Shareholders are likely to put pressure on Gentiva's management team to accept the deal, given the recent volatility in the company's share price, wrote A.J. Rice, an analyst at UBS.
A combined company would serve approximately 127,000 patients a day in 47 states and employ 110,000.
The proposed deal is part of Kindred's strategy to de-emphasize skilled nursing while putting greater focus on home health and rehabilitation. Gentiva claims to be the largest home health and hospice provider by revenue.
In its most recent earnings report, Kindred said it divested 26 skilled-nursing centers as of May 1 and is on track to divest another 59 facilities. All but one center should be divested by the end of the third quarter. The company had 99 nursing centers as of March 31.
“The goal is primarily to create an ecosystem of delivery sites where we can create a continuity of care,” said Paul Diaz, Kindred's CEO. “This furthers our strategy and furthers our goal to go deeper into home health and hospice.”
While acknowledging the sector's challenges, Diaz said Kindred is already familiar with the rate rebasing and expects home health to gain further visibility as payment models encourage care in lower-cost settings. In addition, he said, “this is what patients want.”
Gentiva has a strong brand, and its footprint will allow Kindred to further expand its offerings across the country, said Benjamin Breier, Kindred's president and COO. The company has a presence in 21 of Kindred's 22 integrated-care markets, allowing Kindred to expand its capabilities in integrated- care delivery.
Kindred is projecting $60 million to $80 million in synergies from the deal. In the first year, about $40 million in synergies will come from cutting general and administrative expenses as well as refinancing Gentiva's debt, Breier said. Over the following year, there will be opportunities to reduce contract labor costs and further build out Kindred's “Continue the Care” program, which moves patients from acute-care hospitals into lower-cost settings, he added.
Analysts generally applauded the proposed offer, pointing out that Gentiva's debt burden has inhibited its growth and that the offer price is fair based on current reimbursement challenges.
Dealmakers and analysts have been predicting consolidation in the post-acute-care sector for some time. Most recently, there have been suggestions that Baton Rouge, La.-based Amedisys could be a takeover target after the company replaced its long-time CEO and hired a consulting firm to help turn around its performance.
With post-acute-care operators being squeezed on reimbursement and, to a lesser extent, volume declines, providers are turning to aggressive cost controls to improve their operating margins. Acquisitions also are filling in the gaps to extend their reach and gain economies of scale.
The five largest home health companies can be rolled up for about $2 billion, James Forbes, vice chairman at UBS Group Americas, said on a recent Nashville Healthcare Council “Financing the Deal” panel.
While home health industry leaders insist that their model of care offers value in holding down healthcare costs, the message has not reached Congress, state Medicaid programs and private insurers, which continue to squeeze payments. States also are putting pressure on skilled-nursing operators.
“The home health industry does not have an effective lobby,” Forbes said. “I don't think the knife has fallen far enough.”
Follow Beth Kutscher on Twitter: @MHbkutscher
