February 07, 2017 - 2:08pm EST by
2017 2018
Price: 68.71 EPS 4.80 5.50
Shares Out. (in M): 117 P/E 14.3 12.3
Market Cap (in $M): 8,064 P/FCF 13 10
Net Debt (in $M): 5,600 EBIT 740 0
TEV ($): 13,644 TEV/EBIT 11 9
Borrow Cost: General Collateral

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  • Fraud
  • Insider selling





While we are still doing work on Envision Healthcare Corporation, we have more than enough information now to recommend a short position.  We believe the company faces many fundamental headwinds across its business units as well as credible claims of fraud from a large group of doctor “partners” within its Amsurg business unit.  We see 50%-80% downside in the stock over the next 12-24 months.  With a $13.6 billion enterprise value and relatively low short-interest, this is a fairly liquid and technically safe short opportunity. For background, the company owns and operates several healthcare services businesses, the main ones are: Amsurg (ambulatory surgery centers or ASCs), Sheridan (acute care physician management), AMR (ambulances/medical transport) and Emcare (Hospital Emergency Dept or ED). 


While we believe the company can generate decent FCF near term through an accretive acquisition strategy, longer term EVHC will struggle to deliver organic FCF growth and buckle under the weight of its debt.  The issues facing the company are: physician “partners” leaving, commercial reimbursement practices becoming less generous and hospitals increasingly cancelling or altering contracts due to aggressive business practices coming to light.  The current net leverage is fairly substantial at over 4x and we think this magnifies the downside potential on the stock.


Our thesis is based on numerous conversations with various customers and physician partners that point to deteriorating fundamentals with the core Amsurg and Emcare divisions. It appears both units are utilizing unsustainable business practices that investors are not aware of, especially as management continues obfuscating with bullish rhetoric related to the merger of Amsurg Holdings Incorporated and Envision Holdings Incorporated. Notably, the merger was a good deal for Amsurg shareholders who have suffered weak results and a failed bid to buy Team Health (Emcare’s biggest peer). But the final all stock deal was not good for Envision shareholders, as they received ~$25/share in value, which was 45% below where the stock traded less than one year before the deal was announced. This is odd timing as Envision’s former management claimed the opportunity set hadn’t changed for the old EVHC even after a sharp declines in the stock related to poorly explained revenue softness. Notably, the merger with Amsurg has minimal cost synergies and was heavily promoted by both companies as a revenue synergy story, with the ability to cross-sell each other’s services to hospitals without relying on acquisitions.  However, we believe these revenue synergies are not likely to materialize and the company will be forced to “buy EBITDA” to de-lever. Not surprisingly, since closing the Amsurg deal the company publicly admits the organic growth component may be “less prominent”, and that they are likely to begin “buying EBITDA” to de-lever.


At a high level, today’s Envision (EVHC) is a massive “roll-up of roll-ups” with minimal underlying organic growth, unsustainable business practices and increasingly unhappy physician “partners” that are attempting to circumvent non-compete agreements.  Though less relevant near term, we also believe the current downward pressure on hospital admission rates, more restrictive medicare/medicaid funding under President Trump and states implementing their own limits on aggressive ED billing practices could create more headwinds for the business in coming years.


Emcare: Ripping People Off One Medical Emergency at a Time

 Envision’s physician management services business (Emcare) generates 61% of pro-forma revenues and within that bucket, ED (emergency department) and hospitalist services generate 56% of revenues. So approximately 34% of Envision’s total revenues and a large % of operating profit are from this sub-segment of Emcare.

In general “hospitalists” (aka doctors that make rounds) are generally costs centers in most acute care settings (which is why they’re outsourced). While EDs are typically break-even at best, but serve an important role as feeders to create “in-patients” that get admitted to the hospital overnight and fill beds; which helps hospitals generate revenue.  However, Emcare is able to miraculously generate 11-13% EBITDA margins in the ED/hospitalist practices they run on behalf of hospital customers , on a stand-alone basis.  And more importantly they are able to generate these results within a year (or less) of taking over the ED payroll in a given hospital using the pre-existing physician and support staff (in most cases). At first glance it would seem they do indeed have a superior suite of physician management solutions and infrastructure that drives best practices and efficiency gains, as the company often touts at investor conferences and in pitches to hospitals CFOs. But in reality they are simply taking physicians in a given ED practice out of select commercial insurance coverage networks as soon as they acquire a physician management practice.  This artificially boosts the revenue Emcare can generate from those patients whose commercial health plans are now “out of network”.  After this happens Emcare will be reimbursed at commercial insurer “out of network” rates which can be 20-30% higher than “in-network” rates.  Critically, Emcare also now gets to send a “balance bill” to the patient for whatever the insurance company didn’t fully cover. This is typically anywhere from 25-75% of the gross charges on an already inflated “out of network” ED bill.  This allows them to further increase the revenue they extract from a given ED patient encounter and grow profits without seeing more patients or really putting in place meaningful changes in an ED’s operations.


