Financial (In)stability of Emergency Medicine's Bigs

Credit rating agency reports show debt-related risks for TeamHealth & Sound Physicians - along with more stability for USACS and SCP Health.

Companies take on debt to fund large-scale projects and investments. These initiatives can include building new facilities, researching and developing new products or services, conducting mergers and acquisitions, or paying “dividends” to their owners.

Since acute care medical staffing companies usually don’t build facilities or fund much research & development, their corporate debt is mainly used to buy other medical practices and to pay the companies’ owners.

Before the No Surprises Act, emergency medicine practice acquisitions had financial logic. Private equity-owned companies such as Envision and American Physician Partners were likelier than their physician-owned peers to bill insured patients out of network (OON), thereby collecting more revenue for comparable services. Other staffing groups have used consolidation to increase leverage when negotiating with insurance companies, leading to increased reimbursement rates. The FTC’s lawsuit against US Anesthesia Partners offers a deep dive into this strategy.

The No Surprises Act banned out-of-network patient billing starting on January 1, 2022. Physician staffing companies dependent on inflated OON bills were stuck with large debt burdens, but without the extra revenue. Envision Healthcare and American Physician Partners folded within 18 months of the NSA’s rollout.

Let’s explore the latest assessments of credit rating agencies, which have access to private company financial information, of the acute care staffing groups with significant amounts of corporate debt (in order of the number of emergency departments under management).

A summary spreadsheet, with links to credit rating agency reports inserted as comments, is available via this link.

TeamHealth

• Emergency departments staffed (based on Ivy Clinicians’ data): 567

• Total corporate debt (based on publicly available credit ratings reports): $1,974,000,000

• Interest rates: 6.375% and 13.5%

• Estimated financial leverage: 9x-11x

• S&P Global Credit Rating (November 9, 2023): CCC, defined as “Speculative Grade: Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.” Key quotes from the report:

  • The company issued $750 million of new 13.5% first-lien notes due 2028 and a new $510 million accounts receivable facility.

  • All of the company's secured debt contains a springing maturity that will make the debt due either 90 or 91 days ahead of the company's senior unsecured notes due in February 2025. This springing maturity is in effect if more than $250 million of the company's $714 million of 2025 notes are outstanding on that day. We believe the company is dependent upon favorable economic, operating, and market conditions to be able to refinance its 2025 notes prior to November 2024. Even if it is able to refinance its notes, we expect it will be at a much higher interest rate, which would further burden the company's already negative cash flow.

  • We expect the company will generate negative cash flow in 2023 and 2024, likely no better than breakeven in 2025.

• Moody’s Credit Rating (November 3, 2023): Ca, defined as “highly speculative and are likely in, or very near, default, with some prospect of recovery in principal and interest.” Key quotes:

  • The downgrade of Team Health's ratings reflects deterioration of the company's operating performance in recent quarters, very high financial leverage, weak liquidity and significant refinancing risk.

  • The risk of the company's entire debt capital structure coming due in late 2024 is a material credit risk. Given the company's weak operating performance and difficult market conditions, the company may resort to a transaction which Moody's considers to be a distressed exchange (and hence a default under Moody's definition).

• Fitch Credit Rating (November 13, 2023): CCC-, defined as “Substantial credit risk. Very low margin for safety. Default is a real possibility.” Key quotes:

  • Fitch expects long-term top line growth prospects to be constrained by secular pressure on ED care pricing and volumes (especially lower-acuity visits) such as payors' focus on reducing ED use, high-deductible plans constraining demand, and increasing competition from alternative settings including urgent care clinics.

  • TMH's labor costs have had upward pressure from both the rates paid to employed physicians and the amount and cost of temporary sources to supplement.

  • TMH's reported revenues and margins have had meaningful sequential improvement with 3Q23 company-reported EBITDA approximately 2x that of 1Q23. Fitch believes the underlying drivers, principally volume stabilization and contract growth, are sustainable and the critical consideration is whether EBITDA improves quickly enough to reduce refinancing risk in late 2024.

US Acute Care Solutions

• Emergency departments staffed: 299

• Total corporate debt (based on publicly available credit ratings reports): $1,600,000,000, including USACS’ preferred equity

• Interest rates: 9.75% and 10.5%-11.5%

• Estimated financial leverage: 13x-14x, including USACS’ preferred equity

• S&P Global Credit Rating (April 29, 2024): B-, defined as “Speculative Grade: More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.” Key quotes:

  • Our calculation of its debt of $1.6 billion for 2023 includes about $800 million of preferred shares, which we treat as debt-like, and we assume the company will make payment-in-kind (PIK) interest payments on the preferred debt for 2024 and 2025.

