| THIS WEEK IN HEALTHCARE
What happened in healthcare this week—and what we think about it.
- Federal COVID public health emergency (PHE) ends after more than three years. On Thursday, the Biden administration allowed the emergency declaration governing the nation’s COVID response since Jan 31, 2020 to expire. Hospitals will now no longer receive a 20 percent Medicare payment boost for treating COVID patients, who currently still occupy nearly 8,000 beds, and consumers may now face cost-sharing for COVID testing and treatment. Several key provisions originally tied to the PHE have already been temporarily extended, including some Medicare telehealth flexibilities, virtual prescription of controlled substances, and the Acute Hospital Care at Home waiver program, while Medicaid redeterminations have already begun.
The Gist: While few policies remained tied to the PHE, the end of the COVID emergency period still represents a momentous, symbolic shift in the direction of our policymaking. The pandemic’s unprecedented disruption to healthcare will linger on, for good and for bad. We’re still in the process of codifying the beneficial changes, largely around telehealth policy, that the pandemic necessitated, but have made far less progress reckoning with the weaknesses it exposed in our public health infrastructure. Federal pandemic readiness efforts remain disorganized and underfunded, while many local public health agencies have seen their powers restricted by state legislatures. Each day, COVID still takes the lives of hundreds of Americans. The two unanswered questions: how will the country respond if that number rises again, and how will we fare if (or when) another pandemic arrives?
- Envision Healthcare plans to file for Chapter 11 bankruptcy. On Tuesday, the Wall Street Journal reported that Nashville, TN-based Envision Healthcare, a private equity (PE)-backed physician staffing firm that staffs around 40 percent of the nation’s emergency departments (EDs), could file for bankruptcy protection as soon as this weekend. Envision’s annual pre-tax earnings fell from $1B in 2020 to less than $250M in 2022, driven by a combination of the No Surprises Act’s elimination of surprise billing, higher labor costs, and a negotiations dispute with UnitedHealthcare, in which the insurer was recently ordered to pay $91M. Envision, which now has around $7B in outstanding debt, is backed by PE firm KKR, which bought the then-public company in 2018 in a debt-financed deal worth $10B.
The Gist: When KKR bought Envision, it expected that its out-of-network billing revenue and cost-saving staffing model would generate returns well worth the significant debt burden. Between spiking labor costs, volatile ED volumes, and the implementation of the No Surprises Act, Envision could no longer deliver sufficient returns, though it remained profitable. Envision could be the canary in the coal mine for other PE-backed, hospital-based physician staffing firms that are experiencing similar difficulties. But while PE groups may be losing interest in hospital-based physicians, hospitals will continue to rely on the likes of Envision, once it restructures, for staffing their EDs, as the trend toward outsourced physician staffing is unlikely to reverse.
- California lawmakers pass loan program for financially distressed hospitals. Last week, California’s legislature passed a bill establishing the Distressed Hospital Loan Program, which will dole out $150M in interest-free emergency loans to struggling nonprofit hospitals in the state which meet specific eligibility criteria, including operating in an underserved area and serving a large share of Medicaid beneficiaries. A combination of state agencies will establish a specific methodology for selection, but hospitals that are part of a health system with more than two separately licensed hospital facilities will be ineligible. Hospitals receiving loans must provide a plan for how they will use the loans to achieve financial sustainability, and must pay back the money within six years.
The Gist: With twenty percent of the state’s hospitals at risk of shuttering, California lawmakers are hoping to provide the most vulnerable hospitals an alternative to either closure or consolidation, an example other states may follow. But unlike the Paycheck Protection Program loans that shored up businesses through the pandemic’s initial disruption, the outlook for small, struggling, independent hospitals isn’t expected to improve in coming years, even if the economy recovers. Whether these loans provide lifelines or merely serve as Band-Aids on an untenable situation will depend on whether recipient hospitals can use them to restructure their operating models to absorb increased labor costs amid stagnating volumes and commercial reimbursement. If these loans aren’t used for transformation, they will only delay the inevitable: more closures, and more mergers to find shelter in scale.
Plus—what we’ve been reading.
- The extraordinary decline in not-for-profit healthcare debt issuance. Last month, Eric Jordahl, Managing Director of Kaufman Hall’s Treasury and Capital Markets practice, blogged about the dangers of nonprofit healthcare providers’ extremely conservative risk management in today’s uncertain economy. Healthcare public debt issuance in the first quarter of 2023 was down almost 70 percent compared to the first quarter of 2022. While not the only funding channel for not-for-profit healthcare organizations, the level of public debt issuance is a bellwether for the ambition of the sector’s capital formation strategies. While health systems have plenty of reasons to be cautious about credit management right now, it’s important not to underrate the dangers of being too risk averse. As Jordahl puts it: “Retrenchment might be the right risk management choice in times of crisis, but once that crisis moderates that same strategy can quickly become a risk driver.”
The Gist: Given current market conditions, there are a host of good reasons why caution reigns among nonprofit health systems, but this current holding pattern for capital spending endangers their future competitiveness and potentially even their survival. Nonprofit systems aren’t just at risk of losing a competitive edge to vertically integrated payers, whom the pandemic market treated far more kindly in financial terms, but also to for-profit national systems, like HCA and Tenet, who have been flywheeling strong quarterly results into revamped growth and expansion plans. Health systems should be wary of becoming stuck on defense while the competition is running up the score.
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