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By JEFF GOLDSMITH Envision, a $10 billion physician and ambulatory surgery firm owned by private equity giant Kohlberg Kravis Roberts, filedChapter 11 bankruptcy on May 15. It was the largest healthcare bankruptcy in US history. Envision claimed to employ 25 thousand clinicians- emergency physicians, anesthesiologists, hospitalists, intensivists, and advanced practice nurses and contracted with 780 hospitals. Envisionҳ ER physicians delivered 12 million visits in 2021, not quite 10% of the US total hospital ED visits. The Envision bankruptcy eclipsed by nearly four-fold in current dollars theAllegheny Health Education and Research Foundation (AHERF) bankruptcy in the late 1990ҳ. KKR haswritten off $3.5 billion in equity in Envision. Envisionҳ most valuable asset, AmSurg and its 257 ambulatory surgical facilities, was separated from the company with a sustainable debt structure. And at least $5.6 billion of the remaining Envision debt will be converted to equity at the barrel of a gun, at dimes on the dollar of face value. KKR took Envision private in 2018 when Envision generated $1 billion in profit, in luminous retrospect the peak of the companyҳ good fortune. Envisionҳ core business was physician staffing of hospital emergency departments and operating suites. In 2016, then publicly traded, Envisionmerged with then publicly traded ambulatory surgical operator AmSurg. This merger seemed at the time to be a sensible diversification of Envisionҳ Өospital contractorԠbusiness risk. Indeed, Envisionҳ bonus acquisition of anesthesia staffing provider Sheridan, acquired by AMSURG in 2014, helped broaden its portfolio away from the Medicaid intensive core emergency room staffing business (EmCare), which required extensive cost-shifting (and out of network billing) to cover losses from treating Medicaid and uninsured patients. It is clear from hindsight that where you start, e.g. your core business, limits your capacity to spread or effectively manage your business risk, an issue to which we will return. The COVID hospital cataclysm can certainly be seen as a proximate cause of Envisionҳ demise. The interruptions of elective care and the flooding of emergency departments with elderly COVID patients, which kept non-COVID emergencies away, damaged Envisionҳ core business as well as nuking ambulatory surgery. By the spring of 2020, Envision was exploring a bankruptcy filing. Anestimated $275 million in CARES Act relief and draining a $300 million emergency credit line from troubled European banker Credit Suisse temporarily staunched the bleeding. But the pan-healthcare post-COVID labor cost surge also raised nursing expenses and led to selective further shutdowns in elective care and further cash flow challenges. While one cannot fault KKRҳ due diligence team for missing a global infectious disease pandemic, with hindsightҳ radiant clarity, there were other issues simmering on the back burner by the time of the 2018 deal that should have raised concerns. Two large struggling investor owned hospital chains, Tenet and Community Health Systems, began divesting marginal properties in earnest in 2018, placing a lot of Envisionҳ contracts in the pivotal states of Florida and Texas at risk. More importantly,࠴here were escalating contract issues with ծitedHealth, one of Envisionҳ biggest payers, ࡳ well as increasing political agitation about out-of-network billing, which provided Envision vital incremental cash flow.ࠔhese problems culminated in a United decision inJanuary 2021 to terminate insurance coverage with Envision, making its entire vast physician group ӯut of networkԮ༯p> The United dispute coincided with a skillfully managed public policy initiative laying out the scope and indefensibility of Envisionҳ cost shifting strategy. The assault began with a2016 study covertly assisted and guided by United by a prominent Yale health policy analyst. This study ignited afirestorm of press criticism and was followed by an aggressive lobbying and PR campaign funded by United and other large commercial payers aimed at restricting balance billing by firms like Envision. This campaign culminated in the Dec 2020 Congressional passage of theNo Surprises Act, which effectively ended balance billing and subjected thousands of Envisionҳ out-of-network bills to an arbitration process. NSA went into effect in January 2022. Ironically, days prior to its Chapter 11 filing, Envision won a$91 million judgment from an arbitration panel against United for out-of-network billing disputes from 2017-2018. If this judgment survives the inevitable challenges, the proceeds will end up repaying Envisionҳ creditors. A significant longer term threat to Envisionҳ bargaining power was theproposed Federal Trade Commission prohibition on non-competes for its physicians. Non-compete clauses in employment contracts forbid employed physicians from working for others (e.g. local hospitals, in-market physician groups or competing multi-market staffing firms) in the same community for a period of years. Outlawing non-competes would remove a major leverage point for physician staffing companies- the threat of terminating an unfavorable hospital contract and forcing the hospital to cover its ERs and ORs from out-of-the market docs. If historical FTC precedents hold,non-profit hospitals and systems, a major client group for Envision, would be exempt from the FTC mandate, tipping the bargaining balance decisively their favor.Hospital systems already vastly outstrip staffing firms in physician employment. Asymmetrical restrictions on physician non-compete clauses in employment contracts would pose an existential threat to the many private-equity based physician enterprises, as well as Optum Healthҳ huge and rapidly growing physician group. Strategically, the Envision bankruptcy raises anew the question of whether there are economies of scale, and investment returns to scaling, in healthcare. Certainly the conventional wisdom argued that large firms like Envision had the ability to recruit and retain clinicians across vast geographies, and negotiating power with the large insurers that increasingly dominate key insurance sectors like Medicare Advantage and Managed Medicaid. Envisionҳ demise strongly suggests that the power balance-both political and economic- has tipped decisively in the direction of payers like United. Rising interest rates, the increasing scarcity of clinicians as workaholic baby boom vintage docs and deepening financial challenges for the ultimate customers of many of these companies, namely hospitals, suggest that we may have reached an inflection point in the viability of many private equity physician care models, with their 4-7 year holding periods and a succession of owners. Current owners might find it increasingly difficult to exit their positions. Looking beyond private equity, the evident diseconomies of co-ordination and concentration of business risk in the large healthcare rollups may argue against the type of consolidation that created Envision in the first place. This problem is likely to haunt many of the putative healthcare ӤisruptersԠsuch as CVS and Amazon that are busily and extravagantly overpaying for clinical assets in search of the holy grail of өntegrationԠand market dominance. They are late to the party and will be compelled to Ӱay upԠto get the national market presence they seek.CVS recently paid $18 million per physician to purchase boutique Medicare Advantage provider Oak Street Health. In 2012, financial strategist Nassim Nicholas Taleb, who predicted the 2008 financial crisis, argued in his Anti-Fragile: Things that Gain from Disorder, that prospering in this modern economy requires nimbleness and the ability to rapidly adjust business strategy in the face of uncertainty and rapid market shifts. He argued that many mergers seeking scale and leverage actually made organizations more fragile and, thus, prone to tipping over, as Envision did. What a wise colleague once suggested large healthcare organizations need is ӯptionalityԭ the ability quickly to adjust oneҳ holdings and business models to take advantage of economic cycles, regulatory and political changes and growth potential. To have optionality is to be ӡnti-fragileԮ UnitedHealth Group, a vast healthcare conglomerate spanning health insurance, care delivery, pharmaceutical benefits management and business intelligence and services has optionality, along withmore than $2 billion a month in cash flow to fund it, and is anti-fragile. ࠅnvision- with its heavy reliance on a single financial leverage strategy and a dominant customer type- was not. Unitedҳ optionality and long-game patience rather than its scale per se may be its biggest strategic asset.ࠠEnvision is Unitedҳ first major scalp.ࠔhere will be many others.༯p> Jeff Goldsmithੳ the President ofȥalth Futures, Inc, one of Americas leading health futurists, and regular on THCB Gang.