As the coronavirus pandemic upended the U.S. health-care system, EmCare IAH Emergency Physicians, a Houston staffing company owned by private equity firm KKR, made a little-noticed request of the government: It applied for a $317,379 interest-free loan.
KKR had for years paid lobbyists to fend off efforts to ban a practice known as surprise billing used by EmCare and other providers that has driven up the cost of healthcare. But that didn’t stop the U.S. Health and Human Services Department from approving the loan and almost 300 others totaling more than $60 million to subsidiaries of KKR-owned companies.
Shut out from many coronavirus relief programs, private equity companies have found a back door at HHS, where they have borrowed at least $1.5 billion, according to a Bloomberg News analysis of more than 40,000 loans disclosed by the department.
That money, from two programs intended to provide emergency funding to financially strapped healthcare companies, went instead to hospitals, clinics and treatment centers controlled by the richest investment firms as they seek to take advantage of an economic downturn caused by the pandemic to buy ailing businesses.
KKR has more than $58 billion of cash to invest. Healthcare facilities owned by Apollo Global Management, which started the year with about $46 billion, received at least $500 million in HHS loans. And Cerberus Capital Management’s Steward Health Care System LLC, which threatened to close a hard-hit Pennsylvania hospital, received at least $400 million in loans. Last month Cerberus was working to quadruple the size of a fund to invest in distressed loans to $750 million.
The paradox of private equity funds, which profit from tax breaks the U.S. offers on debt, is that even when they’re brimming with cash, there is little incentive to use it to prop up their struggling investments. In bad times, the funds can set themselves up for future windfalls by buying new distressed companies and using debt to multiply their profits, even if their current holdings suffer. The pandemic is “a time to shine,” two Apollo executives said on a call with investors in late March.
“The GAO report on how HHS got the money out the door is going to be just brutal when it’s published in a couple of years,” said Rodney Whitlock, a former policy aide for Republican Senator Chuck Grassley on the Senate Finance Committee who now represents healthcare clients at McDermottPlus Consulting.
The loans were made through two existing HHS programs administered by the Centers for Medicare & Medicaid Services — the Advance Payments Program and the Accelerated Payments Program — that were expanded under the CARES Act to help health-care companies cope with the pandemic. It included providers that lost business as a result of restrictions on elective surgery and other profitable procedures, as well as those directly treating coronavirus patients. HHS has distributed $100 billion through the programs since late March. The loans are structured as advances on future payments the companies expect to receive from the government. Borrowers have from seven months to a year to repay them without interest, depending on their classification. The rate jumps to 10.25% afterward.
CMS Administrator Seema Verma said the purpose of the program was to get cash into the system quickly. She said the agency didn’t know whether money was paid to companies owned by private equity firms because the applications didn’t ask about the beneficial ownership of the entities seeking loans. “We don’t look into ownership, what we look into is are they Medicare-enrolled providers,” Verma said in a phone interview. “That is not information that the agency has historically looked into in a situation where there is a disaster or an emergency.”
Although there’s nothing in the law that prohibits such companies from getting coronavirus aid, businesses with more than 500 employees were excluded from the Paycheck Protection Program, which has disbursed more than $500 billion in forgivable loans to employers of small businesses. Lawmakers and government officials resisted industry efforts to relax those rules, which count affiliated companies as one business. Some feared that lending money to private equity firms would only encourage their penchant for buying more companies and loading them up with high-interest debt.
Even some lobbyists who represent healthcare companies were stunned to learn that HHS doled out billions of dollars in coronavirus aid without distinguishing between hospitals struggling for survival and those wealthy enough to view the no-interest loans as a free federal contribution to their cash hoards.
Private equity funds have acquired hundreds of healthcare companies in recent years, including large hospitals, dermatology clinics and dental practices. Often their ownership is obscured by layers of limited liability corporations. EmCare is part of Nashville, Tennessee-based Envision Healthcare Corp., which was bought by KKR in 2018 for $9.9 billion with $7 billion of debt financing. That company is an amalgam of firms providing healthcare services such as ambulatory surgery and anesthesiology.
Almost 300 entities affiliated with KKR-owned Envision received HHS loans, according to the Bloomberg analysis, which cross-referenced transactions against lists of known subsidiaries of health-care companies owned by private equity firms. The loans included $1,963,697 for the River Drive Surgery Center in Elmwood Park, New Jersey; $1,049,804 to the Bend Surgery Center in Oregon; and $610,850 to the Surgery Center of Allentown in Pennsylvania.
The loans were made even though KKR was at the center of a congressional inquiry last year into surprise billing, the practice of staffing in-network emergency rooms and surgical centers with out-of-network doctors, then sending unwitting patients big bills. Envision’s profit margins depend on its ability to collect on those expensive claims, and the company has funded a lobbying effort against attempts to ban the practice.
Sandeep Kaur filed a lawsuit against Envision in federal court in Houston in July claiming she was billed $2,844.97 in 2016 after going to the emergency room at Cypress Fairbanks Medical Center, a facility in her insurance plan’s network. The EmCare doctor who treated her head wound wasn’t covered by her plan, it turned out. Lawyers for the company acknowledged in court papers that Kaur had been billed and had made payments before the unpaid balance was sent to a collection agency. They denied other allegations, and the case is scheduled for trial next year.
