Why Kindred Healthcare, Laden with Over $3 Billion in Debt, Won the Favor of TPG, WCAS, and Humana

While China’s rehabilitation industry is still in its infancy, the development of rehabilitative medicine in the United States has long been thriving. The U.S. rehabilitation system has established various types of rehabilitation institutions tailored to the acute phase, rehabilitation phase, and long-term follow-up phase of diseases. These institutions feature clear divisions of labor and functional definitions, forming an overall “upright pyramid” distribution. At the apex of this pyramid once stood Kindred Healthcare, the largest provider of acute care services in the United States, which enjoyed unparalleled prominence for a time.

Counting from the establishment of its predecessor, Vencor, in 1985, Kindred Healthcare has a history of thirty-four years. Over these three decades, a series of major events—including mergers and acquisitions, spin-offs, bankruptcy, initial public offering, acquisition and breakup, and delisting—have added an air of mystery to Kindred Healthcare. In December 2017, Kindred Healthcare announced it would be acquired by a consortium formed by TPG, Welsh, Carson, Anderson & Stowe (WCAS), and Humana, for a total purchase price of approximately $4.1 billion, which included more than $3 billion in debt.

What gives Kindred Healthcare the confidence to “marry off” its debt? And what advantages enabled it to win over TPG, WCAS, and Humana in succession? Can China’s rehabilitation companies draw lessons from Kindred Healthcare’s development history? VCBeat (WeChat ID: vcbeat) seeks answers by examining the tumultuous trajectory of Kindred Healthcare.

In 1985, Bruce Lunsford, a native of Kentucky, co-founded Vencor, the predecessor of Kindred Healthcare, with two other partners in Louisville, Kentucky. Vencor carved out a niche market by providing long-term care for patients requiring ventilators and built a healthcare empire comprising 60 hospitals. Just four years later, Vencor successfully went public and gradually expanded to operate 300 facilities across 45 U.S. states, employing 65,000 people. It was once ranked among the Fortune Global 500 companies.

To achieve rapid expansion, Bruce Lunsford believed that divesting asset-heavy properties would help Vencor secure financing for growth by optimizing its asset structure. Consequently, in 1998, Vencor was split into two publicly traded companies: Ventas and Vencor. Ventas, a healthcare real estate investment trust (REIT), owned all the real estate assets of the former public company, while Vencor leased these properties from Ventas and continued to operate its original business with an asset-light model.

However, things did not go as planned. In 1997, the U.S. government passed the Balanced Budget Act of 1997. This legislation significantly reduced Medicare reimbursement rates, profoundly impacting the nursing home industry and disrupting Vencor’s original growth trajectory. Although Vencor’s ultimate customers were its patients, the company’s revenue primarily came from third-party payers, particularly government reimbursement programs such as Medicare and Medicaid, as well as health maintenance organizations, commercial insurance companies, and preferred provider organizations.

New York Times business writer Kenneth Gilpin wrote, “The decline in payments was so steep that many such companies with inflexible financial structures were unable to adjust.” He also noted that by the summer of 1999, 12% of the 1.7 million nursing home beds had filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code.

Vencor was not spared, filing for bankruptcy protection in September 1999. At that time, five of the top seven nursing home operators in the United States had filed for bankruptcy protection, with Vencor being the first among them to do so. While Vencor was mired in bankruptcy proceedings, its peer, Ventas, experienced robust growth. Ventas’ stock price rose from less than $4 per share in 1999 to approximately $50 per share by April 2008.

In April 2001, Vencor and Ventas underwent restructuring, emerged from bankruptcy protection, and were renamed Kindred Healthcare. On November 14 of the same year, Kindred Healthcare completed an IPO raising $75.3 million and was successfully listed on the New York Stock Exchange under the ticker symbol KND.

Subsequently, Kindred Healthcare enjoyed a decade of smooth growth. In 2011, Kindred Healthcare acquired RehabCare Group for $900 million in cash and stock, becoming the largest chain of subacute rehabilitation medical service providers in the United States.

In October 2014, Kindred Healthcare resorted to its old tactics, acquiring all shares of Gentiva Health, the largest home healthcare provider in the United States, at $19.5 per share in a “cash plus stock” deal. In February 2015, upon completion of the transaction, Gentiva Health became a wholly owned subsidiary of Kindred Healthcare. This acquisition severely burdened Kindred Healthcare and was the direct cause of its subsequent acquisition and delisting.

