California hospital secures $20M to stave off closure

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The San Mateo County (Calif.) Board of Supervisors voted March 10 to allocate $5 million annually over the next four years to keep Seton Medical Center in Daly City, Calif., open, according to Bay City News.

The county supervisors voted 4-1 to give $20 million in funding to the company that buys the hospital from El Segundo, Calif.-based Verity Health. The funding package will come with conditions, including that the purchaser must keep the hospital open and fully functional.

Verity entered Chapter 11 bankruptcy in August 2018. In January, the health system closed St. Vincent Medical Center, a 366-bed hospital in Los Angeles, after a deal to sell four of its hospitals fell through. The system had been planning to close Seton Medical Center as soon as this week, according to the report.

There are currently two companies bidding to purchase the hospital in Daly City and Seton Coastside in Moss Beach, Calif. The funding will help ensure Seton Medical Center, which sees roughly 27,000 patients per year, keeps its doors open.




UnitedHealth likely to keep squeezing physician staffing firms

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The nation’s largest private insurer has been terminating its contracts with physician staffing firms in a bid to extract lower prices, part of a years-long pattern analysts say could spur other payers to follow.

UnitedHealthcare contends it is simply trying to curb the rising cost of healthcare by driving out high-cost providers that charge far more than the median rate in its network. The payer said it had hoped to keep these firms in network “at rates that reflect fair market prices,” a UnitedHealthcare spokesperson told Healthcare Dive.

The most recent action targeted Mednax, a firm that provides specialty services including anesthesia, neonatology and high-risk obstetrics in both urban and rural areas. United cut Mednax contracts in four states, pushing those providers out of network, potentially putting patients at risk of balance bills.

United also recently canceled its in-network contracts with U.S. Anesthesia Partners in Texas, starting in April, which caused Moody’s to change its outlook to negative for the provider group because the contracts represent 10% of its annual consolidated revenue.

These latest moves to end relationships with certain physician staffing firms seem to have escalated in recent years, Sarah Kahn, a credit analyst for S&P Global, told Healthcare Dive.

Since the insurer’s 2018 tussle with ER staffing firm Envision, “it’s sort of ramped up and become more aggressive and more abrupt and more pervasive,” Kahn said of the contract disputes.


United said the volume of negotiations it’s involved in has not changed in recent years, and added that it expects to renegotiate the same amount of contracts in 2020 that it did in 2019. However, United pointed a finger at a small number of physician staffing firms, backed by private equity, that are attempting to apply pressure on United to preserve the same high rates.

Private equity firms have been increasingly interested in healthcare over the past few years, accelerating acquisitions of medical practices from 2013 to 2016. Private equity acquired 355 physician practices, representing 1,426 sites of care and more than 5,700 physicians over that time frame, according to recent research in JAMA. The firms had a particular focus on anesthesiology with 69 practices acquired, followed by emergency physicians at 43.

Mednax is a publicly traded company. But Envision is owned by investment firm KKR; TeamHealth is owned by private equity firm Blackstone; and U.S. Anesthesia Partners is backed by Welsh, Carson, Anderson & Stowe.


Proposed legislation around surprise billing may be influencing United’s actions, Kailash Chhaya, vice president and senior analyst at Moody’s, told Healthcare Dive. Congress has been weighing legislation that seeks to eliminate surprise billing, mainly through two vehicles, either using benchmark rates or arbitration.

If Congress ultimately decides on a bill that uses benchmark rates, or ties reimbursement for out-of-network providers to a benchmark rate (or average), it would benefit insurers like United to lower its average rate for certain services, Chhaya said. One way to do that is to end relationships with high-cost providers.

“It would help payers like UnitedHealth if that benchmark rate is low,” Chhaya said.

In late 2018, United threatened to drop Envision from its network, alleging the firm’s rates were responsible for driving up healthcare costs, according to a letter the payer sent hundreds of hospitals across the country. United and Envision eventually agreed to terms, but United seemed to outmuscle Envision as the deal secured “materially lower payment rates for Envision” that resulted in lower earnings, S&P Global analysts wrote in a recent report.

In 2019, United began terminating its contracts with TeamHealth, which has a special focus on emergency medicine. The terminations affect two-thirds of TeamHealth’s contracts through July 1. The squeeze from United caused Moody’s to also change Team Health’s outlook to negative as an eventual agreement would likely mean lower reimbursement and lower profitability for company, the ratings agency said.

“They’re trying to lower their payments to providers. Period,” David Peknay, director at S&P Global, told Healthcare Dive.​


Data shows prices — not usage — is driving healthcare spending. Physician staffing firms are frequently used for ER services and the ER and outpatient surgery experienced the largest growth in spending between 2014 and 2018, according to data from the Health Care Cost Institute.

