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By Dr. Jim Dahle, WCI Founder

Envision Healthcare filed for Chapter 11 bankruptcy on May 15, 2023. This is kind of a big deal, and there are some lessons to learn from it.

Envision Healthcare, via its subsidiary Envision Physician Services, is a multi-specialty provider group that works at more than 900 facilities in 48 states, and it employs or contracts with more than 25,000 doctors and other providers. Its doctors include anesthesiologists, emergency physicians, hospitalists, radiologists, surgeons, OB/GYNs, and pediatricians. Via its subsidiary AMSURG, it manages more than 250 surgical centers.

Envision originally grew out of a company called EmCare that had a less-than-stellar reputation among emergency physicians. Derided by the American Academy of Emergency Medicine (AAEM), both directly and indirectly in The Rape of Emergency Medicine, EmCare was an early “kitchen scheduler,” founded way back in 1992. By 2005, it had 300 EM contracts in 39 states. It was purchased in 2011 by private equity, which made a billion dollars flipping it to the public markets in 2013 and renaming it Envision Healthcare. By 2017, it was getting a lot of flack in the press for balance billing. In 2018, it was taken private by private equity firm Kravis, Kohlberg, and Roberts (KKR) and was considering bankruptcy as early as 2020. Moody's gave a warning about bankruptcy in September 2022, and by May 2023, the warning had proved prophetic.


What Happened to Envision Healthcare?

If you ask Envision, it blames everybody else for its problems. It said fewer patients came to the hospital due to the pandemic (certainly true in most emergency departments in 2020). It said health insurers (primarily UnitedHealthcare) excluded it from its networks and wouldn't pay Envision as much as they should. It said the No Surprises Act was being implemented in a flawed way. It said there is a physician shortage, and it can't find doctors to work for the company. It said its costs have gone up due to inflation.

All of those things are probably true to a certain extent. But they're also true for every other group of emergency physicians in the country. Yet they haven't all declared bankruptcy. What's different about Envision? The same thing that always leads to bankruptcy: debt.


Private Equity, Leverage, and Business Risk

KKR bought Envision in 2018 for $10 billion. Did KKR have $10 billion? No, it didn't. It had $5 billion. In fact, as part of the bankruptcy, the company is having $5.6 billion in debt canceled. The company was highly leveraged. On average, S&P companies have a debt-to-capitalization ratio of 15%. Not 56%. This isn't unusual for private equity, though; it's how those companies play the game. They use borrowed money to buy companies, try to make them a little more profitable through various practices (some of which are probably good, many of which are not so good), and then sell them. They're in the company-flipping business.

The typical debt-to-equity ratio in the private equity business is 70%. But it doesn't take much going wrong for things to go bad when you owe that much money. Envision Healthcare filed bankruptcy not because it was out of money (it had $665 million in cash in the bank) but simply because it could no longer service its debt. Bankruptcy either eliminated the debt or turned it into equity. In essence, the lenders now own the assets of the company, and KKR lost $5 billion.

More information here:

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More Than Just Leverage

Advisory Board blames more than just leverage, though. It says Envision is different from other private equity firms in the healthcare space. Envision is more heavily focused on emergency medicine, and . . .

“Envision's business model was reliant on exploiting questionable business practices and loopholes, which were heavily impacted by the No Surprises Act. So, this bankruptcy isn't an indictment of PE investment in physician groups. It just shows that healthcare organizations are not immune to being caught on their bad business practices . . .

Envision's business model was not an innovation on care design or delivery. It was a model taking advantage of pricing distortions and patients who are not in a position to shop for emergency care. That model inherently has limited running room.

On the physician practice front, Envision's bankruptcy highlights the challenging business environment PE firms choose to enter when they invest in physician practices. Medical groups are a low-margin business, and the running room on cost savings has a low ceiling.

While many of the highest-profile PE investments in physician groups come from firms with a long track record in the physician space, it remains to be seen whether the return on their investments will be high enough to satisfy investors.”


AAEM Still Hates Envision

In 2021, AAEM sued Envision for breaking laws against the corporate practice of medicine in California. While Envision made a motion to dismiss it, a judge upheld the lawsuit and allowed it to proceed. AAEM is certainly not backing down just because Envision is bankrupt, because the lawsuit really isn't about money. Here's what the AAEM said:

“We are suing for a declaration that the Envision model of practice is illegal under California Corporate Practice of Medicine laws. To be clear, we are not suing for monetary damages.

The members of our Academy work in a difficult profession in consistently high-stress situations. They are charged with treating vulnerable patients in need of emergency care. Patients that put complete trust in the physicians treating them.

It is our view that Contract Management Groups (CMGs) compromise the care of those patients and the well-being of our doctors by exploiting the process. Doctors are pressured to put dollars ahead of medicine. They are required to work longer hours and handle higher patient volumes. Some are pushed to upsell services. Doctors burn out under these conditions. Consequently, they eventually leave the emergency room. As a result, we lose the best doctors where we arguably need them most.