Gentiva Health is the largest home healthcare provider in the United States. However, its growth has not been organic but rather driven by continuous mergers and acquisitions. Due to the geographic limitations inherent in home healthcare (including hospice care) operations, Gentiva Health pursued extensive M&A activity to scale its business, which subsequently led to significant debt accumulation. In fiscal year 2012, Gentiva Health reported annual revenue of $1.7 billion, total assets of approximately $1.5 billion, and total liabilities of around $1.3 billion, resulting in a very high debt-to-asset ratio.

Kindred Healthcare was burdened with heavy debt as the Centers for Medicare & Medicaid Services (CMS) further exacerbated its challenges by reducing reimbursement rates for home health care services. In 2017, the Medicare payment rates for home health care services decreased by an overall 0.7% compared to the previous year. This reduction comprised a 2.8% increase based on market price growth, an overall price adjustment of -2.3% in accordance with the Value-Based Payment Modifier under the Affordable Care Act, and an industry-specific price adjustment for home health care services of -0.9%.

In Kindred Healthcare’s home-based services, 75% of the revenue from its home health care business comes from Medicare reimbursements, while 94% of the revenue from its hospice care business is derived from Medicare. Although population aging has increased demand for these services, the decline in Medicare payment rates set by the Centers for Medicare & Medicaid Services (CMS) has significantly impacted the company’s overall revenue.

In June 2017, Kindred Healthcare attempted to save itself by divesting assets. It signed a sale agreement with BM Eagle, an affiliate of BlueMountain Capital, to sell its skilled nursing facilities for $700 million. The deal included 89 nursing centers, 11,308 licensed beds, seven assisted living facilities, 380 certified beds, and approximately 11,500 employees across 18 states.

Six months later, Kindred Healthcare announced that it would be acquired by a consortium formed by TPG, WCAS, and Humana for a total purchase price of approximately $4.1 billion, which included over $3 billion in debt. Following the completion of the acquisition, Kindred Healthcare was split into two independent companies: Kindred at Home and Kindred Healthcare.

On June 29, 2018, Kindred’s stock ceased trading on the New York Stock Exchange. Thus, after experiencing its ups and downs, Kindred Healthcare ultimately became a privately held company.

Kindred Healthcare’s home-based business—comprising home health, hospice, and community care operations—was spun off and continues to operate under the name Kindred at Home. As Kindred at Home is now independent from Kindred Healthcare, its products and services will not be discussed further in this article. Instead, this piece focuses on analyzing the businesses retained by Kindred Healthcare, which has kept the original company name, including its long-term acute care hospitals (LTACHs), inpatient rehabilitation facilities, and rehabilitation management services. Kindred Healthcare primarily provides critical care and post-surgical rehabilitation, with its operations broadly divided into two segments: Hospitals and Rehabilitation Services.

As of March 31, 2018, the company’s hospital division provided long-term acute care services to post-ICU critically ill patients requiring rehabilitation through 75 critical care rehabilitation/transitional care hospitals distributed across 17 states nationwide. Kindred Healthcare’s critical care rehabilitation hospitals are certified as Long-Term Acute Care (LTAC) hospitals under the federal Medicare program.

Kindred Healthcare’s acute care hospitals provide treatment for critically ill patients suffering from organ failure (such as heart, lung, kidney, gastrointestinal, and skin failure). The organization has established core clinical expertise in managing cardiopulmonary dysfunction, deteriorating skin conditions and wounds, and life-threatening infections.

Prior to admission to Kindred Healthcare’s acute rehabilitation hospitals, many patients have undergone major surgeries or experienced neurological disorders due to head or spinal cord injuries, cerebrovascular diseases, or metabolic instability. Specialists are capable of providing comprehensive and coordinated medical interventions targeting the affected organ systems, while simultaneously developing a patient-centered, integrated rehabilitation care plan. Patients requiring post-ICU acute rehabilitation often need life-sustaining technological support, such as endotracheal intubation, total parenteral nutrition, respiratory or cardiac monitoring, and renal dialysis.

Patients at Kindred Healthcare’s critical care rehabilitation hospitals often require high-level monitoring and specialized care, yet generally do not need traditional intensive care unit (ICU) services. Due to the severity and instability of their conditions, these patients are also clinically unsuitable for transfer to other post-acute care facilities.

