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Many health care practice roll-ups look as if they could have trouble paying off the debt used to create them, according to rating analysts at KBRA.
A "roll-up" is a strategy that a private equity firm uses to create a big company by acquiring many small companies quickly. In recent years, some firms have used roll-ups to create big group medical practices and group dental practices.
Thirty-nine of the 111 health care practice roll-ups analyzed have received cash infusions from their owners, many have large debt payments due soon, and many have a large level of negative cash flow from operations, the KBRA analysts write in a new report.
"KBRA expects many of the over-levered roll-ups may be challenged without continued sponsor support," the analysts warn.
The analysts gave high performance grades to typical dental roll-ups but low grades to typical primary care roll-ups and ophthalmology roll-ups.
For the roll-ups, one challenge has been problems with getting more revenue out of Medicare and Medicaid.
Employer health plans and other commercial payers may pay more, but "adjustments can often take a year or more to take effect and may not keep pace with inflation," the analysts say.
Another challenge, the analysts say, is that investors do not seem enthusiastic about investing in health care practice roll-ups.
When health care roll-ups do fail, reviving them is difficult, partly because any changes that disrupt operations or cause physicians or other health care providers to leave can cause big problems, the analysts add.
Private equity firms: A private equity firm is a company that invests in businesses that do not sell securities to ordinary public investors.
Because the businesses are privately held, they do not have to file quarterly earnings reports with the U.S. Securities and Exchange Commission or let members of the public see the quarterly earnings reports.
Private equity firm advocates say private equity firms can act quickly, be patient investors and invest in opportunities that scare ordinary public investors.
Roll-ups: Private equity firms have used a roll-up strategy to create roll-ups in many different sectors, including software, aerospace, consumer retail and hotels.
Health care roll-ups: Steward Hospital, a private equity-backed hospital roll-up, drew attention to the possibility that a health care sector roll-up could fail in May 2024, by filing for bankruptcy court protection.
The KBRA analysts found 111 roll-ups involving medical and dentistry practices. The health care practices analyzed had about $45 billion in debt.
The health care practice roll-ups had an operating profit margin of just 12%, compared with an average of 18% for the non-health-care roll-ups.
The health care practice roll-ups' operating income was only about 10% higher than their debt payment obligations.
Outside of the health care practice sector, roll-ups had operating income that was about 50% higher than debt payment obligations.
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