Recently, the US commercial insurance giants Humana (HUM.US) and WCAS (Welsh, Carson, Anderson & Stowe) announced that the two companies have invested a total of 600 million US dollars to establish a joint venture to operate primary health care clinics.
The joint venture will develop and operate clinics focused on senior citizens. These clinics will be managed by Humana’s primary care subsidiary “Partners and Primary Care” and operated under the Partners and Primary Care brand. With this cooperation, WCAS has a majority stake in the joint venture and will not be incorporated into Humana’s future statements.
However, although it will not affect Humana’s earnings in 2020, it will actually help its overall income to a certain extent. Partners and Primary Care will receive management fees and performance incentives, as well as a series of options from the joint venture. In addition, the operation of the clinic will also bring insurance income.
Partners and Primary Care was established in July 2019 and was co-founded by Humana and the chain drugstore Walgreens. There are currently 47 clinics in Kansas, Missouri, North Carolina, South Carolina, Texas and Florida.
After the cooperation between Humana and WCAS, Partners and Primary Care plans to more than double the number of clinics managed by the joint venture in the next three years.
Humana was founded in 1964 and is headquartered in Louisville, Kentucky. It is the American health insurance giant and one of the largest health benefits companies in the United States.
As a health insurance company mainly based on Medicare Advantage insurance, Humana provides customers with a variety of health care plans, including medical insurance, group life insurance, dental insurance, etc., and has 13 million insurance members across the United States. The company ranks 179th in the 2019 Fortune Global 500 list, has 41,600 employees, and has annual operating income of 56.9 billion in 2018.
WCAS is a leading private equity company focused on healthcare and technology.Since its founding in 1979, the company’s strategy has been to work with an excellent management team and provide investors with operational improvements, growth plans and strategic acquisitions Create value. The company has raised and managed funds totaling more than $ 27 billion.
Humana and WCAS are not the first collaboration. In 2017, Humana, WCAS, and TPG also invested $ 4.1 billion to acquire Kindred healthcare, a home care and hospice care company.
At the end of 2017, Kindred Healthcare was separated into Kindred at Home and Kindred Healthcare for $ 4.1 billion.
Kindred at Home, which owns the original company’s home care, tranquility services, and community health services, with 40% by Humana, and 60% by TPG and WCAS. The second is Kindred Healthcare, which has a critical care hospital, rehabilitation hospital, and rehabilitation management. Services, and are jointly held by TPG and WCAS. Humana does not participate in this part. Therefore, Humana’s interest in offline medical and health services did not rise on a whim.
Focus on the medical needs of the elderly
Humana was founded in 1961 and was originally called Heritage House. It mainly developed the nursing home business and was renamed Humana in 1974. Therefore, Humana’s focus on the elderly market has its DNA.
Today, Humana has grown to become one of the largest medical insurance providers in the United States, providing a wide range of products and services to customers in multiple market segments, primarily Medicare Advantage insurance. For different customers, the company divides its business into three parts: retail business, group business and healthcare services.
Medicare provides health insurance for legal residents and citizens who have lived in the United States for more than five years and who have lived in the United States for five years, or for people with certain physical disabilities under the age of 65, or those with end-stage renal disease.
Medicare insurance includes Medicare Advantage (including all Part A and Part B insurance items, and some also cover eyes, teeth, hearing aids and other insurance items), Medicare Prescription Drug Coverage (Part D, prescription dispensing coverage), Medicare Supplement (difference insurance )Wait.
Humana is committed to a strategy to improve the health of older people through a value-based health ecosystem that brings new connections to the healthcare experience.
Humana currently has two programs for the elderly: in addition to Partners and Primary Care, there are Conviva operating in Florida and Texas. Overall, the insurance company showed in its 2018 annual report that the two companies had $ 1.99 billion in service revenue and 3.56 million users. Conviva, another wholly-owned subsidiary of Humana, has not joined this cooperation.
Significant growth in insurance performance in 2019
Humana held a conference call on February 5th, revealed Q4 2019 results, and answered questions about the establishment of the joint venture for analysts. Before the release of the 2019 annual report, Humana first revealed last year’s operating results. The number of participants in the Medicare Advantage program increased by 17% from 2018 to $ 56.47 billion.
