- Joined
- Jul 23, 2012
- Messages
- 260
- Reaction score
- 307
Great article
emworkforce.substack.com
American Physician Partners (APP) became the second large private equity-owned emergency medicine group to declare bankruptcy in the last two months. APP will cease operations on July 31, 2023. Click here to see the 119 emergency departments affected and which groups will take over APP’s EM contracts.
The lack of surprises is the most surprising conclusion from digging into APP’s finances. The company’s downfall is due to its business model more than APP-specific factors.
Founded in 2015, APP is owned by Brown Brothers Harriman, a large private equity company and investment bank. Along with emergency medicine, American Physician Partners staffs hospitalist and intensivist practices across 18 states.
Per John Rutledge, APP’s founder & CEO, “As long as we continue to use our mission as our north star and foster our patient-centered, physician-centric culture, we will continue to exceed the expectations of our patients, our providers and employees, and our hospital partners well into the future.” Let’s dig into why Mr. Rutledge’s company failed to meet those expectations.
The private equity playbook for portfolio companies has three main components:
Grow using debt, which is placed on the books of the portfolio company, not the private equity company itself.
Increase margins through “operational efficiencies”.
Sell the enlarged business for a profit in ~5 years.
American Physician Partners’ problems began when its debt came due. APP owed its lenders approximately $472 million in December 2021, so it attempted to get a new $580 million loan. When they could not secure new loans, their existing lenders gave APP an extension, allowing the company to survive another 19 months.
The investor slide deck for APP’s attempted 2021 raise is publicly available, giving us more than the usual detail about the company’s finances. Even in COVID-riddled 2021, APP’s core clinical business was actually doing OK.
APP described the hospital systems it staffed as “blue chip”. American Physician Partners’ payer mix was decent. Only 5% of APP’s ED patients were uninsured (slide 22) compared to 8% nationally. APP collected $161 per ED visit in 2021 (slide 14). Per Pines et al, the average EM collections per visit (CPV) nationally in 2019 was $167. However, APP’s clinician staffing cost per visit was $120 (slide 11), compared to $161 nationally (Pines).
APP made $41 per ED visit ($161 collected, $120 paid out for clinical staffing compensation). In 2021, APP saw 3,190,000 ED patients. That comes to a 2021 gross margin of $130,790,000 = $41 x 3,190,000. Additionally, APP collected an additional $23 million in CARES Act funds (slide 32). With that much 2021 income, how is APP bankrupt in 2023?
The answer starts before the pandemic. Despite generating significant revenue, APP posted a net income LOSS of $147.6 million in 2019. That was followed by net income losses of $131.6 million and $114.6 million in 2020 and 2021. (Slide 39)
The slide deck does not detail APP’s non-clinical staffing expenses - but does give clues. APP spent extravagantly on medical practice acquisitions, purchasing 54 practices between 2016-2019. They paid an average of 8x multiples for those practices, which is higher than expected. APP’s initial transaction was the $24 million purchase in 2015 of Align MD, led by Mark Green (currently serving in the US House of Representatives).
Private equity-owned companies are not known for skimping on executive compensation. APP’s CEO described their regional leadership structure: “We pair seasoned Regional Medical Directors who have experience leading physician teams and Regional Vice Presidents who are former hospital executives.” The company was suit-heavy.
Dividend payments to the private equity owner - BBH in this case - are another non-clinical expense inherent to the private equity model. Per Investopedia, “Dividend recapitalization is a way for investors to receive a return without having to sell their shares but can often be detrimental to the firm as taking on more debt is a risky maneuver if the company does not have a strategy in which to pay it back.” A recent example is Cerberus Capital’s attempt to extract a $4 billion dividend from the Albertsons supermarket chain before the store’s sale to Kroger.
In other words, APP failed to create sufficient operational efficiencies to pay off its massive debts. Despite a decent payer mix, their collections per visit were below the national average. Despite lower-than-average clinician compensation costs, they spent much more than the revenue generated.
And then the US Congress passed the No Surprises Act, which banned out-of-network billing starting on January 1, 2022. 27% of American Physician Partners’ revenue was generated via out-of-network bills in 2021 (slide 22). APP estimated that the NSA’s billing changes would cut its annual revenues by $11 million, or roughly 9%. The company was bleeding; the feds, through the No Surprises Act, administered APP a hefty dose of tPA.
APP succeeded at step one of the private equity playbook; they bought a bunch of practices while accumulating large amounts of debt. They then failed at number two; they could not find operational efficiencies. That left step three: sell.
In 2023, APP attempted to sell to SCP Health (formerly Schumacher). After seeing APP’s finances, SCP did not proceed with the deal. As a result, on July 17th, American Physician Partners announced plans to declare Chapter 7 bankruptcy and will cease operations on July 31st.
APP’s collapse has left their hospital partners scrambling to staff their EDs. Physicians who sold their practices in exchange for debt and equity in APP will be wiped out. For example, Congressman Mark Green declared $5-$25 million of debt holdings in APP, which are now worthless.
What should we make of the rise and fall of American Physician Partners?
There appear to be few operational efficiencies gained by consolidating mid-sized emergency medicine groups into large EM practices.
Emergency medicine is generally a low-margin business. Pines et al estimate national average EM operating margins of 5.7% (excluding out-of-network visits).
Private equity’s emergency medicine thesis in the 2010s relied heavily on out-of-network billing, which is now illegal. Without balance billing, paying off the massive debts inherent to the private equity model is challenging, especially within the current lending environment (high interest rates and low deal flow).
None of the factors that brought down American Physician Partners is unique to APP. Without significant changes to private equity’s acute care business model, expect more bankruptcies to come.
