Friday, May 7, 2010

PEU's Milk HCA Before Public Offering

The largest for-profit hospital chain in America will go public for the fourth time, according to SEC filings. Private equity underwriters purchased HCA in 2006. The list of owners includes Bain Capital Partners, LLC, Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity, Citigroup Inc., Bank of America Corporation and HCA founder Dr. Thomas F. Frist, Jr.

They're ready to sell a chunk of the company, $4.6 billion . Exactly what percent of the company they sell depends on the IPO pricing. Underwriters for the deal include:

Merrill Lynch

J.P Morgan


Credit Suisse

Deutsche Bank

Goldman Sachs

Morgan Stanley

Wells Fargo

This won't be investors first payday. SEC filings show HCA paid investors $1.75 billion and $500 million in 2010. Add the IPO and the combined milking is $6.85 billion.

The filing shows the impact of PEU's on health care. HCA's interest expense rose from $655 million in 2005 to $2.2 billion in 2007, an increase of over $1.5 billion. Add $1.2 billion in management fees over three years and health care costs go higher.

While America's legions of uninsureds continued to explode, HCA reduced its uninsured burden as a percent of revenue. It fell from 10% in 2008 to 8% in 2009. The S-1 states:

Approximately 81% of our admissions of uninsured patients occurred through our emergency rooms.

We are taking proactive measures to reduce our provision for doubtful accounts by, among other things: screening all patients, including the uninsured, through our emergency screening protocol, to determine the appropriate care setting in light of their condition, while reducing the potential for bad debt and increasing up-front collections from patients subject to co-pay and deductible requirements and uninsured patients.
For-profit hospitals steer away uninsured patients to the best of their ability. HCA's liability insurance division held similarly undesirable products, auction rate securities (student loan based). The S-1 speaks to them:

During 2009 and 2008, certain issuers and their broker/dealers redeemed or repurchased $172 million and $93 million, respectively, of our ARS at par value.
Selling at par value is usually a big financial hit, but the pain isn't over. HCA still holds $333 million of untradeable ARS.

The Frists, the first family of for-profit health care, can toast their fourth IPO. It could inspire Cerberus Capital, Blackstone, and The Carlyle Group to dream of spinning off their healthcare holdings, after bleeding them of dividends/distributions.

The health care register rings under For-Profiteering health reform. Nancy-Ann DeParle delivered.