Private equity – The Health Care Blog

Wait Till Health Care Tries Dynamic Pricing

matthew holt — Tue, 12 Mar 2024 15:11:50 +0000

By KIM BELLARD

Nice try, Wendy’s. During an earnings call last month, President and CEO Kirk Tanner outlined the company’s plan to try a new form of pricing: “Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and day-part offerings along with AI-enabled menu changes and suggestive selling.”

None of the analysts on the call questioned the statement, but the backlash from the public was immediate — and quite negative. As Reuters described it: “the burger chain was scorched on social media sites.”

Less than two weeks later Wendy’s backtracked – err, “clarified” – the statement. “This was misconstrued in some media reports as an intent to raise prices when demand is highest at our restaurants,” a company blog post explained. “We have no plans to do that and would not raise prices when our customers are visiting us most.”

The company was even firmer in an email to CNN: “Wendy’s will not implement surge pricing, which is the practice of raising prices when demand is highest. This was not a change in plans. It was never our plan to raise prices when customers are visiting us the most.”

OK, then. Apology accepted.

At this point it is worth explaining a distinction between dynamic pricing and the more familiar surge pricing. As Omar H. Fares writes in The Conversation: “Although surge pricing and dynamic pricing are often used interchangeably, they have slightly different definitions. Dynamic pricing refers to any pricing model that allows prices to fluctuate, while surge pricing refers to prices that are adjusted upward.”

Uber and other ride sharing services are well known for their surge pricing, whereas airlines’ pricing is more dynamic, figuring out prices by seat by when purchased by who is purchasing, among other factors.

Wendy’s wouldn’t be the first company to use dynamic pricing and it won’t be the last. Drew Patterson, co-founder of restaurant dynamic pricing provider Juicer, told The Wall Street Journal that dozens of restaurant brands used his company’s software. The company’s website doesn’t publicize those brands, of course. Still, he emphasized: “You need to make it clear that prices go up and they go down.”

Dave & Busters is public about its pricing strategy. “We’re going to have a dynamic pricing model, so we have the right price at the right time to match the peak demand,” Dave & Buster’s CEO Chris Morris said during an investor presentation last year. On the other hand, Dine Brands (Applebee’s/IHOP) Chief Executive John Peyton said. “We don’t think it’s an appropriate tool to use for our guests at this time.”

The potential revenue benefits are obvious, but there are risks, as Wendy’s quickly found out. Mr. Fares says: “One of the biggest risks associated with dynamic pricing is the potential negative impact on customer perception and trust. If customers feel that prices are unfair or unpredictable, they may lose trust in the brand.”

What Wendy’s tried to announce is not ground-breaking. Catherine Rampell pointed this out in a Washington Post op-ed:

In other words, things will be cheaper when demand is low to draw in more customers when there’s otherwise idle capacity. Lots of restaurants do this, including other burger chains. It’s usually called “happy hour.” Or the “early-bird special.” Non-restaurants do it, too. Think the weekday matinee deals at your local movie theater or cheaper airfares on low-traffic travel days.

Indeed, The Wall Street Journal reported: “An estimated 61% of adults support variable pricing where a restaurant lowers or raises prices based on business, with younger consumers more in favor of the approach than older ones, according to an online survey of 1,000 people by the National Restaurant Association trade group.”

I wonder what the support would have been if the question had been about healthcare instead of restaurants.

Like it or not, some form of dynamic pricing will come to healthcare. Want a private room instead of semi-private? Surge pricing. Willing to see a nurse practitioner instead of a physician? Dynamic pricing. Want to buy prescription drugs in the U.S. instead of in Europe? Surge pricing. Want a doctor’s appointment Monday morning instead of Tuesday? Surge pricing. Need an ER visit Saturday night instead of Sunday afternoon? Surge pricing.

Some of these healthcare has been doing for years. Others, and even more insidious ones, are coming.

We have to know that the private equity firms that have invested in healthcare have to be interested. Yashaswini Singh and Christopher Whaley wrote in The Hill: “Over the last decade, private equity firms have spent nearly $1 trillion on close to 8,000 health care deals, snapping up practices that provide care from cradle to grave: fertility clinics, neonatal care, primary care, cardiology, hospices, and everything in between.”

They go on to warn: “Although research remains mixed on how it affects quality of care, there is clear evidence that private equity ownership increases prices. These firms aim to secure high returns on their investments — upwards of 20 percent in just three to five years — which can conflict with the goal of delivering affordable, accessible, high-value health care.”

Dynamic pricing has to look good to these firms. Surge pricing would look even better.

But one doesn’t have to be owned by private equity to be rapacious in healthcare. Everyone is looking for margins, everyone is looking to maximize revenue, and consumers – A.K.A. patients – grumble about prices but pay them anyway, especially if their health insurance company is paying most of the cost. In today’s healthcare world, if you are a CEO or CFO and you’re not considering dynamic pricing, it’s close to malfeasance.