United said it had been negotiating with TeamHealth since 2017 and does not believe TeamHealth should be paid significantly more than other in-network ER doctors for the same services. United alleges its median rate for chest pains is $340. But if a TeamHealth doctor provides the care it charges $1,508.​

“As Team Health continues to see more aggressive and inappropriate behavior by payors to either reduce, delay, or deny payments, we have increased our investment in legal resources to address specific situations where we believe payor behavior is inappropriate or unlawful,” according to a statement provided to Healthcare Dive.

TeamHealth said it will not balance bill patients in the interim.


The pressure from payers, particularly United, is unlikely to relent. The payer insures more than 43 million people in the U.S. through its commercial and public plans.

“I don’t think anyone is safe from such abrupt terminations,” Kahn said. However, United disputes the characterization of abruptly terminating contracts and says in many cases it has been negotiating with providers to no avail.

Likely targets in the future may include firms with a focus on emergency services, which tend to be high-cost areas, S&P’s analysts said. In their latest report, Kahn and Peknay pointed to The Schumacher Group, which is the third-largest player in emergency staffing services. However, it commands a market share of less than 10%, far less than its rivals Envision and TeamHealth.

Smaller firms may not be able to weather the pressure as effectively as very large staffing organizations.

For those smaller groups, it may be wise for them “to sit tight on their cash or prepare from some pressure,” Kahn said.

Although some believe it may influence other payers to follow suit, Dean Ungar, vice president and senior analyst with Moody’s, said United may be uniquely placed to exert this pressure because it has its own group of providers it can use and considerable scale.

“They are better positioned to play hardball,” Ungar said.





Humana doubles down on its primary care strategy

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Humana, the nation’s second largest Medicare Advantage (MA) insurer, is partnering with a private equity (PE) firm to expand its senior-focused subsidiary medical group, Partners in Primary Care.

The arrangement will be structured as a joint venture between Humana and Welsh, Carson, Anderson & Stowe, with a combined initial $600M investment that will give the PE firm majority ownership of the medical group. The new venture is likely to double the number of centers that Humana’s Partners in Primary Care operates—currently 47 throughout Texas, Kansas, Missouri, Florida and the Carolinas.

While Humana has been looking to grow its MA membership, patients need not be Humana members to access care at the centers. Humana has established other partnerships in the physician practice space, including last fall’s announcement that it is teaming up with Iora Health to add 11 additional Iora-branded primary care practices to its MA networks in Arizona, Georgia, and Texas.

Humana has previously partnered with private equity to acquire postacute providers Kindred Healthcare and Curo Health Services. These latest moves suggest the company is shifting its focus to the front end of the delivery system, looking to control costs of care for seniors by quickly building a primary care physician network focused on reducing high-cost referrals to hospitals and specialists.




The growth of private equity investment in physician practice

Private equity (PE) investment in US healthcare has ballooned over the past decade—2018 and 2019 saw record numbers of deals, representing more than $100 billion in total value. As we show below, in 2018 just under a fifth of these transactions were in the physician practice space, with the largest number of deals in dermatology and ophthalmology.

While these two specialties remain active areas of PE investment, a growing number of recent deals have focused on women’s health, gastroenterology, and urology practices.

Across all these areas, PE firms see an opportunity to grow revenue from high-margin ancillary services, cash procedures, and retail products.

Physician groups are pursuing PE investment as an alternative to joining health systems or large payer-owned physician organizations to access capital and fund buyouts of legacy partners. Doctors’ heads are increasingly being turned by the current sky-high multiples PE firms are offering, often up to 10 or even 12 times EBITA.

Private equity roll-ups of physician practices are far from over. Recent activity suggests that the behavioral health market is heating up, as it remains very fragmented in a time of increasing consumer demand.

And we predict a rush for further investment in cardiology and orthopedic practices, as investors look to profit from the shift of lucrative joint and heart valve replacement procedures to outpatient facilities.


Failure of Fiduciary Duty?

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Sen. Bernie Sanders still may eke out a win in Iowa, and is the consensus front-runner in New Hampshire.

  • But most venture capitalists investing in America’s health care industry — the primary target of Bernie’s ire — have shoved their heads so deep in the sand that they’ve found water, Axios’ Dan Primack writes.

Why it matters: At some point, it could become a failure of fiduciary duty.

Health care accounts for over 20% of all U.S. venture activity.

  • A majority of that is in biotech/pharma, which last year saw 866 deals raise around $16.6 billion.
  • Investors view many of those deals as binary: Either the drug doesn’t work, resulting in a total write-off, or it does work and the financial sky’s the limit. Strike out or grand slam.
  • Sanders pledges to limit the upside, either by limiting drug prices under the current system or (if he gets Medicare for All) by establishing a single, centralized buyer.

