bankruptcy, transitions, and tumult: what can be learned from the app collapse.

August 15, 2023: At the risk of sounding cliché: there has never been a time like this in emergency medicine.

I’ve been an ER physician for more than twenty years, and I’ve never seen anything like the tumultuous events of the last month. I’m talking of course about the sudden implosion last month of American Physician Partners, or APP.

As of August 1st, the physician group abruptly closed its doors. It had been staffing 119 emergency departments around the country—and the rest of the industry rushed to pick up the pieces, practically overnight.

All of this was directly on the heels of the bankruptcy in May of Envision, one of the two largest groups in the country. Together with APP, that’s nearly 600 hospital contracts, employing thousands of clinicians, and serving millions of patients.

And this might not be the end of it.

But what made APP’s bankruptcy actually unprecedented was that the rest of the industry had only two weeks to figure out how to staff all 119 emergency departments.

We have simply never had that many transitions in that little time—EVER.

The good news is that the rest of the industry stepped up huge. Millions of patients essentially won’t be able to notice what happened (although the physicians and APPs involved are a different story—we’ll get to that). Core Clinical Partners will be taking over management of two of APP’s contracts, while many other groups around the country stepped up to take on the management of dozens more. Collectively, the emergency medicine physician services industry did contract transitions that normally take 90 – 120 days each and instead did them in closer to 10 days.

So, what can we learn from all this? And what does the turmoil in emergency medicine mean for hospital leaders? Let’s dive in.

I. What happened here

There are no silver bullets, but there are three things I want to highlight that I think all health systems and hospital administrators should be thinking about now when it comes to their EM or HM partners.

Let’s not sugarcoat it: what happened was two weeks of chaos.

But there had been trouble brewing for months.

For months, no matter where you turned in emergency medicine, there was a private-equity-backed group facing high debt payments and reduced reimbursements. Envision is owned by KKR and APP is owned by Brown Brothers Harriman. Both are among the largest private equity firms in the country.

In the lead-up to and aftermath of the Envision bankruptcy, many wanted to blame private equity itself for Envision’s financial problems. APP’s collapse only seems to have cemented that view. Others see contract management groups (CMGs) themselves as the problem, with private equity only being the funding mechanism.

My view is that the truth is more nuanced than that. Some of what happened to APP is inherent to private equity. Other parts seem to be related to business decisions made by leadership. Some of it is the impact of the No Surprises Act. And yet more is the result of market conditions. Ultimately, it was the combination of several factors that led to the collapse—and from which we can draw lessons.

But first, let’s recap the series of events:

A Failed Deal and APP’s Collapse

Last month’s events began with APP’s unsuccessful attempt to sell its business to SCP Health earlier in 2023, as reported by the Emergency Medicine Workforce Newsletter (the newsletter is written by Ivy Clinicians CEO Dr. Leon Adelman, with whom I did a podcast in January).

When SCP decided not to go through with the deal, APP’s mounting debt combined with a failed cost-saving strategy led to their announcement on July 17th that they would cease operations two weeks later on July 31st.

The Frenzied and Competitive Response

The announcement forced a frenzied response. Where would the contracts go? APP did its best to find homes for each of them, with a priority simply on who would be able to meet payroll for their clinicians.

The day after the news broke, I was on the phone with CEOs from multiple hospitals learning about their needs and how Core might be able to help. In the days following, I took a road trip through the Southeast to visit as many of the potential new partners as I could.

With Envision, its leadership had foreseen the dire situation and declared bankruptcy earlier, giving its hospital partners time to navigate the emergency medicine contracts. But the period after the APP announcement was filled with uncertainty for hospitals, lots of anxiety for the clinicians involved, and a mad scramble to provide seamless continuity of care.

Core Transitions New Contracts

On August 1, Core started four new service lines in two new states.  We had only six business days to transition one of them and only 11 for another.

Over that time, Core contracted approximately 120 clinicians, ensuring each of them was credentialed and had medical malpractice coverage. I’m sure every group and every hospital who took on APP contracts has a similar story of rising to the occasion.

For Core’s part, our ability to rise to the challenge speaks to the infrastructure we have put in place over the last five years.

We built Core to be able to offer the resources of a national company combined with the high-touch attention to partnership that hospital leaders are only used to seeing in much smaller groups. Over the last month, our team has proven that to be true.

II. THE MYRIAD CAUSES

There is a sizeable faction of emergency medicine physicians and others in the industry who feel that private equity groups are inherently detrimental to the healthcare system—as are CMGs in general.

The Ivy Clinician post-mortem on what happened to APP points a large finger directly at the private equity model itself:

None of the factors that brought down American Physician Partners is unique to APP. Without significant changes to private equity’s acute care business model, expect more bankruptcies to come. 

It’s certainly true that private equity has downsides. Besides the huge debt load, it constrains decision-making and reduces flexibility by bringing in outside decision-makers. The private equity groups also extract money in other ways, whether via dividend payments or via fees in exchange for their “expertise.”

But private equity isn’t the whole story here.

