Health Care Companies Leave Wall Street for Richer Pastures

With private equity companies occupying fields of green, something must be done with the billions in harvest while planning for future crops. Two recent deals involved for profit hospital companies going private, HCA and Triad Hospitals. Kohlberg, Kravis, Roberts sponsored HCA’s move while the boys from Goldman Sachs will help take Triad private.

Why the move as many hospitals are financially stressed due to the burden of caring for the legions of uninsured in America? Why would hospitals be a good investment at this time? The answer has at least two parts.

First, not all hospitals bear equal burdens of uncompensated care. For-profit hospitals traditionally have a smaller burden as they locate in affluent parts of a community, prescreen for insurance coverage, and require up front funds for the patient portion of any elective services. While their share of unpaid care has grown as employers bail on providing health insurance, for profit hospitals still bear a lesser cost in caring for the uninsured. In my hometown, the nonprofit provides 80% of this care while the for-profit does 20%.

Nonprofits struggle to serve the ever growing numbers of uninsured, up some 6 million during Bush’s time in office to nearly 47 million people. The President’s budget has more pain in store for community hospitals. With a regulation change he wants to cut reimbursement for county owned hospitals that provide significant amounts of care for the uncovered. Hospital disproportionate share money helps relieve overburdened facilities but the President wants to divert this money to states for innovative insurance coverage efforts. After the state and private insurers take their cuts much less will go directly to providers. Bush’s budget also calls for large cuts in medical education funding for hospitals. Few for-profit facilities conduct medical education.

Virtually all of the President’s budget cuts hit nonprofit and governmental hospitals square in the pocketbook, sparing for-profits much of the pain. From the KKR’s and Goldman’s perspective, HCA and Triad have better revenue predictability. However, each clearly wants to make big money off a future public offering. What do they see that most don’t?

Might they see a chance to buy nonprofit community hospitals for fire sales prices? Distressed facilities call Triad on a regular basis to explore deals according to CEO Denny Shelton. Our local nonprofit briefly inked a deal with Triad only later to be called off. In an investors conference call Denny bragged about the “significant consolidation play” in our market. He noted this gives the company greater negotiating power and pricing power in dealing with insurers. In other words, they raise rates. The Bush health care environment gives private hospital companies the opportunity to buy distressed hospitals on the cheap before turning around and negotiating better paying deals with insurers.

That alone could be attractive enough for the Goldman Sach’s and KKR’s, but there’s more. Currently 46.7 million people are uninsured with roughly 2/3 not able to financially participate in their care or at least limited in that ability. What happens if they get coverage? With a payer source behind them, these patients become attractive for the for-profit hospital. Covering the uninsured finally is in the forefront as our national discussion develops. While the President admits his own program of tax credits will only put a small dent in the problem (5 to 10%), other more serious efforts are underway at the state level.

If our nation brings more people under the umbrella of coverage, these private equity firms will reap a significant harvest. Who wants a greater chunk of health care investments? It’s none other than the Carlyle Group. Their acquisitions to date have been more on the health insurance and cost management side. The President’s Uncle and Senator Evan Bayh’s wife sit on another large insurer’s board of directors, WellPoint.

The President’s two big advisors have similar roots. Bush’s economic advisor, Al Hubbard used to warm the seat next to Uncle Bucky and Susan Bayh at the WellPoint table. And steering the whole U.S. economy is Treasury Chief Hank Paulson, former head of Goldman Sachs. They decide which farms get the rain and which undergo drought…