APP’s Cause of Death - The PE Business Model
Also: ACEP & AAEM hug it out re: CPOM, EMPATH for the win, half of US physicians don’t trust their leaders, & “nurses are screaming for help; lawmakers should listen.”
emworkforce.substack.com
American Physician Partners (APP) became the second large private equity-owned emergency medicine group to declare bankruptcy in the last two months. APP will cease operations on July 31, 2023. Click here to see the 119 emergency departments affected and which groups will take over APP’s EM contracts.
The lack of surprises is the most surprising conclusion from digging into APP’s finances. The company’s downfall is due to its business model more than APP-specific factors.
Founded in 2015, APP is owned by Brown Brothers Harriman, a large private equity company and investment bank. Along with emergency medicine, American Physician Partners staffs hospitalist and intensivist practices across 18 states.
Per John Rutledge, APP’s founder & CEO, “As long as we continue to use our mission as our north star and foster our patient-centered, physician-centric culture, we will continue to exceed the expectations of our patients, our providers and employees, and our hospital partners well into the future.” Let’s dig into why Mr. Rutledge’s company failed to meet those expectations.
The private equity playbook for portfolio companies has three main components:
Grow using debt, which is placed on the books of the portfolio company, not the private equity company itself.
Increase margins through “operational efficiencies”.
Sell the enlarged business for a profit in ~5 years.
American Physician Partners’ problems began when its debt came due. APP owed its lenders approximately $472 million in December 2021, so it attempted to get a new $580 million loan. When they could not secure new loans, their existing lenders gave APP an extension, allowing the company to survive another 19 months.
The investor slide deck for APP’s attempted 2021 raise is publicly available, giving us more than the usual detail about the company’s finances. Even in COVID-riddled 2021, APP’s core clinical business was actually doing OK.
APP described the hospital systems it staffed as “blue chip”. American Physician Partners’ payer mix was decent. Only 5% of APP’s ED patients were uninsured (slide 22) compared to 8% nationally. APP collected $161 per ED visit in 2021 (slide 14). Per Pines et al, the average EM collections per visit (CPV) nationally in 2019 was $167. However, APP’s clinician staffing cost per visit was $120 (slide 11), compared to $161 nationally (Pines).
APP made $41 per ED visit ($161 collected, $120 paid out for clinical staffing compensation). In 2021, APP saw 3,190,000 ED patients. That comes to a 2021 gross margin of $130,790,000 = $41 x 3,190,000. Additionally, APP collected an additional $23 million in CARES Act funds (slide 32). With that much 2021 income, how is APP bankrupt in 2023?
The answer starts before the pandemic. Despite generating significant revenue, APP posted a net income LOSS of $147.6 million in 2019. That was followed by net income losses of $131.6 million and $114.6 million in 2020 and 2021. (Slide 39)
The slide deck does not detail APP’s non-clinical staffing expenses - but does give clues. APP spent extravagantly on medical practice acquisitions, purchasing 54 practices between 2016-2019. They paid an average of 8x multiples for those practices, which is higher than expected. APP’s initial transaction was the $24 million purchase in 2015 of Align MD, led by Mark Green (currently serving in the US House of Representatives).
Private equity-owned companies are not known for skimping on executive compensation. APP’s CEO described their regional leadership structure: “We pair seasoned Regional Medical Directors who have experience leading physician teams and Regional Vice Presidents who are former hospital executives.” The company was suit-heavy.
Dividend payments to the private equity owner - BBH in this case - are another non-clinical expense inherent to the private equity model. Per Investopedia, “Dividend recapitalization is a way for investors to receive a return without having to sell their shares but can often be detrimental to the firm as taking on more debt is a risky maneuver if the company does not have a strategy in which to pay it back.” A recent example is Cerberus Capital’s attempt to extract a $4 billion dividend from the Albertsons supermarket chain before the store’s sale to Kroger.
In other words, APP failed to create sufficient operational efficiencies to pay off its massive debts. Despite a decent payer mix, their collections per visit were below the national average. Despite lower-than-average clinician compensation costs, they spent much more than the revenue generated.
And then the US Congress passed the No Surprises Act, which banned out-of-network billing starting on January 1, 2022. 27% of American Physician Partners’ revenue was generated via out-of-network bills in 2021 (slide 22). APP estimated that the NSA’s billing changes would cut its annual revenues by $11 million, or roughly 9%. The company was bleeding; the feds, through the No Surprises Act, administered APP a hefty dose of tPA.
APP succeeded at step one of the private equity playbook; they bought a bunch of practices while accumulating large amounts of debt. They then failed at number two; they could not find operational efficiencies. That left step three: sell.
In 2023, APP attempted to sell to SCP Health (formerly Schumacher). After seeing APP’s finances, SCP did not proceed with the deal. As a result, on July 17th, American Physician Partners announced plans to declare Chapter 7 bankruptcy and will cease operations on July 31st.
APP’s collapse has left their hospital partners scrambling to staff their EDs. Physicians who sold their practices in exchange for debt and equity in APP will be wiped out. For example, Congressman Mark Green declared $5-$25 million of debt holdings in APP, which are now worthless.
What should we make of the rise and fall of American Physician Partners?
There appear to be few operational efficiencies gained by consolidating mid-sized emergency medicine groups into large EM practices.
Emergency medicine is generally a low-margin business. Pines et al estimate national average EM operating margins of 5.7% (excluding out-of-network visits).
Private equity’s emergency medicine thesis in the 2010s relied heavily on out-of-network billing, which is now illegal. Without balance billing, paying off the massive debts inherent to the private equity model is challenging, especially within the current lending environment (high interest rates and low deal flow).
None of the factors that brought down American Physician Partners is unique to APP. Without significant changes to private equity’s acute care business model, expect more bankruptcies to come.
