Physician staffing firm Envision Healthcare filed for Chapter 11 bankruptcy this week, but will "continue operating its business as usual" so that the company can "provide patients with the high-quality care they require."

Envision Healthcare files for Chapter 11 bankruptcy

On Monday, Envision Healthcare filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas. Following the filing, all of the company's debt — except for a revolving credit facility for working capital — will be cancelled, totaling around $5.6 billion.

In a news release, Envision said several events have placed significant pressure on its finances since it was acquired by private equity (PE) firm KKR for $10 billion in 2018.

"The lingering impacts from COVID-19 on volume and labor costs, the delays resulting from tactics and recalcitrance by Envision's largest insurance payors, and the ongoing regulatory uncertainty caused by the flawed implementation of the No Surprises Act have proven too much," said Paul Keglevic, Envision's chief restructuring officer.

Throughout the pandemic, healthcare staffing firms struggled to find enough workers to meet patient demand, especially in the highly competitive contract labor market, Modern Healthcare reports.

While Envision said it filed for bankruptcy because it is not generating enough revenue to cover its expenses and debt, it currently has $665 million of cash in the bank. According to the filing, the company expects those funds to help it exit bankruptcy faster.

"The decision to file these chapter 11 cases now, while the debtors have ample cash on hand, will ensure that the company can continue to provide patients with the high-quality care they require," Keglevic said in the filings.

The company has entered a Restructuring Support Agreement (RSA), with plans to operate normally during the restructuring. Pending court approval, Envision said it will tap into cash collateral from ongoing operations to cover costs, "including supplier obligations and employee wages, salaries, and benefits during the restructuring process."

"This will enable the company to continue operating its business as usual throughout the process and provide support to critical partners, including clinicians, hospitals, vendors and suppliers," the company said.

Under the RSA, the company will divide its primary businesses, AMSURG and Envision Physician Services, which will be owned by their respective lenders. (Herman, STAT+ [subscription required], 5/15; Hudson, Modern Healthcare, 5/15; Indap, Financial Times [subscription required], 5/15; Envision Healthcare news release, 5/15)

Does Envision's bankruptcy spell trouble for other PE investments?

By Sarah Hostetter and Vidal Seegobin

Envision isn't like other medical group PE investments

As we discussed in a previous expert insight, PE investments in physician practices aren't a monolith. Many different types of medical groups receive investments, and PE firms have a range of healthcare sector experience and business practices. 

Envision is an example of an outlier in all of these areas. First, their physician services are all hospital-based, with a heavy emphasis on emergency medicine — this contrasts with the predominant wave of physician practice investment in ambulatory practices. KKR only has one other physician practice investment, and their healthcare portfolio is rather limited.

Most importantly, 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 — though PE, which is already struggling in the court of public opinion, won't be helped by Envision's demise.

What Envision's bankruptcy means

Envision's bankruptcy shines a light on trends we've been watching with hospital-based medicine that make financial solvency challenging: the strain of uninsured patients on revenue, workforce shortages driving up labor costs, and COVID-related volume impacts, to name a few.

What's different with the average health system compared to Envision? While clearly rife with inefficiencies, health systems have mechanisms to self-correct.

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.

The spotlight on large, heavily resourced healthcare organizations is not going away anytime soon. In fact, as consolidation continues, new investors enter the forefront, and organizations diversify the type of assets they acquire, that spotlight is only getting brighter.