By Miriam Gottfried
Two big health-care buyouts are shaping up to be among the
worst-performing private-equity investments in recent years. The
coronavirus pandemic is only the latest reason why.
Physician-staffing firms Envision Healthcare Corp. and
TeamHealth Holdings Inc., whose emergency-room workers are
ubiquitous throughout the country, were purchased by KKR & Co.
and Blackstone Group Inc. in 2018 and 2017 for roughly $6 billion
and $3 billion, respectively.
The private-equity firms bought the companies, which contract
with hospitals to provide them with an array of medical
professionals, with plans to boost revenue and accelerate growth
through acquisitions. As is typical in leveraged buyouts, they
funded the deals with ample debt, which would accelerate their
returns if plans worked out.
But things didn't go according to plans.
Instead, the companies have faced a litany of problems,
including bruising contract battles with insurance company
UnitedHealth Group Inc. and a costly lobbying fight in Washington
over l egislation to curb what are known as surprise medical bills,
which arise when patients are treated at hospitals in their
insurance networks by out-of-network doctors.
A global health crisis has paradoxically become their latest
threat. Visits to emergency rooms have plummeted as noncoronavirus
patients stay away. Envision closed a number of its surgery centers
when elective procedures were put on hold, though it has since
reopened most.
The dismal performance of the deals -- among the largest LBOs in
a relatively fallow period for such activity -- raises questions
about how two of the most successful private-equity firms failed to
understand the risks of investing in a highly regulated industry
with powerful stakeholders.
Also noteworthy is how they underestimated the potentially dire
effects of pending federal legislation meant to end surprise
billing, which could ratchet down all-important insurance
reimbursement rates at the staffing companies.
Envision and TeamHealth swung to net losses of $55 million and
roughly $40 million in the first quarter, respectively, and this
quarter is likely to be worse, according to documents seen by The
Wall Street Journal and people familiar with the companies'
financials.
Envision's bonds due in 2026 climbed off their lows after the
company asked bondholders to take a haircut last month, but are
still trading at 36 cents on the dollar -- indicating investors see
a real chance of some sort of restructuring in the future. Jim
Momtazee, the KKR partner who led the deal, left the firm last
summer.
"Like every medical group in the country, Envision is facing
several formidable challenges simultaneously," said Pete Stavros,
KKR's co-head of Americas private equity who was brought in to try
to help save the company. "We are doing everything we possibly can
to address these issues and get operations back on track."
TeamHealth hasn't been hammered quite as hard by the virus
because it doesn't own surgery centers, but its bonds due in 2025
still trade at just 55 cents.
"The lights on the dashboard should have been blinking red for
anyone who came within a thousand feet of these companies," said
Zack Cooper, a Yale University health economist whose research on
surprise billing prompted Congress to examine the issue. "I
wouldn't invest in a company whose entire business model would go
away because of a single rule change."
Visit a U.S. emergency room, particularly in a rural area, and
the trained medical providers are quite likely employees of a
physician-staffing company. Founded in 1992 and 1979, respectively,
Envision and TeamHealth collect revenue for services performed by
their doctors through reimbursements from the government and
insurance companies. They must compensate doctors and other staff
and cover costs such as technology and malpractice insurance.
Anything left is profit, which even before the virus only amounted
to single-digit margins, according to people familiar with the
businesses.
In the case of an average TeamHealth emergency room, the roughly
25% of patients with private insurance cover a disproportionate
amount of those costs, so a lot rests on a staffing company's
negotiations with the likes of UnitedHealth.
Envision was engaged in a contract dispute with UnitedHealthcare
when KKR said in June 2018 it was taking the company private.
Prior to KKR's buyout, Envision said it was moving all its
providers in-network and was already 90% in-network at the time of
the deal.
The deal it reached with UnitedHealthcare in December 2018
delivered a bigger hit to 2019 profit than the buyout firm had
forecast, according to people familiar with the matter.
Blackstone had previously owned TeamHealth, but a year after it
bought the company again, some of its assumptions already looked
optimistic. UnitedHealthcare, the largest U.S. health insurer by
revenue, told TeamHealth it would need to accept a 40%
reimbursement-rate cut to stay in-network, according to people
familiar with the matter. A spokeswoman for UnitedHealthcare said
TeamHealth expects its physicians to be paid nearly three times
more than the median rate paid to in-network physicians at
participating hospitals.
TeamHealth sued UnitedHealthcare and the litigation is
pending.
Health-care providers have long used the threat of going out of
network as a tool to help them combat the market power of insurers.
Insurers fear out-of-network providers will send patients
unexpected -- sometimes large -- bills hoping they will complain to
their employers, who in turn will push insurers to accept the
reimbursement rates the providers seek.
It is a practice the staffing companies acknowledge, but one
that has come under intense scrutiny in recent years.
The spotlight has been particularly intense on Envision ever
since Mr. Cooper and his Yale colleagues found in a 2017 study that
the company had been leading the industry in driving out-of-network
bills higher at hospitals it entered. The study also was critical
of TeamHealth's behavior with regard to out-of-network billing.
The time frame of the Yale study predated KKR and Blackstone's
ownership, but the companies' private-equity backing has allowed
insurers and their allies to position the issue in a well-funded
advertising and lobbying campaign as a battle between well-heeled
private-equity firms and patients.
The optics of enacting a rate-setting measure that would cut
doctor salaries during a pandemic could help spare them from the
worst-case scenario, but Congress might still pass
anti-surprise-billing legislation this year.
TeamHealth "is part of a wide coalition that fully supports
bipartisan legislation to end surprise billing through independent
arbitration," Blackstone said in a written statement.
--Andrew Scurria contributed to this article.
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com
(END) Dow Jones Newswires
May 28, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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