, managers said on the second-quarter earnings call.
Some of the lost revenue will also be partially offset by growth in the company’s other healthcare offerings, such as pharmaceutical services, Diamond said.
Despite the initial loss, the sale is promising for next year’s profit margins as it reduces debt and lowers operating costs, said Himana CFO Susan Diamond.
“Apart from the known headwinds, the expected hospice disintegration is always factored into our thinking in 2023,” Diamond said during the earnings call. “The hospice business carries an operating cost ratio higher than the company’s consolidated operating expense ratio. In terms of capital deployment, we expect our debt-to-capital ratio to be in the low 40s by the end of the year as we leverage the proceeds from the Kindred Hospice divestiture.
The sale will reduce operating expense ratios — the amount Himana spends to generate revenue — by an estimated 13% to 13.5%, Diamond said. Previous estimates put this number at between 13.2% – 14.2%.
Relatives at Home’s hospice business was more expansive compared to the company’s other lines of business, Humana said in its Q2 earnings report. Hospice operations increased approximately 220 basis points to 2022 second quarter operating expenses, and 210 basis points to year-to-date total operating expenses.
Humana indicated that it will receive a cash payment of approximately $2.8 billion when the Kindred Hospice deal closes. Most of those funds go toward paying down debt.
On an enterprise-wide basis, Humana’s Q2 revenues fell to $22.2 billion, compared to $23.9 billion in Q1. The health care services segment contributed $8.9 billion, up from $7.5 billion last year. The segment includes supplier, pharmaceutical and home services, among others.
Himana’s Q2 performance in its healthcare service lines was driven primarily by lower-than-expected medical cost trends and lower-than-expected Medicare benefit businesses, Diamond said.
Humana is one of the largest payers participating in the US Centers for Medicare and Medicaid Services (CMS) Value-Based Insurance Design (VBID) demonstration. Also known as the Medicare Hospice Carve-In, the demonstration examines coverage of these services by Medicare Advantage. Humana operates more participating health plans than any other payer.
Huma President and CEO Bruce Broussard announced on the earnings call that the company is in the process of restructuring by splitting into two divisions. One part includes the insurance service offerings. Another includes its health services, including those under the Center Well brand. Following the acquisition of 100% of Kindred, Humana began transitioning home health services under the CenterWell umbrella this year.
Broussard refers to the segment as a “wheel of inclination” that creates opportunity in both value-based payment and service offerings.
“Our ability to integrate and also expand on the Medicare side of the business with the CenterWell services side is what you see us create on a regular basis,” Broussard said on the earnings call. “Through insurance, [we’re] Continue to leverage efficiencies across multiple insurance platforms. [With] We’re seeing some really great opportunities to simplify and leverage some of our different divisions in insurance environments.
Center Well includes Humana’s home health, pharmacy and specialty pharmacy services. Center Well also includes primary care senior services through a joint venture with private equity firm Wells, Carson, Anderson & Stowe (WCAS).
A second JV partnership aimed at expanding access to value-based care among Medicare patients was recently formed between Humana’s CenterWell and WCAS. Through the second JV, Himana expects to deploy up to $1.2 billion to develop 100 de novo advanced primary care clinics over the next two years.
“There’s a lot of work to be done now in consolidating service centers into one service center and leveraging our clinical programs in a more integrated way, not only through Medicare, but also through our book of business.” . “When we are able to integrate our various healthcare services, we will see it in our work in local markets.”
The split is the latest strategic step in Humana’s goal to grow its enterprise value by $1 billion.
Himana is “well positioned” to achieve its $1 billion value creation goal, Diamond said. The initiative will allow the company to further invest in Medicare benefits through 2023, along with expanding its healthcare services capabilities and long-term growth potential.
For now, Humana will continue to look at building more partnerships with providers “to move toward value-based care,” Brossard said. A supplier’s quality scores will be highly valued in value-based contracting cases, he continued.
“If you can’t make adjustments in both stars in addition to health effects, it’s really useless,” said Bressard.
