Better Solutions for Healthcare

Bloomberg: Private Equity Lands Billion-Dollar Backdoor Hospital Bailout

By David Kocieniewski and Caleb Melby
June 2, 2020

As the coronavirus pandemic upended the U.S. health-care system, EmCare IAH Emergency Physicians, a Houston staffing company owned by private equity firm KKR, made a little-noticed request of the government: It applied for a $317,379 interest-free loan.

KKR had for years paid lobbyists to fend off efforts to ban a practice known as surprise billing used by EmCare and other providers that has driven up the cost of health care. But that didn’t stop the U.S. Health and Human Services Department from approving the loan and almost 300 others totaling more than $60 million to subsidiaries of KKR-owned companies.

Shut out from many coronavirus relief programs, private equity companies have found a back door at HHS, where they have borrowed at least $1.5 billion, according to a Bloomberg News analysis of more than 40,000 loans disclosed by the department.

That money, from two programs intended to provide emergency funding to financially strapped health-care companies, went instead to hospitals, clinics and treatment centers controlled by the richest investment firms as they seek to take advantage of an economic downturn caused by the pandemic to buy ailing businesses.

KKR has more than $58 billion of cash to invest. Health-care facilities owned by Apollo Global Management, which started the year with about $46 billion, received at least $500 million in HHS loans. And Cerberus Capital Management’s Steward Health Care System LLC, which threatened to close a hard-hit Pennsylvania hospital, received at least $400 million in loans. Last month Cerberus was working to quadruple the size of a fund to invest in distressed loans to $750 million.

The paradox of private equity funds, which profit from tax breaks the U.S. offers on debt, is that even when they’re brimming with cash, there is little incentive to use it to prop up their struggling investments. In bad times, the funds can set themselves up for future windfalls by buying new distressed companies and using debt to multiply their profits, even if their current holdings suffer. The pandemic is “a time to shine,” two Apollo executives said on a call with investors in late March.

“The GAO report on how HHS got the money out the door is going to be just brutal when it’s published in a couple of years,” said Rodney Whitlock, a former policy aide for Republican Senator Chuck Grassley on the Senate Finance Committee who now represents health-care clients at McDermottPlus Consulting.

The loans were made through two existing HHS programs administered by the Centers for Medicare & Medicaid Services — the Advance Payments Program and the Accelerated Payments Program — that were expanded under the CARES Act to help health-care companies cope with the pandemic. It included providers that lost business as a result of restrictions on elective surgery and other profitable procedures, as well as those directly treating coronavirus patients. HHS has distributed $100 billion through the programs since late March. The loans are structured as advances on future payments the companies expect to receive from the government. Borrowers have from seven months to a year to repay them without interest, depending on their classification. The rate jumps to 10.25% afterward.

CMS Administrator Seema Verma said the purpose of the program was to get cash into the system quickly. She said the agency didn’t know whether money was paid to companies owned by private equity firms because the applications didn’t ask about the beneficial ownership of the entities seeking loans. “We don’t look into ownership, what we look into is are they Medicare-enrolled providers,” Verma said in a phone interview. “That is not information that the agency has historically looked into in a situation where there is a disaster or an emergency.”

Although there’s nothing in the law that prohibits such companies from getting coronavirus aid, businesses with more than 500 employees were excluded from the Paycheck Protection Program, which has disbursed more than $500 billion in forgivable loans to employers of small businesses. Lawmakers and government officials resisted industry efforts to relax those rules, which count affiliated companies as one business. Some feared that lending money to private equity firms would only encourage their penchant for buying more companies and loading them up with high-interest debt.

Even some lobbyists who represent health-care companies were stunned to learn that HHS doled out billions of dollars in coronavirus aid without distinguishing between hospitals struggling for survival and those wealthy enough to view the no-interest loans as a free federal contribution to their cash hoards.

Private equity funds have acquired hundreds of health-care companies in recent years, including large hospitals, dermatology clinics and dental practices. Often their ownership is obscured by layers of limited liability corporations. EmCare is part of Nashville, Tennessee-based Envision Healthcare Corp., which was bought by KKR in 2018 for $9.9 billion with $7 billion of debt financing. That company is an amalgam of firms providing health-care services such as ambulatory surgery and anesthesiology.

Almost 300 entities affiliated with KKR-owned Envision received HHS loans, according to the Bloomberg analysis, which cross-referenced transactions against lists of known subsidiaries of health-care companies owned by private equity firms. The loans included $1,963,697 for the River Drive Surgery Center in Elmwood Park, New Jersey; $1,049,804 to the Bend Surgery Center in Oregon; and $610,850 to the Surgery Center of Allentown in Pennsylvania.

The loans were made even though KKR was at the center of a congressional inquiry last year into surprise billing, the practice of staffing in-network emergency rooms and surgical centers with out-of-network doctors, then sending unwitting patients big bills. Envision’s profit margins depend on its ability to collect on those expensive claims, and the company has funded a lobbying effort against attempts to ban the practice.

Sandeep Kaur filed a lawsuit against Envision in federal court in Houston in July claiming she was billed $2,844.97 in 2016 after going to the emergency room at Cypress Fairbanks Medical Center, a facility in her insurance plan’s network. The EmCare doctor who treated her head wound wasn’t covered by her plan, it turned out. Lawyers for the company acknowledged in court papers that Kaur had been billed and had made payments before the unpaid balance was sent to a collection agency. They denied other allegations, and the case is scheduled for trial next year…