This, of course, leads to an even more adverse effect on our patients. Board-certified physicians are replaced by some less qualified. Decisions can be made more in the interest of the corporation than the patient. Treatment is compromised. The quality of healthcare suffers.

This is a consequence we simply cannot tolerate. This is why we must continue our pursuit of this action regardless of Envision’s impending bankruptcy filing.”

Note that I have plenty of conflicts of interest in this story. Not only has Envision paid me to speak to their physicians, but I have also been a member of AAEM.

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Lessons Learned from the Envision Healthcare Bankruptcy Filing

Envision healthcare bankruptcy

What takeaways should you take from this bankruptcy? I think there are a number of lessons for both individual white coat investors and for companies and society as a whole.


#1 Be Careful with Debt

Nobody ever declared bankruptcy without debt. While leverage works, it works both ways. When projected income doesn't show up, it becomes very hard to service debt, and real money can be lost. I don't know that $5 billion is the biggest loss KKR has ever had, but it's got to hurt. That applies to your financial life just as much as it does to KKR's business.


#2 Cheaters Don't Win in the Long Run

When your business is built on exploitation, eventually it's going to be hurt. Insurers, patients, and doctors all felt exploited by Envision. In my experience, saying what you are going to do and then doing it is the key to business success. The most successful business people, especially in the long run, tend to be honest, upstanding citizens delivering value and treating employees, customers, and even competitors fairly.


#3 Your Job Is Not as Secure as You Might Think

While I don't know of any massive layoffs associated with this bankruptcy (Envision claims none of its employees/contractors/patients will be affected at all), it's generally hard to get a raise and build a career at a company in financial trouble. With fewer and fewer physicians owning their practices every year, docs need to be prepared to change jobs and to weather periods of unemployment. Building an emergency fund, maintaining contacts and networks, and minimizing fixed expenses all go a long way in these situations.


#4 The Pendulum Swings?

While private equity has been buying up practices en masse the last decade, perhaps the pendulum is beginning to swing back the other way as investors realize healthcare—as a low-margin, high-risk business—maybe cannot provide the returns they seek.  Jeff Goldsmith speculates:

“Envision’s demise strongly suggests that the power balance—both political and economic—has tipped decisively in the direction of payers like [health insurance company] United. Rising interest rates, the increasing scarcity of clinicians as workaholic baby boom vintage docs, and deepening financial challenges for the ultimate customers of many of these companies—namely hospitals—suggest that we may have reached an inflection point in the viability of many private equity physician care models, with their 4-7 year holding periods and a succession of owners. Current owners might find it increasingly difficult to exit their positions . . . Envision is United's first major scalp. There will be many others.”

Perhaps in a decade or two, doctors will have more control over how healthcare is delivered and how businesses are run. One can hope. Or perhaps health insurance companies will be bossing us all (hospitals, doctors, staffing groups, patients) around. Maybe I should be careful what I wish for. William Sullivan, DO, JD was almost sympathetic to Envision in a column for Emergency Physicians Monthly:

“The issues underlying Envision’s bankruptcy petition remain a significant longer term concern. If healthcare insurer activism can help drive a large national staffing company into bankruptcy, how well will smaller groups and hospitals fare against those same insurers? Although Envision claims that hospital labor expenses increased by 25% compared to 2019, I don’t know many physicians whose pay increased by 25% during that time frame. If anything, there is a trend toward paying emergency physicians less and decreasing staffing in larger emergency departments.

The No Surprises Act has been a morass from its inception. Insurance companies shaped the narrative leading up to this law as one of greedy physicians demanding outrageous payments for their services. The issue was never one of ‘surprise medical bills.' Instead, it has always been a ‘surprise denial of insurance coverage.' Our professional organizations did little to counter that narrative. By the way, while Envision is filing for bankruptcy protection, UnitedHealth’s profits increased from $17 billion in 2021 to more than $20 billion in 2022. Speaking about ‘No Surprises,' if our government is so concerned with surprise medical bills, why weren’t hospitals, labs, and pharmaceutical companies subject to the terms of the No Surprises Act?”


#5 Bankruptcy Law Is a Good Thing

While bankruptcy sounds terrible and none of us want it for ourselves or our companies, bankruptcy law is actually a good thing. Imagine the economic disruption without it. All of a sudden, the jobs of 25,000 providers and the healthcare of millions could disappear overnight. Far better to wipe out the equity holders, punish the debt holders, and see if it can all be worked out. Our economy and personal lives are a lot better with current bankruptcy laws than they would be if debtor's prisons still existed.

More information here:

Physicians, Bankruptcy, and What to Do If You’re Stuck There


There are lots of lessons to learn from the Envision Healthcare bankruptcy. Incorporate them into your life and practice.

What do you think of the bankruptcy? What are your thoughts on Envision, United Health, AAEM, or KKR? Comment below!