Monday, June 20, 2011

HCA's PEU Health Care Costs

KKR and Bain Capital took HCA private in 2006, the deal financed mostly by debt.  This added over $1.5 billion in additional interest expense per year.  Add management fees of roughly $120 million per quarter and the private equity burden grew to $2 billion per year.  Over five years this totals $10 billion.

Private equity underwriters (PEU's) milked HCA via special dividends, $4.25 billion worth prior to their independent public offering in March 2011.   Debt financed much of a $2 billion dividend payout, adding future costs to the health care system.

The dividend, HCA's third this year, will go to private-equity investors, including KKR  and Bain Capital,  It will be financed through the sale of $1.5 billion in junk debt maturing in 2021 and the use of HCA credit lines. 

That makes $15 billion dollars in higher health care costs from KKR and Bain's ownership of HCA.

How is the public exposed to PEU associated costs and dividend bleeding?  Medicare and Medicaid comprise 62% of HCA's admissions and 55% of revenue.  Medicare cost reports have over 650 categories of interest expense and categories for capital interest expense allocation.

Two states, Texas and Florida, comprise over half of HCA's admissions and revenue.  Texas is the wild west for health care, with the highest number and rate of uninsureds in the country.  Nearly one in four Texans have no health insurance.

Medicaid helps with the burden of the uninsured by providing federal matching funds through the Upper Payment Limit (UPL) program.  HCA gets nearly $700 million a year in UPL funds according to SEC filings.

Texas and Florida are responsible for 62% of HCA's uninsured admissions.  Imagine if those could be turned into paying HCA patients.  That's why Chip Kahn, head of the for-profit hospital lobby, the Federation of American Hospitals, joined with Bill Clinton in an all out push for PPACA.

SEC filings produced two other tidbits on HCA.  The company pushed back nearly $3 billion in debt from three offerings.  They pushed a $600 million debt back four years, $540 million six years and $1.84 billion five years.

HCA is also under investigation by the IRS:

At March 31, 2011, we were contesting, before the Internal Revenue Service (“IRS”) Appeals Division, certain claimed deficiencies and adjustments proposed by the IRS Examination Division in connection with its audit of HCA Inc.’s 2005 and 2006 federal income tax returns. The disputed items include the timing of recognition of certain patient service revenues, the deductibility of certain debt retirement costs and our method for calculating the tax allowance for doubtful accounts. In addition, eight taxable periods of HCA Inc. and its predecessors ended in 1997 through 2004, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, were pending before the IRS Examination Division as of March 31, 2011. The IRS Examination Division began an audit of HCA Inc.’s 2007, 2008 and 2009 federal income tax returns in 2010.

Our liability for unrecognized tax benefits was $402 million, including accrued interest of $92 million, as of March 31, 2011 ($413 million and $115 million, respectively, as of December 31, 2010).

Depending on the resolution of the IRS disputes, the completion of examinations by federal, state or international taxing authorities, or the expiration of statutes of limitation for specific taxing jurisdictions, we believe it is reasonably possible our liability for unrecognized tax benefits may significantly increase or decline within the next 12 months. However, we are currently unable to estimate the range of any possible change.

For-profiteers have a history of pushing the envelope on reimbursement.  I expect that to ramp up with Medicare's extrinsic motivation schemes.  HCAHPS and Accountable Care Organizations will generate creative behavior in reward obtainment.  While many will do so honestly, a significant number will lie, cheat or steal to garner the prize.   Nearly thirty percent of corporate executives backdated stock options over a decade long period.    Surely doctors, nurses and hospital administrators are as smart as their public traded counterparts.  In the case of HCA, corporate executives are doctors and administrators.

Greed, the ceaseless drive for ever expanding profits, and extrinsic motivation systems will interact in disturbing ways.  Obama's Commerce nominee John Bryson oversaw fraud as SCE's CEO, requiring a $148 million settlement.  The widespread P4P push leads me to believe fines are an expected new revenue source for the government. 

The government needs to find revenue given PEU's don't like paying taxes.  HCA owner, KKR had this to say in their 10-k:

The U.S. Congress has considered legislation that would have in some cases after a ten-year period, precluded us from qualifying as a partnership or required us to hold carried interest through taxable subsidiary corporations.

Congress was willing to let private equity skate on a ten year phase in on carried interest.  2020 is about the time America is supposed to have legal citizens covered by health insurance.  How many nonprofit community hospitals will be forced into tax paying entities, i.e. for-profiteers?  How many PEU health care companies will be flipped and how many times between now and 2020?  Rest assured, 30% annual returns won't bring health care costs down.  It will produce billions in dividend bleeding and management fees.

PEU's aren't the answer.  Neither is deforming pay for performance, the win/lose kind.  Greed addicts dangling punishment by rewards will combing in disturbing ways.  We must be in some sort of sleep walk...

Update 6-21-11:  HCA announced it would buyout the nonprofit ownership in Colorado's HealthOne for $1.45 billion.

Update 11-29-21:   Bain Capital ended up raking in a stunning $1.2 billion off an initial equity investment of $64 million in HCA.  

Update 3-23-23:   HCA charges new nurses huge training fees if they leave before their contract commitment.  Some call it indentured servitude.