Kindred Healthcare staffs each of its critical care rehabilitation hospitals with qualified multidisciplinary physician teams to meet the medical needs of patients requiring intensive rehabilitation. The hospitals provide diagnostic and therapeutic services across multiple specialties, including cardiology and pulmonology, internal medicine, infectious diseases, neurology, urology, radiology, and pathology. Additionally, the hospitals employ nurses specialized in long-term acute care, as well as respiratory therapists, physical therapists, occupational therapists, speech-language pathologists, pharmacists, dietitians, and social workers, to address the diverse rehabilitation needs of these critically ill patients.

Each critical care referral hospital will use a pre-hospital assessment system to evaluate each patient’s condition and other relevant factors to determine their suitability for admission. Upon acceptance, the hospital’s multidisciplinary team will assess each patient’s specific circumstances to develop a care plan. Commonly implemented plans (where appropriate and necessary) involve interdisciplinary collaboration among pulmonology, infectious diseases, and physical therapy departments.

The core management team at each hospital consists of the Hospital Director, Head of Finance or Accounting, Medical Director, and Quality Control Director. At the business unit level, the core management team includes the President, Chief Operating Officer (COO), and Chief Financial Officer (CFO). More than 70 hospitals are divided into eight operational regions based on geography, each managed by a Vice President of the Hospital Division who reports to the COO. At the Hospital Division level, there is a Chief Medical Officer (CMO) and a Senior Vice President responsible for medical operations, who oversee clinical affairs and quality control. At the regional level, Marketing Directors are appointed and report to the Senior Vice President of Marketing within the Hospital Division.

As of March 31, 2018, Kindred Healthcare’s Rehabilitation Services division operated approximately 19 inpatient rehabilitation facilities (IRFs) and managed 99 acute care hospital-based rehabilitation units (ARUs). It also provided rehabilitative support services—including physical therapy, occupational therapy, and speech-language pathology—to skilled nursing facilities, hospitals, outpatient clinics, home health agencies, and care centers. The division generated approximately $1.4 billion in revenue for the full year 2017, placing it among the top-tier providers nationwide in this sector. Rehabilitation services were primarily delivered through two independently operated segments: Kindred Hospital Rehabilitation Services and RehabCare.

Hospital Rehabilitation Services (Kindred Hospital Rehabilitation Services) operations include running inpatient rehabilitation facilities (IRFs) and managing acute rehabilitation units (ARUs) within Kindred Healthcare’s inpatient rehabilitation business unit, as well as providing rehabilitation management and therapy services to critical care hospitals, subacute/skilled nursing facilities requiring inpatient care, and non-inpatient programs. Hospital Rehabilitation Services is overseen by two vice presidents: one responsible for the IRF business line, and the other for all other businesses outside of IRFs, such as ARUs, critical care hospitals, subacute/skilled nursing facilities, and clinics.

As of the end of 2017, this business unit operated 19 rehabilitation hospitals (17 of which were joint ventures) and 99 acute rehabilitation units (ARUs), providing rehabilitation services to 104 critical care rehabilitation hospitals (two-thirds of which were operated under Kindred Healthcare’s Hospital Division), four subacute/skilled nursing facilities, and 123 clinics. In 2017, the inpatient rehabilitation business unit of Kindred Healthcare generated approximately $700 million in revenue.

From the perspective of revenue sources, the revenue of Inpatient Rehabilitation Facilities (IRFs) operated by Kindred Healthcare primarily comes from Medicare, Medicaid, and other payers. As for rehabilitation services, they are categorized into different scenarios based on customer circumstances:

Kindred Healthcare’s RehabCare business originated from the 2011 acquisition of RehabCare Group. It primarily provides rehabilitation services and management to skilled nursing facilities, care centers, independent living communities, home health agencies, and hospice/palliative care organizations, helping these institutions recruit, train, and retain rehabilitation professionals. The RehabCare segment largely meets the outsourced rehabilitation staffing needs of independent nursing facilities and is overseen by a Chief Operating Officer.

RehabCare’s services are typically billed based on per-diem rates or rates determined by the scope of services provided. As of the end of 2017, the RehabCare business unit delivered rehabilitation services across 1,616 facilities in 42 U.S. states, generating annual revenue of approximately $750 million.

Kindred Healthcare went from becoming the largest home healthcare provider in the United States in 2015 to being acquired by a consortium in just three years.

In late 2017, Kindred Healthcare was split into Kindred at Home and Kindred Healthcare in a $4.1 billion transaction. Kindred at Home, which retained the original company’s home health, hospice, and community-based care businesses, was owned 40% by Humana and 60% by TPG and Welsh, Carson, Anderson & Stowe (WCAS). The other entity, Kindred Healthcare, which operated inpatient rehabilitation hospitals, long-term acute care hospitals, and rehabilitation management services, was jointly owned by TPG and WCAS, with no participation from Humana.

