Envision Healthcare – the private equity-owned physician staffing firm whose clinicians can be found staffing 540 health care facilities in 45 states – is in serious financial trouble. Envision was acquired in a 2018 leveraged buyout by Kohlberg Kravis Roberts (KKR), a large financially successful private equity firm. The deal saddled the company with a 5.3 billion first lien term loan due in 2025, plus more than a billion more in unsecured loans. How was Envision going to service its debt and yield outsized returns for KKR’s investors?
Private equity firms like to boast about the closely guarded “secret sauce” they use to improve the operations and business strategy of the companies they acquire before they turn around and sell them at a profit. But KKR had no need for a fancy secret sauce. Most of Envision’s emergency room and radiology doctors did not belong to any insurance network. This let Envision send surprise medical bills to insured patients. The secret sauce consisted of loading patients who came to a hospital seeking emergency care with medical debt which they found difficult to pay. It was as simple as that.
Passage of the No Surprises Act in December 2020, effective January 1, 2022, banned the practice of sending large medical bills to insured patients and threw a monkey wrench into Envision’s business plan. As political support for a ban on surprise medical bills grew in the fall of 2019 and during 2020, credit markets lost faith in the ability of Envision to pay off its debts. The outbreak of the pandemic in March 2020 put a further strain on Envision’s finances, as elective surgeries were canceled and ER visits plummeted. By April 2020, Envision was in talks with creditors about restructuring its debt and the possibility of bankruptcy. Envision was saved from financial ruin by the CARES Act, which included generous support for health care providers. Envision’s bailout was estimated by Axios to be $100 million. Envision’s first lien term loan, the safest debt held by its creditors, fell to 50 cents on the dollar in 2019, when the initial effort to ban surprise medical bills nearly succeeded. It recovered after that and reached 73 cents on the dollar in March of 2022, but it never emerged from distressed debt territory (less than 80 cents on the dollar).
The handwriting was on the wall; Envision was heading for a fall. Creditors were understandably bracing for the worst. In a bankruptcy, creditors would be paid off at cents of the dollar. KKR’s stake in Envision would be wiped out – or would it? Rosemary Batt and I realized that KKR had an ace up its sleeve. Envision’s credit agreement made it possible for the company to transfer as much as $2.5 billion of assets to an unrestricted subsidiary. And, as we predicted, that is what Envision did.
Writing in The American Prospect in March 2022, we argued that KKR would use a PE playbook tactic that had famously been used by ESL when Sears faced the possibility of bankruptcy, by Sycamore when it acquired struggling retailer Nine West, and by the PE owners of the Serta Simmons Bedding company. We made the case that KKR would move Envision’s profitable assets to a new investment vehicle, out of the reach of creditors, and would leave the left-behind-assets in Envision, still burdened by all the debt its PE owners had loaded on it. This was sure to become untenable and we predicted that Envision would ultimately face a major restructuring, or even bankruptcy.
Events proved us right.
Envision Healthcare consists of two businesses – EmCare, a physician staffing business, and AmSurg, an ambulatory surgical center (ASC) engaged in outpatient surgery. The ban on surprise billing threatened EmCare’s business model and its profitability. But AmSurg, with more than 250 surgery centers across the U.S., was thriving. In May 2022, Envisionmoved an estimated $2.5 billion in AmSurg assets to a new Envision Healthcare subsidiary, away from many of its existing lenders, as part of a $2.6 billion recapitalization. The difference of $1.1 billion represents new debt placed on AmSurg.
The move protected KKR’s investment in Envision. If Envision were to fail, KKR would be stripped of its investment in EmCare. But the PE firm would retain its AmSurg assets, which would not be included in a bankruptcy proceeding. Stripped of its profitable AmSurg business, Envision’s financially struggling physicians’ practices were now liable for all of the company’s debt. The situation, as financial markets recognized, was untenable. In November 2022, AmSurg’s debt was trading at a healthy 98 cents on the dollar while Envision’s first lien debt traded at about 25 cents on the dollar.
Envision – now with its profitable AmSurg assets moved to a new subsidiary but still burdened with all the debt – has struggled to remain viable. In mid-April of 2023, Envisionmissed a key deadline to report its financials, triggering a technical default. Most at risk of financial losses are the creditors, who own about $1.2 billion of unsecured bonds. The bonds carry an 8.75 percent interest rate, which made them desirable while Envision was profitable. But by April, this debt was trading at about 4 cents on the dollar, meaning that creditors believed the bonds were worthless. On April 26, 2023 the Wall Street Journal reported that Envision had missed an interest payment of about $40 billion on this debt. The company is now considering its restructuring options. KKR is in talks with Envision’s creditors about a debt for equity exchange that would reduce KKR’s stake in the company. Another option would be for Envision to file for bankruptcy protection; this would allow Envision to continue to function while the search for a new owner to buy it out of bankruptcy continues. Bankruptcy would wipe out KKR’s investment in Envision’s physician staffing business, but the PE company would still own the lucrative AmSurg assets.
What will happen to the thousands of doctors, mainly ER docs and radiologists, employed by Envision? It’s unlikely that Envision will be liquidated and all of its doctors will lose their jobs. The more likely outcome is that some company will buy Envision out of bankruptcy after the bankruptcy court relieves it of most of its debts. Health insurance companies are likely bidders; insurance giant UnitedHealth Group has been actively buying up doctors’ practices. Job cuts and reductions in pay are possible, but there won’t be mass layoffs except in the unlikely case that a buyer can’t be found. Ownership by a publicly traded health insurance company will come with less debt to pay off, and might come with less pressure to become supremely profitable in a 3 to 5- year window. But this brings its own problems. There is an inherent conflict of interest between an insurance company whose profits depend on it paying out as little as possible to providers, possibly restricting doctors’ options. Meanwhile doctors, as health care professionals, will want to provide the level of care the patient requires, even if it is expensive.
The problem, ultimately, lies in the corporate practice of medicine that is behind the tension between profit maximization by firms that own health care providers, and the best care possible for patients that providers are obligated to provide.
This first appeared on CEPR.