Few health care VCs Dan spoke with are working on a Plan B in the event of their risk/reward models being made obsolete. Three main reasons:

  1. They don’t believe Sanders will win.
  2. Even if he does win, they don’t believe Sanders will get Medicare for All.
  3. If Sanders wins and implements his full plan, then it’s such a revolutionary shift that there’s not much health care VCs can do to counter it.

The bottom line: For now, health care venture’s strategy is see no Bernie, hear no Bernie. We’ll see how long that’s viable.




The world of private equity — 15 key observations

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Private equity funds have significantly grown in number, size and significance in the last 20 years.

Recent high-profile acquisitions include a stake in the Manchester City soccer team and the purchase by Ithaca Holdings, backed by private equity firms, of Taylor Swift’s recording catalog. Along with private equity’s growth, it has also become an area of political focus, sure to be a talking point during the next presidential election. Following are 15 key observations on the current state of private equity.


1. Private equity raises money from investors and invests that capital in different types of companies. The most common investment is a leveraged buyout, whereby a fund buys a majority stake in a company, attempts to improve it, and then sell the company for a profit. Private equity funds also invest in distressed assets, real estate, other funds and venture capital. Private equity funds raised approximately $700 billion in 2018. This broadly goes into several different categories. This amount raised is slightly less than in 2017.


2. Private equity as an asset class has matured greatly. Increasingly, to have broad equity exposure, investors must also have exposure to private companies. Along with diversification, private equity has historically (but see points below) offered the potential for returns that beat the public markets. Private equity investment continues to increase, with investments in around 8,000 + private companies. By contrast, the US public markets are shrinking. According to the New York Times, in the mid-1990s, there were more than 8,000 publicly traded companies, and by 2016, there were only 3,627.


3. As private equity funds have grown to be a larger part of the equity market, their returns have regressed closer and closer to the public markets. The largest funds are closer in returns to the public markets. According to a recent Wall Street Journal report, private-equity funds of $10 billion or more posted 14.4 percent five-year annualized returns net of fees as of the end of September 2018, barely edging past the 14.1 percent return for the S&P 500. See “Wall Street Journal “Private Equity Funds are Raising Bigger and Bigger Funds. They Don’t Often Deliver.”


4. Private equity have generally outperformed the public markets during periods of volatility. In 2018, where there was political and economic uncertainty, the average private equity fund appreciated 8.2 percent while public market indexes had double-digit declines. See, “10 Predictions for Private Equity for 2019” by Antoine Drean. However, the statistic may be misleading as private equity can choose not to exit investments in more challenging markets. Also, there is a large variety of returns in different private equity funds.


5. The spread of returns from high returns to very low returns among private equity funds is very large. See McKinsey “Return Dispersion is much Greater in Private Equity than in Public Markets.” This means it’s become increasingly difficult to find the right private equity fund to invest with. It also means that successful funds can outperform the median by a significant degree. However, it is hard to consistently be a successful fund.


6. The 5 biggest private equity funds are largely considered to be the following – The Carlye Group, Kohlberg Kravis Roberts (KKR), The Blackstone Group, Apollo Global Management and TPG. Each has more than $100 billion in assets under management. The CEO, Chairman and Co-Founder of the Blackstone Group recent authored “What it Takes– Lessons in the Pursuit of Excellence”. This book provides a good primer on private equity.


7. Private equity mega funds, those funds with $5 billion or more in pooled capital, take up a larger and larger part of the investment area. 19 mega funds were raised in 2018. These 19 funds reflected 20 percent of all private equity fundraising. See McKinsey and Co “Private Markets Come of Age.” The 2019 Preqin Global Private Equity and Venture Capital Report discusses the growing concentration of capital amongst a relatively small number of funds. It reported at the end of 2018, that 62 percent of the total capital raised was committed to the 50 largest funds.


8. According to Pitchbook, private equity fundraising in the US hit an all-time high in 2019. Pitchbook reports that as of the beginning of November 2019, US buyout funds raised north of $246 billion. According to a Fitch Ratings report, Private equity is sitting with approximately $2.1 trillion globally to invest. See “Private equity fundraising in the US hits all-time high” by Eliza Haverstock. This amount of “dry powder” is at an all-time high. See “This is the Biggest Year Ever for Private Equity Funding. Where are the Deals?” Dallas Business Journal.

9. Investors, economists and politicians are signaling the likelihood of a recession in the near future. With a huge amount of money to deploy, funds are developing strategies to deal with an economic downturn. This may mean less new deals and a focus on margins of existing investments.