Despite getting the HHS loans, Envision’s credit rating was downgraded deeper into junk territory in April by Moody’s Investors Service, which said the company had deployed an “aggressive financial strategy characterized by high financial leverage, shareholder-friendly policies and the pursuit of acquisitive growth. This is largely due to its private equity ownership by KKR since its leveraged buyout in 2018.”
Envision said last month that it was considering bankruptcy as it sought to restructure its existing debt. A spokesman for the company said that the loans were intended “to support front-line providers, including Envision,” and that it intended to start paying back the money within 120 days of issuance.
“We support any assistance for Envision’s 27,000 medical workers making sacrifices every day,” said Kristi Huller, a spokeswoman for KKR, “including those whose practices were shuttered as a result of the pandemic.”
Subsidiaries of Apollo-owned LifePoint Health Inc. received more than 90 loans, ranging from $439 for a small hospital in Paris, Kentucky, to $39.7 million for a bigger one in Marquette, Michigan, that it manages in partnership with Duke University. The New York-based private equity firm has aggressively pursued distressed companies in past crises. “We’ve actually made our most money during recessions,” Apollo founder Leon Black told Bloomberg Businessweek earlier this year, before the pandemic struck. “Everybody else is running for the doors, and we’re backing up the trucks.”
Joanna Rose, a spokeswoman for Apollo, didn’t provide comment about the HHS loans, and Michelle Augusty, a spokeswoman for LifePoint, didn’t respond to calls or emails.
The private equity playbook, with its focus on profit, has sometimes proved an odd fit with healthcare companies dedicated to saving lives. One such conflict played out as Covid-19 ravaged a hospital in eastern Pennsylvania owned by private equity firm Cerberus, run by Stephen Feinberg, often mentioned as a potential appointee to an intelligence role at the White House. In March, Michael Callum, executive vice president of Steward, which operates 37 community hospitals and has 42,000 employees, issued an ultimatum to Governor Tom Wolf: Cover all operating costs and liabilities for the company’s hospital in Easton, or he would close it.
Steward had been trying to sell Easton since acquiring it along with a group of hospitals in 2017, according to Darren Grubb, a spokesman for the company. In February, after several potential deals fell through, he said, Steward informed the state that it planned to close the facility in May. After the ultimatum, Pennsylvania offered $8 million to keep the hospital open through April. But in May, Steward informed the state that it would shut Easton if a sale expected to close this month falls through. Grubb said in an emailed statement that Steward “only requested support to maintain operations at the facility” and promised to return any excess funds to the state.
Steward received more than two dozen loans from HHS for a total of at least $400 million, department data show. Grubb said that the money was placed in a segregated account, that only Steward can access the funds, and that would only happen in case of an emergency. “We are the largest private, tax-paying hospital system in the country,” Grubb said, adding that many of its hospitals are in under-served areas and care for a high proportion of Medicare and Medicaid patients. David Millar, a spokesman for Cerberus, didn’t provide comment.
The loans to companies owned by private equity firms came in addition to hundreds of millions of dollars in Covid relief grants that HHS automatically sent the health facilities when it disbursed funds to providers that have treated Medicare patients in the past two years. That money, which was allocated according to billings, doesn’t have to be repaid.
Verma, the CMS administrator, said that the grants provided under the CARES Act, many of which were set aside for rural hospitals, safety net hospitals and hot-spot facilities swamped by Covid patients, were intended to work in tandem with the loans. “Arguably the CARES Act funding is easier for them because they don’t have to return those funds,” she said.
In a normal year, HHS receives about 20 applications through the advanced and accelerated payments programs and distributes less than $8 million, but the department was deluged with more than 40,000 loan requests after the virus outbreak. Overwhelmed, it shut down both programs in late April and is now evaluating whether to limit the amount of aid each provider can get.
The providers that moved quickly include thousands of medical facilities, nonprofits and university teaching hospitals. Buried amid the flood of applicants are also hundreds of private equity owned limited liability corporations or other subsidiaries.
One entity in Arkansas, KAH Development 4 LLC, received almost $7.5 million in loans spread out over 17 transactions, Bloomberg found. Those funds were among about $250 million of loans issued to entities associated with Kindred Healthcare LLC, a Louisville, Kentucky, services provider owned by private equity firms TPG Capital and Welsh, Carson, Anderson & Stowe in a consortium with Humana Inc. Andrew Siegel, a spokesman for Kindred, declined to comment, and representatives of the two private equity firms didn’t respond to emails and phone calls.
Although private equity companies have the cash reserves to repay the HHS if Congress doesn’t forgive the loans, some struggling hospitals worry that they won’t be able to. Because the loans include steep interest rates that kick in after a year, the safety-net hospitals hit hardest by the pandemic could face financial ruin. They have asked Congress to consider extending the grace period, lowering the interest rate or forgiving the loans completely — changes that would also benefit private equity owned providers.
“Our focus now is on loan forgiveness for our hospitals, because we believe severe financial challenges will remain when these loans come due,” said Beth Feldpush, senior vice president of policy and advocacy at America’s Essential Hospitals, which represents more than 300 health-care providers. “We also continue our call for targeting more funding to hospitals with many Medicaid and low-income patients. So far, the allocation formulas have put these hospitals at a disadvantage.”