By the end of 2019, Medicare Advantage has 3.59 million members. Its Medicare Part D prescription drug program has lost about 550,000 customers. The decline in the Medicare D program is expected. In February last year, the insurance company expected 700,000 people to withdraw from the Medicare D project in 2019 because of increased competition among insurance companies, weakening the insurance company’s market share
In the fourth quarter of 2019, Humana’s revenue was $ 16.2 billion, compared to $ 14 billion in the fourth quarter of 2018, and the quarter’s profit was $ 512 million. The company’s retail segment reported revenue of $ 14.21 billion in the fourth quarter, an increase of $ 2.17 billion, and adjusted earnings per share of $ 2.28, exceeding its fourth-quarter earnings forecast. This is due to the increase in membership brought by Medicare Advantage.
Payers have set precedents for opening clinics
Compared to 2018, Humana’s retail insurance business has grown by 17% in 2019, but Humana still focuses its investment on evolving clinical services.
Another focus of the conference call is on this newly formed company. Bruce Brusad believes that for insurance companies, clinics should be a long-term investment that, in addition to being part of Humana’s source of income, can also help reduce insurance members’ care costs.
Humana CEO Bruce Brusad stated at J.P. Morgan 2020 that growth and (69.4, -0.55, -0.79%) enhancement of clinical capabilities are a key investment focus for Humana. “The entire insurance industry is increasing its ability to keep users healthy and away from hospitals,” he said. “The recent mergers and acquisitions in the insurance sector are proof of that.”
Of course, Humana is not the only payer running its own clinic. Other large insurance companies have also been buying clinics. For example, the acquisition of Aetna by CVS combined a large national health insurance company with a large pharmacy chain and healthcare providers.
It also includes UnitedHealth Group’s acquisition of the DaVita Doctor Group for $ 4.9 billion. And the Community Medical Group acquired by Centene to gain the ability to provide diagnostic services.
The same is true for Humana, including the acquisition of hospice provider Kindred Healthcar, and investments in other primary care centers and physician teams.
The only difference is that Humana will open a clinic from scratch.
Brusad believes that clinics should be an important business line for insurance companies. “We think this is a very effective model of care. We have been doing business development for some time and have obtained many reliable results from it,” he said on Wednesday’s earnings call. “If we can continue to work, we hope that the clinics in this project will double.”
Providing value medical services for the elderly
More and more seniors have chosen Humana’s Medicare Advantage plan. Humana expects that the number of individual Medicare Advantage members in 2020 will continue to grow from 270,000 to 330,000, compared with last year, an increase of 9.2% compared to last year.
There are currently 262 clinics in Humana, operated directly or through joint ventures. The company serves approximately 250,000 Medicare Advantage patients through these clinics.
In the next three years, the newly established joint venture company is expected to more than double the business scope of elderly-focused clinics, double the current 47, and increase 50.
Although Humana saw excellent operating results and good user satisfaction during the operation of Partners and Primary Care, continuing to expand and recruit doctors is still a very difficult task, and sometimes even a risky task. Therefore, in order to ensure success, we chose to cooperate with WCAS, which is also important for WCAS to play its value.
WCAS partner David Caluori said: “In the United States, there is a large number of unmet needs for the elderly-centric primary care market based on value healthcare.” WCAS has a 40-year history of successfully establishing a world-class healthcare company. The establishment of this joint venture company can have sufficient resources to provide effective nursing and medical services for the elderly in the most needed areas of the country. ”
The current business model is Partners and Primary Care charging WCAS management fees. As more and more members move to value-based care, Humana will still benefit from clinics in its insurance business. And within five to 10 years, Humana will have the opportunity to buy back clinics through put and call options, similar to the 2017 deal it bought with WCAS and TPG Capital to buy a minority stake in Kindred.
In addition to the user group being the elderly, the news also mentioned that the area that the clinic wants to cover in the future is a community with insufficient primary medical services and a low level of service. Location is also an important consideration for clinics, and Humana is looking for neighborhoods without a primary care clinic or hospital nearby.
Humana provides clinics to make them an affordable option for Medicare Advantage members, although these members may or may not choose them.
At the close on Wednesday, Humana’s stock rose more than 6% to $ 364.80. The company reported revenue of $ 64.88 billion in 2019, a 14% increase from 2018, and pre-tax income of $ 3.46 billion, up from $ 2.06 billion last year.
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