Monday, August 17, 2009

Altegrity-USIS History Symbolizes Government-Industrial Monstrosity

America's Government-Industrial Monstrosity (GIM) is Eisenhower's Military-Industrial Complex (MIC) on steroids. It now includes health care, education, and homeland security.

Uncle Sam is the contractor, footing the bills. It no longer conducts "make or buy" analysis. GIM buys from the private sector. It facilitates this by spinning off public sector functions/assets. Consider the case of USIS, a security firm recently rebranded as Altegrity.

1995-President Bill Clinton spins off the security investigation arm of the Office of Personnel Management. It is an employee stock owned firm. Government Executive reported "When USIS was formed, lawmakers were concerned about the job risk for employees leaving the protected confines of the federal government for the business world." It granted the company an exclusive contract in 1996 to perform background investigations and related work.

1999-The Carlyle Group invests in USIS as a minority shareholder.

2001-OPM conducted a new competition for its investigations work, and USIS won the contract again.

2003-Welsh, Carson, Anderson & Stowe (WCAS) paid $545 million for the firm. Employees got $500 million, while the Carlyle Group netted $45 million. Carlyle reinvested $172 million, along with USIS senior managers.

2007-Providence Equity Partners purchased USIS for $1.5 billion at the height of the buyout boom. WCAS, the Carlyle Group, and other investors made nearly a $1 billion profit.

What does this series of buyouts have to do with health care? Two for-profit hospitals changed hands during this period. HCA was bought out by KKR, a private equity underwriter (PEU) like Carlyle & WCAS. Community Health Systems acquired Triad Hospitals. SEC filings show a $2 billion increase in annual interest expense between the two firms. Costs rose by the billions without the addition of a hospital bed, doctors or high tech equipment.

Two of the firms above, The Carlyle Group and Welsh, Carson, Anderson & Stowe have huge health care portfolios. They just struck a deal. Carlyle's MultiPlan will acquire WCAS's Viant. Both firms offer health networks and cost management services to health plans. Will MultiPlan-Viant benefit from the White House/Senate's decision to drop a government run "public" insurance option? The government has ways of setting up sweet franchises for its friends and sponsors. GIM control-alt-deleted integrity.

Update: Altegrity is buying Kroll, the corporate security and investigations firm.

Update 1-31-14:   S&P said it believes Altegrity's capital structure is "unsustainable" and that it expects a selective default or a Chapter 11 bankruptcy filing.

Update 2-3-15:  Altegrity will declare Chapter 11 bankruptcy to wipe out $700 million in debt.