Yet another hospital staffing company primarily owned by private equity investors appears to be in trouble, adding to the pile of stresses in the sector, according to news reports.
“Sound Inpatient Physicians Inc. has hired PJT Partners for debt advice as the hospital-staffing company grapples with earnings pressure, according to people with knowledge of the situation,” Bloomberg reported on Aug. 4.
Sound, based in Tacoma, Wash., provides staffing for hospitals and centers providing short-term care to patients, including intensive care or emergency medicine. The private equity firm Summit Partners acquired Sound in 2018; UnitedHealthCare’s Optum group was also an investor.
This bad news for Sound comes after the sudden and spectacular failure of American Physician Partners, another private equity company, which collapsed in late July, failing to pay its employees and failing to find a buyer to stave off collapse. Other big private-equity-owned agencies are also struggling, with bankruptcies and tense discussions with creditors, according to news reports.
Stresses on the private equity model
Why is this happening now? At least part of the trouble these companies are encountering is downstream from the federal No Surprises Act. The act is an attempt to end the practice that has fattened the bottom lines of staffing companies: Staff an emergency room with doctors who are not in any network, and then send massive surprise bills to patients who thought they were in an in-network hospital. No Surprises pretty much ends the foundation upon which these companies built their businesses.
While it is not always clear how much surprise billing brings to a company’s bottom line, because the private equity companies are privately held and therefore not reporting public results, some information is known. “27% of American Physician Partners’ revenue was generated via out-of-network bills in 2021 (slide 22),” Leon Adelman, an emergency physician, wrote in his newsletter recently. “A.P.P. estimated that the N.S.A.’s billing changes would cut its annual revenues by $11 million, or roughly 9%. …
“Private equity’s emergency medicine thesis in the 2010s relied heavily on out-of-network billing, which is now illegal. Without balance billing, paying off the massive debts inherent to the private equity model is challenging, especially within the current lending environment (high interest rates and low deal flow).”
Describing the death of A.P.P., Maureen Tkacik wrote over at The American Spectator on July 29: “One of the nation’s biggest employers of emergency physicians is liquidating, in one of the more unruly sagas American medicine has experienced since the first wave of the pandemic. The collapsing entity is American Physician Partners, a private equity–owned operator of about 135 hospital emergency rooms and hospital-owned ‘freestanding’ ERs in 18 states, which was co-founded by a sitting Republican congressman.”
Before A.P.P. failed, two other private-equity-owned staffing giants were in serious trouble. Envision Health filed for bankruptcy, and TeamHealth has been struggling with its debt.
“K.K.R.-owned Envision Healthcare filed for bankruptcy protection in May with $7.7 billion in debt; Blackstone-owned TeamHealth has been mired for months in negotiations with creditors to restructure part of its $5 billion debt load,” Tkacik wrote.
“It is worth noting that Pimco is now leading a group of senior creditors of Blackstone-owned TeamHealth, which provides doctors and other clinical staff to emergency rooms, in seeking advice on restructuring the company’s loan maturing in 2024,” Eileen Applebaum wrote at the Center for Economic Policy and Research. “TeamHealth has $1.2 billion due next year on that loan. It also has a loan with more than $2 billion outstanding that is due in 2027. PE firm Ares is leading a second group of creditors that want the 2024 and 2027 debts restructured. The debt due in 2024 was quoted in mid-May around 80.5 cents on the dollar, and its debt due in 2027 was trading at 65 cents on the dollar. It does not look like TeamHealth is in imminent danger of going bankrupt, but things may get worse next year. “
She also wrote that Envision’s future is uncertain. “A private equity firm such as Welsh Carson Anderson and Stowe, that has owned a physician staffing company, might acquire it to expand its footprint in this space. It is more likely, however, that health insurance companies will be bidders for the physician practices. Insurance giant UnitedHealth Group has been actively buying up doctors’ practices.”
The rise of private equity investments in various healthcare companies has been accompanied by some complicated consequences.
