Envision: A Very, Very Big Private Equity Bankruptcy

It took a few years before it finally got there, but massive private equity-owned physician staffing company Envision finally filed for Chapter 11 bankruptcy this week.

The harbinger of the coming wave of PE defaults, bankruptcies, distressed exchanges, and other failures has fully arrived. Make no mistake, this is just the beginning.

There are people who see this news and rejoice. It’s not hard to see why. There might be more than a bit of schadenfreude seeing a big private equity company go belly up. These entities are so often in the business of pure value extraction. They aggressively use leverage to buy a bunch of stuff using a bunch of borrowed money and try to increase profits through negotiating clout, suppressed salaries, and unsavory financial machinations. They often take successful companies and saddle them with so much debt that they fail, strip them for parts, and let everything fall apart after they’ve made sure they made their buck. Many of the big retail failures of the past decades have all been the same story.

Envision was in the process of the usual playbook of financial machinations to separate the profitable wheat from the debt-riddled chaff when the WSJ reported on the possible impending bankruptcy and forced their hand.

Because such a large portion of their purchases are funded through debt, it’s relatively rare that the PE-owner actually loses a ton of their own money in the process. Envision’s owner KKR wasn’t quite so lucky: while the levered buyout was almost $10 billion in 2018, they are still likely to lose their entire ~$3.5 billion stake.

A Fall Long Coming

Envision’s reimbursement games didn’t pan out, not just their ploy of going out of network to charge exorbitant rates to unsuspecting patients–a practice curtailed by the No Surprises Act–but also from the bad acting of big payers like UnitedHealthcare (there are very few good guys in healthcare). Adding insult to injury, they weren’t able to squeeze physicians and other staff in the hot job market. Labor costs have been going up.

While Envision as a normal business is functioning, valuable, and generates cash, its growth was nowhere near the level required to service its more than $7 billion of debt. If the credit markets were loose like in the pre-Covid era, they probably would have been able to refinance without issue. Now, the cost of capital is simply too expensive.

This possibility was in the news back during the early Covid days, but Envision was temporarily saved by an influx of cash from the CARES Act. They recently defaulted on their debt and subsequently filed for Chapter 11 bankruptcy on May 15.

From the announcement email from Envision CEO Jim Rechtin:

Upon emergence from the restructuring, both Envision and AMSURG will be under new and separate ownership, comprised of current lenders. KKR will no longer have a stake in either company.

The email goes on to state the following items unironically:

  • Envision and AMSURG are not going out of business. The filing ensures an orderly process for restructuring our debt and finances. This is not a liquidation.
  • Our clinicians and clinical support teammates can expect to receive their normal wages and benefits. Independent contractors and locums can expect their usual payments.
  • The filing does not change the regular work schedules of our clinicians or clinical support teams – operations will be business as usual.
  • Our top priority is continuing to deliver high-quality care and supporting our hospital partners and surgery centers without interruption to services.
  • There should be no change to the quality of service our patients and their families have come to expect from us.

As part of the process, Envision is now owned by its creditors (the lenders who had given secured loans and/or purchased corporate bonds,) and KKR has lost its stake and will no longer own/run the company. And it’s worth pointing out that nothing unsavory has really happened in the sense of business practice. This is how the industry is designed to work. People invest money and take on risk in order to make money. A company taking on debt it knows it can’t really afford and other unnecessary/excessive risks that might screw over its creditors is part of the game. When companies fail, the creditors get the scraps before the equity owners/shareholders.

Billions of dollars have been lost, absolutely, but at the end of the day, it’s mostly big institutional investors like large pension funds that are the ones who have lost in the short term. KKR made a bet and lost. They’ll be fine.

Of interest to most physicians is that the day-to-day function of Envision probably won’t change much, and this big company that got big by borrowing an unsustainable amount of money to fund its growth still exists. It may even emerge from this process potentially stronger than recent years now that it won’t have billions of dollars on the balance sheet and the need to make periodic debt payments. They will probably not be able to raise more capital in the current environment, which will prevent the kind of debt-fueled highly-leveraged growth that allowed a company like Envision to buy large practices in the first place. And their management record still does not inspire confidence. But at the end of the day, Envision as an entity is still big, still employs thousands of doctors, and still has a dominant market position in several locales. If there is any physician staffing company that could be considered too big to fail, Envision is one.

You might ask, why would Envision’s creditors take the deal? Is losing billions of dollars fun? Well, no. This is the nature of distressed exchanges: better to lose a few billion and end up with a big profitable company at the end than lose all of your billions.

What Next?

From the official FAQ:

How will patients be impacted?   
Patients will continue to receive the same high-quality, high-value care our clinicians and physician partners have always provided. Patients and their families should notice no difference in our operations or level of care.

This is why those hoping that the collapse of private equity-funded healthcare ventures will lead to a return to better times are unfortunately in for a grim reality check. The tactics and market consolidation don’t have to go away just because they can’t pay their debts. We’re not likely to undo any damage already done. For better or worse, these companies will mostly soldier on. The playbook lives to see another day.

Unless physicians quit in droves on principle or in fear, the status quo continues. If people take the wake-up call about the flaws in the funding model, that’s a different story.