Saturday, February 23, 2013

Health Deform: Prediction Upddate

Nearly four years ago I made five predictions for healthcare deform:  I offered the following in May 2009:

1. Undocumented residents being left out of any plans. This leaves 9 to 12 million uninsureds for the safety net to address in perpetuity.

2. Any public plan being privately administered. From our hallowed halls of government to corporate executive suites, general contracting is their forte. The question is how many layers of "profit maximizing" private sector corporations sit between the public plan and the insured?

3. Taxing employer health insurance benefits as a revenue source. This is a ruse. When coverage becomes taxable for the business and deductible for the individual, corporations will shed that pesky health insurance benefit like a used condom. The benefit savings will fuel another engorgement of CEO incentive pay.

4. Taxing nonprofit community hospitals, i.e. safety net providers. This is another revenue source idea floated by Senator Chuck Grassley and Gail Wilensky. They suggested with all Americans having coverage, this tax break would no longer be needed. Yet, huge holes will remain in the safety net from the lengthy phase in and undocumented residents. Taxing safety net providers would implode those already in financial distress. The for-profit health care sector, which grandly supports Max Baucus and the aforementioned tax proponents, could ride in and pick up distressed assets on the cheap. It's the same game plan private equity underwriters (PEU's) have for buying bad banks. Will Uncle Sam finance HCA's purchase of your nonprofit community hospital, like it does for The Carlyle Group's buying of BankUnited?

5. What won't get taxed are 527 nonprofit political organizations. Ex-Columbia/HCA CEO Rick Scott can use tax free money for ads distorting health care reform efforts. Conservatives for Patients' Rights and Swift Boat Veterans for Truth may soon have greater tax benefits than a safety net provider.

Of the above, numbers 1,2,3 and 5 came true.  There is movement on #4.  As for private equity firms buying distressed hospitals at fire sale prices, consider this Illinois experience.

Heartland was a wholly owned subsidiary of iHealthcare, and in October 2005, iHealthcare decided to sell its shares in Heartland to a third party, Wright Capital Partners, for approximately $25 million. (Id. at 13.) The sale was accomplished through what is called a "leveraged buy out." (Id.) That's a type of transaction in which a buyer borrows the funds needed to purchase an acquisition and then sells or pledges that company's assets to service the debt -- essentially, the acquired company pays its own sale price. In this case, in order to secure the necessary funds, Heartland sold its interest in a group of physician practices for $18 million, and then it leased those assets back. (Id. at 14.) This sort of arrangement, in which a company sells an asset for an up front cash payment but then leases it back to use over the long term, is called a "leaseback" or "sale-and-leaseback" transaction.

The Complaint alleges that a significant portion of the proceeds from the transaction ($7.3 million) was distributed to iHealthcare and its shareholders instead of being used to pay down Heartland's debt. (Id. at 15.) Therefore, Heartland contends that the practical effect of the deal was to "monetize" Heartland's assets and extract the resulting funds, all at a time when Heartland was insolvent or nearly so. (Id. at 20.) Heartland asserts that under the state law that it says should apply here, when a subsidiary approaches insolvency, its owner has an additional duty to protect the creditors in the financially-troubled entity. (DE 17 at 12-13.)
Many Heartland hospitals are distressed.  Will the solution make things better or worse?  My bet is private capital boys win, the public loses.

Red and Blue love PEU (private equity underwriters).