To me, the scariest part of Wendy’s plan wasn’t the dynamic pricing but the “AI-enabled menu changes and suggestive selling.” Upcoding has been a problem in healthcare for as long as there has been coding, but when we get an AI-enabled menu of treatment options and suggested selling (aka treatments), well, we haven’t seen anything yet.

Maximize away.

Look, I’m not going to Wendy’s even if they pay me, but I take my wife out on Valentine’s Day even though I know the restaurant has surged the hell out of its prices. Some things you pay for, and, when it comes to healthcare pricing, every day is Valentine’s Day.

I’m resigned to the fact that dynamic pricing has a toehold in healthcare already, but I’m holding out hope that we can use AI to help us make those recommendations and set those prices to deliver the most effective, efficient care, not just to maximize profits.

Wait Till Health Care Tries Dynamic Pricing

OK, then. Apology accepted.

What Wendy’s tried to announce is not ground-breaking. Catherine Rampell pointed this out in a Washington Post op-ed:

I wonder what the support would have been if the question had been about healthcare instead of restaurants.

Some of these healthcare has been doing for years. Others, and even more insidious ones, are coming.

Dynamic pricing has to look good to these firms. Surge pricing would look even better.

Maximize away.

Kim is a former emarketing exec at a major Blues plan, editor of the late & lamented Tincture.io, and now regular THCB contributor

What Can We Learn from the Envision Bankruptcy?

matthew holt — Wed, 24 May 2023 19:21:00 +0000

By JEFF GOLDSMITH

Envision, a $10 billion physician and ambulatory surgery firm owned by private equity giant Kohlberg Kravis Roberts, filed Chapter 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. Envision’s 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 the Allegheny Health Education and Research Foundation (AHERF) bankruptcy in the late 1990’s. KKR has written off $3.5 billion in equity in Envision. Envision’s 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 company’s good fortune. Envision’s core business was physician staffing of hospital emergency departments and operating suites. In 2016, then publicly traded, Envision merged with then publicly traded ambulatory surgical operator AmSurg. This merger seemed at the time to be a sensible diversification of Envision’s “hospital contractor” business risk.

Indeed, Envision’s 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 Envision’s demise.

The interruptions of elective care and the flooding of emergency departments with elderly COVID patients, which kept non-COVID emergencies away, damaged Envision’s core business as well as nuking ambulatory surgery. By the spring of 2020, Envision was exploring a bankruptcy filing. An estimated $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 KKR’s due diligence team for missing a global infectious disease pandemic, with hindsight’s 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 Envision’s contracts in the pivotal states of Florida and Texas at risk.

More importantly, there were escalating contract issues with UnitedHealth, one of Envision’s biggest payers, as well as increasing political agitation about out-of-network billing, which provided Envision vital incremental cash flow. These problems culminated in a United decision in January 2021 to terminate insurance coverage with Envision, making its entire vast physician group “out of network”.

The United dispute coincided with a skillfully managed public policy initiative laying out the scope and indefensibility of Envision’s cost shifting strategy. The assault began with a 2016 study covertly assisted and guided by United by a prominent Yale health policy analyst. This study ignited a firestorm 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 the No Surprises Act, which effectively ended balance billing and subjected thousands of Envision’s 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 Envision’s creditors.

A significant longer term threat to Envision’s bargaining power was the proposed 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 Health’s 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.

Envision’s 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 “disrupters” such as CVS and Amazon that are busily and extravagantly overpaying for clinical assets in search of the holy grail of “integration” and market dominance.

They are late to the party and will be compelled to “pay up” to 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 “optionality”- the ability quickly to adjust one’s holdings and business models to take advantage of economic cycles, regulatory and political changes and growth potential. To have optionality is to be “anti-fragile”.

UnitedHealth Group, a vast healthcare conglomerate spanning health insurance, care delivery, pharmaceutical benefits management and business intelligence and services has optionality, along with more than $2 billion a month in cash flow to fund it, and is anti-fragile. Envision- with its heavy reliance on a single financial leverage strategy and a dominant customer type- was not. United’s optionality and long-game patience rather than its scale per se may be its biggest strategic asset. Envision is United’s first major scalp. There will be many others.

Jeff Goldsmith is the President of Health Futures, Inc, one of Americas leading health futurists, and regular on THCB Gang.

Some of My Best Friends are in Private Equity

cindywilliams — Sun, 05 Jun 2011 12:00:16 +0000

By PAUL LEVY

Like moths to a flame, private equity investors are quick to pounce on those sectors of the economy that have the potential for higher than average returns. Such investors also have an appetite for the higher risk that accompanies those sectors. In this manner, private equity can serve a useful role in capital formation for the economy. It also helps money managers who want a portion of their portfolio to be in that part of the risk-reward spectrum.

