barbarians at the door or world experts at work?
While the American medical system – with its frequent indebtedness for patients – is radically different from that of Australia, the same arguments can be made regarding the potential conflicts between the public interest in managing healthcare assets well and the obligations private equity firms to earn a minimum return for their investors.
There are pros and cons to private equity ownership.
KKR’s 2018 purchase of Envision for $9.9 billion made the company the nation’s largest emergency medicine group, partnering with 540 healthcare facilities in 45 states. This was met with criticism, and many pointed to private equity’s focus on returns and the short-term approach to ownership. It usually lasts five to seven years (although it can be longer in some cases).
However, if an asset is held in a fund with a longer term of 10-15 years, the private equity war stories don’t apply as much. Many buyout firms investing in healthcare around the world have gone from plundering working capital to adding value to the business.
CSL Chairman and KKR Advisor Brian McNamee is a firm believer in private equity and the role it can play in companies that benefit from time spent in private hands.
The highly respected McNamee, who spent 23 years at the helm of CSL, says KKRs are “high quality operators with interesting global experience in hospital management” who bring deep knowledge to the table.
“It’s not a buy burn flip,” he says FRG weekend. “Nothing could be further from the truth.
“I think they [KKR] try to find companies where they think there is a thesis for improvement. Time will tell if it’s executable, but that’s what they do. They are an important part of the capitalist system.
McNamee adds that in this capitalist system, there is no doubt that all companies must seek to improve their business model.
“All for-profit companies have an obligation to try to improve their productivity and efficiency,” he says.
Ramsay boss Craig McNally said Friday that as the company moves toward a more normal operating environment — after the challenges of COVID-19 — lost productivity is becoming a priority.
And KKR Australia’s approach, led by Scott Bookmyer, to Ramsay is a far cry from the cartoonish stereotype of private equity “barbarians at the door” that has prevailed over the past few decades.
The global investment firm had stalked Ramsay for two years – and spent 18 months in talks with the country’s largest private hospital operator – before revealing its offer of more than $20 billion.
As well as securing the backing of the Abu Dhabi Investment Authority as a consortium member, KKR Australia’s head of private equity, David Lang, also convinced HESTA, the main workers’ pension fund in the health, to support its offer.
He has also won backing from the Paul Ramsay Foundation, the company’s largest shareholder, while the Health Service Union is comforted by the backing of its industry super fund for the proposed cash offer of $88.
HESTA’s enthusiasm is palpable. The fund’s managing director, Debbie Blakey, said the offering had “the potential to positively impact the health and wellbeing of patients in Australia and overseas while helping to generate strong returns. for our members.
Blakey declined to give further details.
At first glance, this seems like an obvious contradiction: if Ramsay is to become more profitable, patients will surely be hurt by higher prices or cheaper, lower-quality care.
In the United States, where private equity is estimated to have invested US$200 billion ($280 billion) in the private hospital sector over the past decade, critics have railed against large increases and surges in patient bills, lower service levels and reduced quality of care.
But HESTA’s hope for better patient outcomes and greater long-term returns may not be so far-fetched.
proof of return
Analysts believe a key part of the KKR deal to unlock value is to turn the 54 properties on Ramsay’s books into a separate vehicle, with the operating business in another.
The properties have a low book value of $2.5 billion, but Macquarie estimated the portfolio could be worth up to $8.7 billion under the type of sale-leaseback arrangement Brookfield used when privatized rival Healthscope in 2019.
There is also evidence that KKR can generate operational returns without harming patient outcomes.
A paper published in February by three academics from Indiana University in the United States examined 1218 M&A transaction in the US hospital sector from 2001 to 2018, with a focus on private equity ownership.
He found that while total employment tended to decline in privately owned hospitals by 8-9%, the number of basic medical staff (doctors, nurses, and pharmacists) typically increased by 50%, with salaries also increasing. . Savings by private equity firms, both in terms of headcount and salaries, usually come from the administrative side of hospitals.
The study also looked at mortality rates, readmission rates and patient satisfaction scores to judge patient outcomes, and found no major differences from non-private hospitals. The authors said this was “consistent with our previous finding that these acquirers increase the proportion of core employees who are critical to the delivery of quality healthcare.”
“Our results suggest that PE-supported acquirers are associated with a higher core employee ratio, higher administrative efficiency, and no deterioration in patient outcomes,” the paper concludes.
The KKR Australia camp is keen to position its Ramsay tilt as a different type of private equity deal.
The capital committed by KKR and its consortium has a time horizon of 10 to 15 years and as such does not need to seek short-term profit increases.
KKR will not be determined whether it has provided commitments regarding staffing levels to HESTA or other stakeholders, but insiders point out that it does not view cost savings as a key element of the returns that ‘he expects to generate.
While a level of optimization is expected if KKR’s bid is successful, sources say the company has told Ramsay’s board that it remains committed to the ‘Ramsay Way’ at the heart of its model. cultural and operational.
The two drivers of the strategy
KKR’s strategy to improve operational efficiencies is based on two main drivers.
The first is to bring Ramsay back to the historic strong earnings growth it enjoyed before COVID-19, when underlying annual earnings growth was between 15% and 20%.
The second is to expand by investing in technology and new brownfield facilities – i.e. expanding Ramsay’s existing facilities – to be able to treat the growing number of Australians who will need care. as the population ages.
Any property sale and leaseback agreement would provide the icing on the cake.
But Mark Reiter, physician and CEO of the American Academy of Emergency Medicine Physician Group (AAEM PG), which provides practice management and consulting services to groups of independent emergency physicians, is not convinced of the ownership of the P.
In the United States, many physicians are not employed by hospitals. On the contrary, they have their practices within the hospital. But now secular corporations have been set up to do things like employing doctors, suppressing profits and selling to private equity.
“After secular corporations backed by private capital acquire medical practices, they often make changes that may be too damaging to doctors and patients,” Reiter said. FRG weekend.
Reiter notes that medical staffing levels are often reduced, which can lead to fatigue and compromise patient care. He says doctors’ pay often goes down and instead of recruiting the most qualified people, the focus may be on recruiting the cheapest doctors or increasing the proportion of patients seen by assistants. to the doctor or nurse practitioners.
“Profits are distributed to shareholders, rather than being reinvested in local practice,” he says.
In December, doctors sued Envision, saying the KKR-backed company shouldn’t handle California emergencies. The AAEM PG filed a lawsuit, alleging that Envision violated California laws on the practice of occupational medicine.
“The group of doctors no longer controls its medical decisions or its doctors’ fees — they are now controlled by Envision, a multibillion-dollar company,” Reiter says.
“Companies have a fiduciary duty to maximize profits for their shareholders. And that’s very different from the duty doctors feel to their patients, where patient care is the top priority.
McNamee, who chairs KKR-backed GenesisCare, says Ramsay must continue to have high-quality patient outcomes under any new ownership.
“I assure you that a transaction of this size cannot succeed saving your way to success,” he said.
“You have to look at the doctors and the support staff, who have to believe in the mission of the company and what they’re trying to accomplish, and none of those values change.”