Saturday, May 21, 2011

GTCR's Rauner Speaks with Spooned Tongue

The Dartmouth reported:

Bruce Rauner ’78, co-founder of the private equity firm GTCR, emphasized the importance of stability and predictability to a recovery. The current U.S. government’s policies are “anti-business” and “unpredictable,” and have prevented the market from regaining stability. 
Granted, one area of unpredictability is taxes, which private equity underwriters (PEU's) hate to pay. Otherwise, these are odd statements from a man investing in government guaranteed sweet spots of the U.S. economy. GTCR just closed Fund X, a $3.25 billion fund.  Fund X targets include health care.

GTCR and The Carlyle Group are shopping for medical insurers given government passed health reform.  GTCR owns ten health care affiliates.  Three are pharmacy companies, one focuses on medical devices and one is a hospice provider.  GTCR also has:

APS Healthcare, Inc. is a leading specialty healthcare services company that provides a full range of outsourced healthcare service solutions to government entities, health plans and employers.
 Uncle Sam is a huge payor for health care via TriCare, Medicare and Medicaid.

ATI Holdings, LLC (“ATI”) is a leading provider of physical therapy and operator of outpatient rehabilitation clinics.
 GTCR has a for-profit health care division, Capella Healthcare.  Capella targets struggling nonprofit community hospitals:

Capella Healthcare, Inc. (“Capella”) is an operator of community hospitals in growing, mid-size communities across the U.S. Capella’s hospitals are operated in tandem with local healthcare leaders, hospital boards, physicians and employees. Capella targets hospitals that are struggling to meet the growing demands of governmental regulation, complicated reimbursement requirements and the constant and capital-intensive upgrading of equipment and facilities. Capella infuses capital to expand services quickly and provides the highly specialized expertise to recruit physicians, maximize cash flow, improve quality and control costs.
It also changes them from 501(c)3 to for-profit hospitals.  Capella takes a management fee, 1.8% of revenues.  That's frequently higher than a safety net hospital's profit margin.   Capella recently approached Whidbey General Hospital in Washington state.  Their chief selling point:, besides dapper suits, was:

The company could make capital improvements to the hospital campus, save the hospital millions of dollars because of the company’s purchasing power with vendors and suppliers, and expand services while maintaining staff and seniority levels. He also noted that, as a for-profit venture, the hospital would start paying taxes, which he said would provide millions of dollars for local jurisdictions.
Let's examine these one at a time.  Capital improvements were already in the works at Whidbey General.  How much capital did Capella promise to invest?  The public hospital had a vote scheduled on a bond issue.

The presentation came about a week before mail-in voting wraps up May 17 for a $50 million bond that would fund construction of a new wing at the 41-year-old hospital’s Coupeville campus. 
How would interest rates compare between Capella's capital financing and the public bond?  Whidbey has access to tax exempt bond financing, which Capella lacks.

The timing of the presentation raises questions if Capella's aim was to submarine the bond vote.
“People are upset and confused about what to do about the bond,” said one community member
Capella was happy to introduce instability for competitive advantage.  What about their purchasing power claim?  The company has 13 hospitals, ranging from 60 to 275 beds.  Average bed size is 135.  Total beds are 1,757.  Any state hospital association purchasing program has more beds, thus greater negotiating power than Capella.  Two Capella states, Arkansas and Oklahoma, partner with Amerinet on group purchasing.  If size matters in getting good pricing, Amerinet spanks Capella.

Who thought a PEU affiliate would claim the advantages of paying taxes?  How many millions would need to come out of operations to pay for Capella's management fee and new local taxes?  How many jobs would be eliminated and benefits cut to position the Whidbey's of the world for resale? 

Obama's health care reform brings uncertainty, bringing back memories of the mid 90's when CEO's panicked over the specter of managed care.  History repeats itself and PEU's stand ready to profit from uncertainty, while decrying it.  Bruce Rauner is a PEU fractal.  It's shape is a silver spoon.. 

Note:  White House Chief of Staff Rahm Emanuel rescued PPACA from a certain death.  The Golder side of GTCR mentored Rahm in investment banking.  Surely, they discussed the investment sweet spots in health reform, especially given Emanuel's return to Chicago as Mayor.  The government sets up winners, in this case for-profit hospitals.  Safety net hospitals have three more years to struggle without significant help.