10. Private debt funds have grown greatly and raised more than $100 billion a year for the last 4 years. According to Preqin, there are now 417 private debt funds in the market. The market for investing in private debt funds seems to be slowing some in 2019 with less on track to be raised than the last four years. See, e.g., Institutional Investor, “Investors are backing off from private debt”. Here, the article headlines that investors are backing off from the once booming asset class. Oct 10, 2019. The largest private debt funds are often closely connected to the largest private equity funds. These include GSO Capital Partners which is related to Blackstone, KKR, Ares Management, OakTree Capital Management and Goldman Sachs via its Goldman Sachs Merchant Banking Division. Pitchbook reports the following firms as leading the private debt market: Antares Management, Ares, Barings, TwinBrook Capital Partners, The Carlye Group, Midcap Financial, NXT Capital, BMO Financial Group, Madison Capital Funding, and Citizens Bank. See also Bloomberg, December 18, 2019, “Apollo and Blackstone are Stealing Wall Street’s Loans Business.” The movement to these behemoth funds also having large direct debt financing funds will have a big impact on the business of other traditional lenders and financing sources.


11. According to SPG Global, multiples for PE funded deals are averaging close to 11.5 times EBITDA. They attribute this to the sinking cost of debt, a mountain of private equity dry powder, and larger equity investments. The leverage on deals is overall close to 5.5 times EBIDTA. The multiples differ dramatically based on the size of the deal, the growth trajectory of the company, the assessment of risk of the company, and several other factors.


12. As private equity funds grow larger and have more capital to deploy, there are less club deals. According to McKinsey, “in 2007, 27 percent of megadeals included more than one large global GP. By 2018, that number was 4 percent. Club deals were associated with several notable investment catastrophes and largescale bankruptcies.” However, co-investments, where investors invest alongside a private equity fund, often without paying some of the usual fees, are continuing to increase. These deals are becoming increasingly competitive and provide an opportunity to reduce the exposure of investing in a single company.


13. Increasingly the largest private equity funds have grown their own operations teams and have more operating partners and executives than they used to. For example, Blackstone is reported to have more than 2,400 employees. Carlye has close to 1,600 employees. KKR has 1,300 employees. Funds are also investing in analytics and other technology to manage the fund and platform companies.


14. Funds are diversifying their fundraising and investment strategies in interesting ways. On the investment side, some of the largest funds are starting to raise funds from retail investors. On the investment side, there are now funds like Dyal Capital which has raised $9 billion to invest in other private equity funds.


15. The total volume of dollars going into private equity related deals is growing. However, the total number of deals transacted has been fairly flat the last few years. The average dollar volume per deal is increasing. According to Bain, the number of individual transactions in 2018 decreased by 13 percent, to 2,936 worldwide — but total buyout value jumped 10 percent to $582 billion (including add-on deals). See Bain, Global Private Equity Report 2019. A related trend is private equity funds selling their stakes in companies to other private equity funds in secondary transactions. This is different from years past where the normal exit was to a strategic buyer or to the public markets – this secondary market is anticipated to continue to grow. Increasingly the volume of deals done is driven by add on or bolt on transactions added to platforms.



Buyer of 4 California hospitals misses closing deadline

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Corona Calif.-based KPC Group missed the court-appointed deadline to purchase four hospitals from El Segundo, Calif.-based Verity Health, which entered Chapter 11 bankruptcy in August 2018.

KPC Group bid $610 million in January to purchase the four hospitals from Verity. Three months later, U.S. Bankruptcy Judge Ernest M. Robles approved the asset purchase agreement for KPC’s Strategic Global Management to acquire the hospitals. In late November, the judge ordered SGM to close the deal by Dec. 5.

After SGM failed to complete the purchase by the court-appointed deadline, Verity asked the court to issue an order requiring SGM’s principals to testify as to why the deal did not close and whether SGM has the financial ability to close the sale. Verity also asked the court to issue an order finding SGM in breach of the asset purchase agreement and allowing it to keep SGM’s $30 million deposit and proceed with other plans to sell the hospitals.

On Dec. 9, the court denied Verity’s request to force SGM’s executives to appear and testify in court.

“By failing to close, SGM risks the loss of its $30 million good-faith deposit as well as the possibility of damages for breach of contract in an amount of up to $60 million,” Judge Robles wrote in a Dec. 9 court filing. “Being compelled to offer testimony will not motivate SGM to close where the threat of the loss of up to $90 million has failed to accomplish that end.”

The judge assured Verity that it would have the chance to litigate the issues of whether SGM breached the asset purchase agreement and whether it’s entitled to keep the good-faith deposit.

Though neither party has terminated the sale process, the judge said Verity can “explore options for the alternative disposition of the hospitals” without violating the asset purchase agreement.

The next bankruptcy court hearing is slated for Dec. 30.