June 23, 2023
Envision Healthcare – the private equity-owned physician staffing firm whose clinicians can be found staffing 540 health care facilities in 45 states – was in serious financial trouble for the past year, and sought bankruptcy protection in May 2023. How did Envision get here, and what does the future hold for the doctors and other clinicians on its payroll?
Envision Healthcare (hereafter Envision) was acquired in a 2018 leveraged buyout by Kohlberg Kravis Roberts (KKR), a very large and financially successful private equity firm. The deal valued Envision at nearly $10 billion. KKR 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 the outsized returns KKR promised its 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 allowed Envision to 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 COVID-19 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 at that time 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 agreement with its creditors included a provision that 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 Investments 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 predicted that KKR would move Envision’s profitable assets – the surgicenters – to a new investment vehicle, out of the reach of creditors, and would leave the left-behind-assets – the physicians and clinicians – in Envision, still burdened by all the debt its PE owners had loaded on it. Envision, shorn of its profitable outpatient surgery centers, was now responsible for repaying all of the company’s billions of dollars of debt. This was sure to become untenable and we predicted that Envision would ultimately face a major restructuring, and even bankruptcy.
Events proved us right.
Envision 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. As Rosemary Batt and I predicted, Envision moved an estimated $2.5 billion in AmSurg assets to a new Envision subsidiary in May 2022, 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 was intended to protect 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 a claim on 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 most secure first lien debt traded at about 25 cents on the dollar.
Envision, now consisting just of EmCare – with its profitable AmSurg assets moved to a new subsidiary – was burdened with repaying all the debt. It struggled to remain viable. In mid-April of 2023, Envision missed a key deadline to report its financials, triggering a technical default. Most at risk of financial losses are those creditors that 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 considered its restructuring options. KKR engaged in a deal with Envision’s senior creditors for a debt-for-equity exchange that would reduce KKR’s stake in AmSurg. And on May 14, Envision filed for bankruptcy protection in Texas. The bankruptcy court reduced Envision’s debt substantially and approved a request to allow EmCare to use Envision’s cash on hand to finance its continuing operations. At the time of the bankruptcy, Envision had $665 million on hand. This has allowed what remains of Envision, now once again an independent company renamed EmCare, to continue to function while the search for a new owner to buy it out of bankruptcy continues. Bankruptcy wiped out the initial $3.5 billion equity investment of KKR and its PE investors in Envision. Their stake in the bankrupt EmCare physician staffing business was wiped out. However, KKR and its PE investors still owned a 20 percent stake in the profitable AmSurg company. In the restructuring deal, AmSurg became an independent company; Envision’s senior creditors, led by Pacific Investment Management Company (Pimco), exchanged their debt in Envision for equity in AmSurg. These former Envision creditors were now the majority owners of the ambulatory surgery center company, with KKR the minority owner.
The story does not end there – as KKR likely hoped it would. Pimco and the other senior creditors, now turned shareholders in AmSurg, bought out KKR’s remaining one-fifth share of the company for $300 million. KKR and its private equity investors no longer own any part of the former Envision Healthcare company.
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. 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.
What will happen to the thousands of doctors, mainly ER docs and radiologists, employed by Envision? Some doctors have already faced layoffs, and more are likely. But if a buyer can be found for EmCare, it’s unlikely that the company will be liquidated and all of its doctors will lose their jobs. 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. UnitedHealth is an exemplar of the consolidation of health services. At the time of this writing, its Optum subsidiary is actively bidding to acquire Amedisys, one of the largest home health companies in the U.S. Amedisys offers home health, hospital-at-home, and hospice services. In addition to owning the largest health insurance company with 50 million beneficiaries, UnitedHealth Group’s Optum subsidiary currently owns networks of doctors as well as clinics and other medical sites. It employs roughly 70,000 doctors. It’s unclear what effect a successful bid for Amedisys will have on its need for doctors and whether it will be interested in acquiring EmCare.
Ownership by a publicly traded health insurance company will come with less debt to pay off and less pressure to become supremely profitable in a 3 to 5- year window. It might entail some job cuts, and doctors might see some reductions in pay. But mass layoffs are unlikely. However, ownership by an insurance company brings its own problems. There is an inherent conflict of interest between an insurance company, whose profit depends on it paying out as little as possible to providers, and doctors. 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 fuels the tension between profit maximization by firms that own health care providers, and the best care possible for patients that providers want, and are obligated, to provide.