For Sound, the future seems grim. “Some of its lenders have already formed a steering committee and signed a cooperation agreement that will bind them to act together in negotiations, said the people, who asked not to identified because the matter is private. Typically lenders sign such agreements when they perceive a company to be struggling.” said Bloomberg. “Sound’s first-lien term loan due 2025 has sunk to around 57 cents on the dollar, from around 80 cents at the start of the year, according to data compiled by Bloomberg. Its second-lien term loan due 2026 has also plummeted, and now changes hands for around 27 cents on the dollar.”
Rising interest rates
Rising interest rates are one key to the struggles. The private equity model depends on cheap capital.
These companies raise debt at floating rates, not at fixed rates — so as interest rates rise, with the end to the zero interest-rate policy (ZIRP), the private equity companies’ costs rise. S&P Global wrote recently that bankruptcies in private equity in all sectors are up.
Beyond that, the private equity companies’ usual playbook is to sell their companies five to seven years after purchase, but there are not always easily found buyers.
“The business model is being severely tested,” Gretchen Morgenson, an NBC reporter, said in an interview recently. The private equity companies say they whip the acquisition into shape and then sell a much-improved company, but the “improvements” may include loading the company up with debt to pay the private equity firms.
Private equity companies often sell real estate the company owns and then lease back, taking out money from the sale and loading more costs onto the company. This strains the business model. They also charge monitoring fees, adding to the company’s expenses and threatening its bottom line.
“We’re starting to see private equity firms not getting out as easily,” said Morgenson, lead author of a book called “These Are the Plunderers: How Private Equity Runs — and Wrecks — America.” “We’re even seeing them selling to each other.” The private equity giant Apollo sold one of its companies from one of its funds into another fund recently, she said, pointing to the difficulty of the private equity exit that the business model requires, as well as rising interest rates. And some private equity companies are selling their acquisitions to other private equity companies, partly because turning a company public by an initial public offering is not as easy in today’s economy.
The private equity firms serve as something of an intermediary between the investors — providers of capital, as in pension funds and other investors — and the companies themselves. When the private equity investments struggle, she said, the possibility that individuals’ pensions will be threatened looms. The heavy leverage and the need for short-term gain, Morgenson said, mean no voluntary big changes in the private equity playbook are likely soon, especially with rising interest rates.
This is all taking place as huge shifts in the healthcare system proceed, as a result of pandemic stresses and an aging population. The new bywords “system redesign” are floating around the C-suites of the nation, according to a recent report in Beckers Hospital Review.
” ‘We recognize that the challenges the healthcare industry faces provide an opportunity for radical paradigm shifts to increase efficiency, and we understand that many pivots and course corrections are needed to maintain a positive financial outlook,” Wendy Horton, PharmD, CEO of UVA Medical Center in Charlottesville, Va., told Becker’s. “We are implementing pipeline programs, leveraging technology, and creating flexible workforces to support our teams. We are also modernizing care delivery and patient progression, focusing on essential areas like our emergency department. We’re in the midst of a multi-year initiative that will transform outpatient access and deliver a consistent patient experience while enhancing provider satisfaction.”
SG2, a healthcare industry trend analyzer, released a report noting that staffing shortages and “higher patient acuity” would create challenges for hospitals going forward.
“Case mix index, a measure reflecting the diversity, complexity, and severity of patient illnesses, is up 5% since 2019, the year before the pandemic,” SG2 said in a release about its report. “At the same time average length of stay for patients admitted to a hospital has risen 10%, driven by the increasingly complex nature of the patient population further exacerbating workforce challenges and the closure of 30,000 patient beds between 2019 and 2022. The Forecast projects continued rises in patient acuity, which will strain capacity across sites of care.
“’As the population continues to age and chronic disease incidence rises, we expect increased demand across all sites of care. The reality is access is a challenge for these patient populations and care redesign will be critical to prevent the acute exacerbation of their medical conditions,’ said Tori Richie, intelligence senior director, Sg2.”