  • USACS' improved operating performance will enable it to generate modest discretionary cash flows after distributions to departing employees. USACS experienced strong same-site volume growth of about 3% in 2023, returning almost to pre-COVID-19 pandemic levels. Overall, its revenue for 2023 increased about 8.5% (14% growth in net patient service revenue). We expect revenue growth in the mid-teens percent area for 2024, driven by organic growth in the low-to-mid-single-digit precent area and the full-year impact of acquisitions completed in 2023, as well as increased subsidies from the hospitals.

• Moody’s Credit Rating (April 29, 2024): B3, defined as “speculative and subject to high credit risk.” Key quotes:

  • USACS has some geographic concentration with Texas, Maryland and Ohio representing a significant portion of business volumes. The B3 CFR is supported by USACS' strong competitive position in the markets where it operates. The company has relationships with a majority of the top ten health systems in the US. USACS' rating incorporates the benefits of more than 95% ownership by company's physicians.

  • Moody's also incorporates the event risk posed by a sizeable portion of preferred equity funding in the company's capital structure. Apollo Global Management, Inc.'s Hybrid Value Fund is the majority holder of the preferred investment in USACS. Apollo has the right to request the redemption of its preferred investment beginning March 5, 2026. However, with a minority position on the USACS Board, Apollo cannot unilaterally force a sale or IPO of the company.

SCP Health

• Emergency departments staffed: 295

• Total corporate debt (based on publicly available credit ratings reports): $530,000,000

• Interest rates: 3-month SOFR + 4.750% (10.1% on 5/18/2024)

• Estimated financial leverage: 5x-5.5x

• S&P Global Credit Rating (March 25, 2024): B, defined as “Speculative Grade: More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.” Key quotes:

  • We expect The Schumacher Group of Delaware Inc. (SCP) to endure a free cash flow deficit in 2023 and 2024, primarily due to a delay in collections associated with the No Surprises Act (NSA) and timing of flow-through funds.

  • We also expect modest margin expansion in 2024.

  • Roughly about 30% of SCP's commercial patient volume is out-of-network and potentially subject to arbitration under the NSA legislation. The backlog in this process has led to free cash flow deficits in 2023, and we expect that to continue for 2024.

  • Although subsidy revenue from hospital customers declined about 5% due to contracts remediated during 2023, we expect low-single-digit percent growth in 2024 and beyond. Many hospitals are pushing back against increasing subsidies to physician groups and are seeking alternative ways to lower them.

• Moody’s Credit Rating (January 12, 2024): B2, defined as “speculative and subject to high credit risk.” Key quotes:

  • The affirmation of the B2 CFR reflects Moody's expectations that the company will maintain steady operating performance in the next 12-18 months.

  • Key challenges include clinical labor cost inflation, reimbursement pressure, ongoing disputes between physician staffing providers and commercial insurers, increased borrowing costs and regulations (including the No Surprises Act). However, despite these challenges, [SCP Health] has been more resilient than some of its larger competitors primarily because of greater in-network share of revenues, relatively moderate financial leverage and a favorable cost structure. While the company remains exposed to payor disputes for its out-of-network business, it has effectively utilized the Federal Independent Dispute Resolution (Federal IDR) provisions to manage this exposure. The company also benefits from interest rate hedges it put in place in 2021 which limits interest rate exposure of more than half of its outstanding debt.

Sound Physicians

• Emergency departments staffed: 38

• Total corporate debt (based on publicly available credit ratings reports): $1,100,000,000

• Interest rates: L+300 bps (8.6% on 5/18/2024) and L+675 (12.3% on 5/18/2024)

• Estimated financial leverage: 23

• S&P Global Credit Rating (February 20, 2024): CCC-, defined as “Speculative Grade: Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.”

• Moody’s Credit Rating (February 26, 2024): Ca, defined as “highly speculative and likely in, or very near, default, with some prospect of recovery in principal and interest.” Key quotes:

  • Moody's believes that the company's capital structure is unsustainable with estimated financial leverage above 20 times.

  • The company faces ongoing challenges in successfully returning the company's business to profitability on a sustained basis and the heightened risk of the company pursuing a transaction that Moody's considers to be a distressed exchange (and hence a default under Moody's definition).

  • Sound's liquidity is weak.

• Update from May 21, 2024:

  • Sound announced a refinancing with its lenders to provide access to an additional $124 million of capital.

  • In addition to the new money, the Transaction provides material discount on the pre-Transaction indebtedness and an extension of maturities of the Company's loan facilities until 2028, at the earliest.

Envision Healthcare

• No credit rating reports since Envision’s 2023 bankruptcy and restructuring.

• Many of Envision’s emergency medicine contracts have been part of a joint venture (JV) with HCA Healthcare, the US’ largest hospital system. In 2023, HCA increased its ownership stake in the JV to 90%. Per reports, HCA plans to acquire Envision’s remaining share of the JV this summer (2024).

Vituity, ApolloMD, Concord Medical Group, and Integrative Emergency Services

• No known corporate debt.

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