S&P Global Ratings’ decision to downgrade Envision Healthcare might have been largely overlooked during another busy healthcare news week, but it could prove to be part of one of the biggest stories in healthcare economics.
About Envision – The private equity-backed mega practice employs more than 25k clinicians across hundreds of US hospitals, including roughly 800 radiologists who perform over 10 million reads per year.
The Downgrade – S&P downgraded Envision Healthcare to ‘CCC’ (from CCC+) and assigned it a ‘Negative’ CreditWatch rating, citing the company’s “inadequate” liquidity, a missed financial filing deadline, and a challenging path forward. Envision owes $700M by October 2023 (and more after that), but S&P expects the company to end 2022 with less than $100M in cash, risking more short-term downgrades and bigger long-term disruptions.
The Background – If you’re wondering how Envision found itself in this situation, a recent Prospect.org exposé has some answers (or at least its version of the answers):
- When private equity giant KKR acquired Envision in 2018, it burdened the company with billions in debt, including a $5.3B first-lien term loan due in 2025
- KKR’s initial strategy involved keeping most of Envision’s clinicians out-of-network (and earning higher surprise billing rates), but Envision moved many of its physicians in-network amid public backlash and looming legislation
- Ongoing surprise billing legislation spooked investors, causing Envision’s first-lien term loan to trade for 50 cents on the dollar in early 2020, before bouncing back to a somewhat-less-distressed 70-80 cent range later that year
- The COVID pandemic further strained Envision’s finances, as many of its core specialties saw major volume declines (emergency, anesthesiology, radiology, GI, etc.)
- Envision avoided bankruptcy thanks to an estimated $100M CARES Act bailout and help from its creditors
- The final surprise billing legislation turned out to be pretty favorable for Envision, but not as favorable as back in the pre-legislation days
- As of March 2022, Envision’s $5.3B first-lien term loan was still trading in distressed territory (73 cents), and it has other loans to pay off too
The Path Forward – It’s hard to predict how this will work out for Envision, although Prospect.org suggests that it might involve KKR splitting Envision into two companies. One could be saddled with all the debt and destined for bankruptcy, while the other entity (and KKR) could emerge “unscathed.”
For many in healthcare this is a cautionary tale about what can go wrong when private equity influences are combined with an over-reliance on a disputed business model (in this case surprise billing) and a global pandemic. It also makes you wonder if other mega practices are in similar situations.