Rising interest rates

All the private-equity-backed groups took on a lot of debt to grow. With interest rates so low over the past decade, there was a lot of logic to borrowing in order to grow. But as interest rates have risen, subsequent debt payments got more expensive, as did recapitalization.

The new economic environment has not only made debt much more expensive for these groups, it’s limited their options for bringing in new investors or reorganizing that debt.

The No Surprises Act

During the Envision bankruptcy, a lot of observers pointed to Envision’s reputation (deserved or not) for pursuing a deliberate strategy of balance billing out-of-network patients, which was made illegal by the No Surprises Act.

Meanwhile, a publicly available APP investor deck shows that 27% of the company’s revenue came from out-of-network billing in 2021, just before the law took effect—that would be a big dent to any group’s revenue stream.

Good Deals Turned Into Bad Deals

Another thing about the No Surprises Act is that it made any physician group that relied heavily on out-of-network billing less valuable—including groups who were bought up in the private equity spree.

In other words, what looked like good deals prior to the law became bad deals after the law. You could chalk this up to bad luck. On the other hand, perhaps more groups should’ve seen this coming. The No Surprises Act was debated for years before Congress passed it at the end of 2020. It had been clear for a long time that the “surprise bills” for which the law was named were not sustainable. Thus, relying on them for such a large part of revenue was a questionable business strategy at best.

Size Matters Less Than It Used To

A third effect of the No Surprises Act is that it removed much of the leverage that large groups had planned to use against insurers in negotiations over reimbursement rates. As I predicted nearly two years ago: “The clear outcome is that, over time, the No Surprises Act will lead to an evening out of rates, so that there is less fluctuation between groups in the same market.”

In the last two years, the largest groups just haven’t been able to collect as much as they had hoped when they were consolidating.

Leadership Decisions

Finally, we shouldn’t pretend that APP’s leadership doesn’t bear some responsibility for what happened. Many kinds of decisions over time can ultimately prove significant, especially when combined with other headwinds.

One of these might have been APP’s decision to outsource its billing. Most large groups do the opposite and bring billing in-house (as Core is also doing). This usually benefits revenue as the groups have a greater incentive to go after small payments than the billing companies do.

If we understand APP’s failure as purely a problem with private equity, we’ll miss some key lessons. For example:

Iii. THE LESSONS

1. Preserve flexibility. You never know what might come (and sometimes you do know). By using debt to grow, groups like Envision and APP didn’t just saddle themselves with payments that got more expensive once interest rates rose. They constrained their options for the future.

Changes in both the market and the regulatory environment had substantial effects on both companies. Meanwhile, Core has chosen to grow entirely organically and thus isn’t constrained by debt. Therefore, we weren’t as impacted by changing market conditions.

Meanwhile, the changes brought about by the No Surprises Act were arguably foreseeable, and its most detrimental outcomes could at least have been planned for as a possibility. Instead, the largest groups bet mostly on their lobbying efforts before Congress to maintain the status quo.

2. Operational efficiencies are really hard—there is no magic wand. The formula for high growth in emergency medicine over the past ten years has been, 1., use debt to buy other companies, followed crucially by 2., find efficiencies so that you can pay back the debt.

But as all of these groups have found, finding operational efficiencies is harder than it looks in emergency medicine. You can’t just pay physicians less, for example—a strategy at least implied by certain groups’ investor pitches. If you do, the docs can always take jobs elsewhere, forcing you to use temporary locum staffing and actually pay higher hourly rates than before. It’s self-defeating.

The lesson of APP is that you (or rather, the private equity executives) can’t simply wave a magic wand because there really is no magic wand in our business. There is only the long, slow, intense, sustained work of continual improvement, month by month, year by year.

3. It’s not PE vs. not PE—it’s organic vs. acquisition. Private equity has earned itself a bad name. But at the end of the day, I think the more important divide isn’t between groups backed by PE or not backed by PE. The divide is between groups that grow by buying other groups and those that grow organically, contract by contract.

In the first case, all you need to do is write a big check. As I wrote last year, when you grow through acquisition, “no one checks your quality. They only check to see if your check is going to bounce.” This way of growing may be easy to do when debt is cheap. But we’ve seen what can happen when that changes.

In contrast, when a company grows by submitting proposals in response to RFPs, they must win new hospital contracts based on the strength and quality of their existing programs. There are only a handful of groups in the country like this, Core included. We have to focus on quality, because every time we pitch another hospital, we have to bring those metrics in and show our work. And, we need every current hospital administrator to be a good reference.

Iv. THERE COULD BE MORE TO COME

It’s possible that emergency medicine hasn’t seen its last bankruptcy. Other companies are currently struggling with debt just as Envision and APP did.

It’s also possible that many of the 119 hospitals that accepted a hastily arranged marriage to a new group ultimately decide that they rushed the decision and want to do better.

But whatever happens, I’m more confident than ever that Core was built to thrive, even amid chaotic times like these. We have shown our resilience, agility, and commitment to partnership, reinforcing why we continue to be an example of stability even as tumultuous times continue.