Health care is a fertile field for private equity. You might not think so because of concern about rising costs, but as someone once said, “One person’s costs are another person’s income.” Let’s look at it this way. First, more people will have access to insurance to pay for diagnosis and treatment because they will be newly eligible for private insurance under the national health care reform law. Second, demographic changes in society are producing an ever-increasing demand for health care services. Longer lifespans and the aging population offer a growing number of people with cancer and the other diseases that are more likely to occur with age. The number of Medicare beneficiaries is projected to rise from 46.6 million today to 78 million in 2030. (It was 40 million in the year 2000.)

It is with this background that we should consider the growing interest by private equity in proton beam facilities. You have heard before about my real concern about the cost impact of rapid expansion of the number of such facilities.

I want to expand on that today and give you a sense of how the dollars work in this kind of investment. I have pointed out how the Medicare rate-setting process contributes to its profitability. Let’s look at this in very rough form.

First, the revenues. Let’s assume we have a facility that can serve about 1500 patients per year, with an average reimbursement of $50,000. We generate annual revenue of $75 million.

On the cost side, let’s say a new facility costs $125 million and is financed with 60% debt; is depreciated over 20 years; is in leased space; and has personnel and other expenses. Total expenses will be in the range of $30 million.

Net profit (pre-tax) is about $45 million per year. The private equity investors have put in about $50 million in cash. This starts to look pretty good.

That’s just one projection, and I am not privy to real pro forma’s so I might be a bit off track. This article has a more conservative view of the numbers. For now, ignore the variability in the assumptions. Instead, note this all-important introductory line from the article:

Proton beam therapy gets a 9% reimbursement increase for 2011. . . .With the new CMS payment level, reimbursement for simple treatments is now $1,031 (APC 664), up from $942 in 2010. More complex treatments are reimbursed at a rate of $1,349 (APC 667), up from $1,232 in 2010. Depending on the cancer, a protocol of 10 to 15 treatments may be required per patient.

You can understand why the moths are flocking! In an era of flat Medicare payments to hospitals and doctors, these payments are going up at three times the rate of inflation.

But now, compare these actions by CMS and the resultant private equity gold rush with important scientific and public policy concerns, set forth in a 2008 US News and World Report article:

But certain doctors—not to mention the occasional patient who has experienced side effects from proton therapy—wonder whether the high-tech allure of protons hasn’t outpaced the science. “Because of Internet buzz, the morbidity associated with proton beam therapy is underappreciated,” says Anthony Zietman, a radiation oncologist at Mass General who specializes in prostate cancer. Many of his patients, he says, are surprised to learn that proton beam therapy exposes the bladder and rectum to high doses of radiation and does, in fact, carry a significant risk of causing impotence. Although preliminary research has suggested protons may be superior to conventional radiation for prostate cancer, there’s a lack of randomized studies (the type doctors consider most rigorous) comparing the two—and standard radiation techniques are improving all the time.

…The lingering questions about prostate cancer are helping to fuel a debate over the location of new proton beam centers and the pace of expansion. Experts who believe prostate cancer should be widely treated estimate there could be a need for scores of new centers. Others contend that five to 10 evenly distributed academic research centers could better serve the rare patients who most need protons—and help determine whether the therapy should be extensively used to treat prostate and other common tumors.

We never learn when it comes to health care. Old patterns repeat. A new technology is invented. Sure, it has some good therapeutic effects for some patients; but it really takes off when marketeers or investors prey on people’s fear of disease to suggest that it should be available to everybody in their backyard. A new bolus of costs is then added to the system without proper evaluation.

It feels like the last line from The Great Gatsby:

So we beat on, boats against the current, borne back ceaselessly into the past.

Here’s the deal, though. If you believe that there is some overall, sustainable level of health care expenditures for a country, every dollar that goes into expanding the number of facilities like these proton beam machines is one less dollar for primary care, cognitive specialists, palliative care, and the like. If we permit the “rule of rescue” to drive our health care expenditures, we will never focus on the most cost-effective and compassionate aspects of the care delivery system.

Some of my best friends work in private equity. But I don’t trust them to make the right decisions for our health care system. I would like to think I could trust CMS, but it appears to have become complicit in the medical arms race. Other parts of government remain silent as this occurs.

In 1961, President Eisenhower said:

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence — economic, political, even spiritual — is felt in every city, every statehouse, every office of the federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.

Change a few words and see if this doesn’t describe many aspects of our health care system, fifty years later.

Paul Levy is the former President and CEO of Beth Israel Deconess Medical Center in Boston. For the past five years he blogged about his experiences in an online journal, Running a Hospital. He now writes as an advocate for patient-centered care, eliminating preventable harm, transparency of clinical outcomes, and front-line driven process improvement at Not Running a Hospital.