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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