TPG Capital is a global private equity firm founded in 1992 in Austin, Texas. WCAS, also known as Welsh Carson Anderson & Stowe, was established in 1979 as a private equity investment company focusing on the technology and healthcare sectors. TPG and WCAS are specialized private equity funds that held phased investment stakes in Kindred Healthcare.

Unlike TPG and WCAS, Humana is a well-known health insurance giant in the United States. Why did Humana, as a healthcare payer, acquire the service provider Kindred at Home? Humana CEO Bruce D. Broussard provided the answer: long-term strategic industry investment.

He stated, “Humana is focused on enhancing its home-based care capabilities, improving patient well-being, and delivering high-quality services at a lower cost. As the most widely distributed home health business in the United States, Kindred at Home will continue to drive the successful implementation of Humana’s established strategy. We are confident that the new capabilities brought by this transaction will help Humana modernize its home-based care services, effectively enhancing the experience and satisfaction of both members and providers.”

As of the end of March 2019, Kindred Healthcare employed approximately 34,000 people across 1,782 locations in 46 U.S. states, including 73 long-term acute care hospitals, 22 inpatient rehabilitation hospitals, 11 sub-acute units, 97 hospital-based inpatient rehabilitation units, and a contract rehabilitation services business that served 1,579 non-affiliated facilities.

On June 26, 2019, Mercy Fort Smith announced plans to build a new inpatient rehabilitation hospital with 40 beds. Kindred Healthcare will be responsible for the day-to-day operations of the new facility. The hospital will care for patients with stroke, neurological disorders, brain injuries, and other debilitating conditions, as well as adults requiring rehabilitative care following injuries.

Jason Zachariah, President of Kindred Rehabilitation Services, a division of Kindred Healthcare, stated: “Kindred’s expertise in operating inpatient rehabilitation hospitals will complement the highly regarded patient care services currently provided by Tennova and UTMC, thereby fostering collaboration, improving health outcomes, and enhancing inpatient rehabilitation and clinical integration. We are delighted to partner with two leading healthcare providers in the East Tennessee region to deliver high-quality post-acute care resources for the benefit of the community.”

It is reported that Kindred Healthcare will also collaborate with Mercy Fort Smith to build a new rehabilitation center, with an estimated cost of approximately $23 million. Construction is expected to begin this fall and is planned to be completed within one year.

Thus, it is evident that Kindred Healthcare’s confidence in assuming debt obligations stems from its robust internal business portfolio, ranging from high-end critical care rehabilitation and general rehabilitation to rehabilitation outsourcing and home-based rehabilitation services. It also derives from its flexible business model, as Kindred Healthcare maintains numerous external partnerships and directly serves a large base of individual patients and households.

Why Was Kindred Healthcare, Despite Its Strong Growth Momentum, Acquired by TPG, WCAS, and Humana? The Answer Lies in Capital Operations. Capital is a double-edged sword: companies can grow stronger through mergers and acquisitions (M&A), but they may also be weakened or even driven out of existence by them. Kindred Healthcare’s trajectory illustrates this dynamic—it has continuously acquired other companies while also being acquired by other entities. Kindred Healthcare has been both an integrator of resources and a target for integration. In reality, the market is the ultimate force pulling the strings behind the scenes.

Furthermore, Kindred Healthcare was dealt a severe blow by the Balanced Budget Act when it faced debt burdens. This demonstrates that changes in federal Medicare policies can determine whether rehabilitation hospitals profit or incur losses, survive or perish. This holds true not only in the United States but also in China.

In recent years, China’s medical insurance policies for the rehabilitation industry have undergone gradual changes, with many institutions poised for growth. However, how to thoroughly study and effectively leverage these medical insurance policies to address payer-related challenges is a critical issue that both domestic and international industry players must carefully consider. As a leading rehabilitation healthcare group in the United States, Kindred Healthcare’s business structure and commercial model offer valuable insights for Chinese peers. Nevertheless, domestic enterprises must tailor their implementation strategies to local conditions.

Reference link:

https://mp.weixin.qq.com/s/av4_BDvC9QVTIvFN-5927A

https://en.wikipedia.org/wiki/Kindred_Healthcare

https://en.wikipedia.org/wiki/Long-term_acute_care_facility