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.




Memphis hospital CEOs discuss policies on debt collection after patient lawsuits draw scrutiny

Dr. Reginald Coopwood, CEO of Regional One Health, on Feb. 5, 2016.

Representing more than half of the hospitals in Shelby County, the CEOs of four local health care organizations convened at the University of Memphis Tuesday for a panel on “successfully leading change” in the industry.

The gathering took place amid a growing conversation on medical debt — the cause of more than 58 percent of bankruptcies in the United States, according to the American Journal of Public Health. 

Communities across the countries have recently seen individuals and faith-based organizations launch fundraising initiatives to erase millions in medical expenses as part of a burgeoning movement to buy medical debt for the sole purpose of erasing it.

Memphis has also been at the fore of the conversation in recent months, with a pair of investigations by MLK50 and ProPublica revealing an aggressive system of suing patients involving wage garnishments, interest charges and court fees.

That reporting has since prompted a wave of debt reduction and forgiveness for thousands who were being sued by Methodist Le Bonheur Healthcare and Southeastern Emergency Physicians, a private equity-owned firm that staffs Baptist Memorial Health Care’s four local emergency rooms.

‘We have to be a profitable business’

At the Tuesday panel, organized by the professional association Mid-South Health Care Executives, the discussion touched on workplace harassment, the impending automation of health care jobs, and diversity.

The CEOs of Methodist Le Bonheur and Baptist Memorial also addressed medical debt as did their fellow panelists.

Dr. Reginald Coopwood, CEO of Regional One Health, the county hospital, said his organization was compelled to reassess its policies as a result of the recent scrutiny surrounding debt collection, though he defended the practice of suing patients in general.

“We send people through processes of collection,” Coopwood said of the public hospital.

“We have a great passion to deliver great care to whoever walks into our door. The flip side of that is … if everybody cannot pay their bills, we can’t buy $100 million record systems and we can’t buy technology that the community as a whole wants,” Coopwood said. “So we have policies to collect whatever is collectible from individuals.”

“That’s what a business needs to do,” he said.

According to General Sessions Court data, analyzed by MLK50 and ProPublica and shared with The Commercial Appeal, those hospitals and a physicians staffing firm, sued more than 2,500 patients in the first six months of the year, between January 1 and June 30:

  • Baptist Memorial Hospital, 486 lawsuits
  • Methodist Le Bonheur, 622 lawsuits
  • Regional One Health, 161 lawsuits
  • Southeastern Emergency Physicians, 1,292 lawsuits

“At the end of the day, we’re businesses, and in order to stay in business, we have to be able — in order to take care of those that are uninsured — we have to be a profitable business,” Coopwood said.

Sally Deitch, CEO of St. Francis Hospitals in Memphis, said the amount of charity care hospitals give back to communities is rarely seen, and, meanwhile, “most of these hospitals are living under their margins of actually being able to say ‘We are financially solid and stable and ready to make investments in new technology.'”

In a Memphis Business Journal review of nonprofit tax filings, Coopwood, Methodist Le Bonheur CEO Michael Ugwueke and Baptist Memorial Health Care CEO Jason Little are listed among the five highest paid nonprofit executives in the metro area, earning between $874,493 and $1,300,954 in 2018. Deitch was appointed to her position in October, after the Memphis Business Journal’s compensation review.

‘No one is perfect’

In the Methodist Le Bonheur system, MLK50 and ProPublica’s investigation found the nonprofit hospital’s practice of taking patients to court, through its in-house collection agency, had entrapped some of its own workers in a cycle of wage garnishments, interest and debt — while they were being paid less than a living wage.

Ugwueke, president of Methodist Le Bonheur’s hospitals in Shelby County, said his organization has gone “above and beyond the issues that were raised.”

The hospital, which is affiliated with the United Methodist Church, announced in July it would cease suing its employees and would raise the hospital network’s minimum wage to $15 an hour.

Methodist Le Bonheur also said it would institute a revamped financial assistance policy to ensure no one making less than 250 percent of federal poverty guidelines would be sued for debt collection in the future. For the approximately 6,500 patients who were in the process of being sued, the hospital also committed to forgiving or reducing their debts.

“As part of our process, we have made additional changes and accommodations,” Ugwueke said. “No one is perfect. I don’t think it’s anyone’s intention to do anything to harm patients.”

He added that he thinks other institutions have a role to play in serving the needs of low-income and poor communities.

“Memphis is a very challenging community. Health care organizations are not going to be the only ones solving the problems,” he said.

Deitch said no one seeking emergency care would ever be turned away from any hospital. Beyond that, she said she considered hospitals to be participants in helping their communities but not a deciding factor.

“When you start to think through the cost to the system and the burden to the system — at a certain point, it can’t all be the responsibility of a hospital,” she said.

Charity care

Little said he  thinks hospitals should address problems with affordability.

“We still need change in health care because it’s expensive. … Seventy-five percent of Americans are living paycheck to paycheck,” Little said, “and nobody sets money aside and plans to need a transplant. So that’s a challenge for all Americans and all Memphians.”

“And it’s a challenge that I’m really bullish on my colleagues up here continuing to address,” Little said, “because I think we’ve gotten really good at caring for our communities, particularly those in the greatest of need.”

For every dollar spent on expenses, Little said, Baptist Memorial spends 21 cents of it on charity care.

But that financial assistance hasn’t always been accessible to emergency-room patients, MLK50 and ProPublica reported in an investigation into Southeastern Emergency Physicians. The staffing firm contracts with doctors to treat emergency room patients in four of Baptist’s five hospitals in the region.

Southeastern filed nearly 1,300 lawsuits in the first half of 2019, according to MLK50 and ProPublica’s analysis of General Sessions Court data — more lawsuits than Regional One, Baptist Memorial and Methodist Le Bonheur combined.

But by the end of the year, in response to the MLK50 and ProPublica investigation, the firm’s parent company, TeamHealth, said it promote financial assistance program participation and would no longer pursue its active lawsuits — or sue any patients again.



Physician staffing firm suing patients

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An emergency room staffing firm owned by TeamHealth has filed thousands of lawsuits against patients in Memphis in the last few years, ProPublica and MLK50 report.

This is a collision of two storylines: the aggressive billing practices of private equity-backed health care companies, and providers’ decision to take patients to court to collect their medical debts.

  • Media reports have, until now, mostly focused on hospitals’ lawsuits, but ProPublica and MLK50’s reporting suggest the practice could be more widespread.

Between the lines: TeamHealth has already been in hot water for its role in surprise billing.

  • Emergency room physicians send patients surprise medical bills more often than other specialties, especially physicians employed by TeamHealth.
  • These doctors then have leverage to obtain higher in-network payment rates, making the practice lucrative.
  • The group is also one of the main funders of the dark-money group that has run millions in ads against what was Congress’ leading solution to surprise medical bills.
  • The company was acquired by the Blackstone Group in 2017.

By the numbers: The Memphis subsidiary Southeastern Emergency Physicians has filed more than 4,800 lawsuits against patients in Shelby County General Sessions Court since 2017, per ProPublica and MLK50.

  • TeamHealth said last week, after receiving questions from reporters, that it will no longer sue patients and won’t pursue the lawsuits it’s already filed.