 It is important to note that it doesn’t matter if the hospital accepts your insurance plan, if the doctor does not, you will be considered “out of network” and get billed for the full amount of the visit.  Sometimes the ED will submit the bill to your insurance company as a “courtesy” on your behalf and the insurance company will pay a percentage of the bill that it deems fair (perhaps 25-75% of the bill), but you will still get a “balance bill” for what the insurance company didn’t pay.  Emcare is using these tactics  with nationally recognized insurers such as the Blue Cross/Blue Shield system, Aetna, United Health, Cigna and Humana. 

In fact, this thesis is partially a result of this happening to me when I took my child to a local ED and received a massive bill that my carrier (United) partially covered. Less than 25% of the charges were paid by my insurance and when I appealed to the physician management practice to clear the balance, they refused and sent my bill to a collection agency (within 60 days). Of course this showed up on my credit report and has impacted my FICO.  Notably, this ED was in-network for my carrier 12 months prior when it was run by the same ED management company.    Unfortunately, most people are fearful of hurting their credit-report and so settle (out of pocket) with the physician management company quickly.  This allows Emcare to recoup a large % of an inflated ED bill from the commercial payer and then also “double-dip” by sending the patient a bill for the balance.  None of this would have been possible if the ED stayed in network. Another thing to bear in mind is that the average bill for ED services that are “out-of network” is significantly higher than it would be for identical services “in-network”, in the same hospital ED.    

This attempts to illustrate how much “excess return” Emcare is likely earning from this practice and what is potentially at risk:

There are several potential ways this can play out, but we believe longer-term that Emcare will not be able to earn above market economics on commercially insured patients. We assume their revenue per ED patient eventually looks more like the rest of the industry as they continue to take share through acquisitions and are forced to deal with patient blow-back, hospital push-back and potential loss of contracts. 

Team Health (TMH), which is Emcare’s largest competitor employs similar tactics.  However our conversation with current and former executives at TMH confirmed a general industry view that Emcare is the most aggressive user of the “in and out of network game” in the ED.   Several senior executives at competitors also seemed unhappy that Emcare was being so aggressive as it would bring more unwanted attention to these controversial practices.   TMH executives admitted that at any given time the company was trying to manage the mix/flow of commercially covered patients coming into the ED that are “in vs out” of network. As they believe it’s an effective “revenue management tool” and improves leverage against commercial payers when negotiating rates. One executive believes that TMH tries to ensure “15-20% of commercially covered patients in the ED on any given day are out of network”.   This is done in a variety of ways, but most commonly they claim an ED or a particular doctor is in negotiations with a given commercial payer, and until that’s resolved the ED will bill patients for “out of network” services. 

Notably, there is no legal requirement to notify a patient if their insurance is accepted before they are seen by a hospital ED. In fact the law prohibits EDs from making care contingent on coverage – but the patient should submit their insurance cards and ask if the ED is accepting the carrier first.  In some cases patients check hospital websites before going to the ED, however the hospital websites generally don’t reflect ED coverage if Emcare or another player is running the ED.   So most often patients aren’t aware that they visited an ED that didn’t accept their insurance until the bill comes weeks later. In many cases, hospital administrators themselves aren’t aware that certain commercial payers are no longer accepted by their ED, as it is truly an arm’s length contract with Emcare.  And many hospital administrators happily look the other way if someone else is making life hard for commercial payers, at least for a little while.  But eventually administrators begin to respond as complaints pile-up and hospitals worry about patient ratings and scores, which can have major implications for federal funding and reimbursements.  In our view, this practice is not sustainable as hospitals are getting increasingly more “blow back” from patient advocacy groups, insurance companies, and ED physicians that are worried about reputational risks. While this may be an effective “revenue management tool” for the physician management industry, it seems somewhat deceptive as most ER patients do not have the capacity or ability to check if a doctor or ED is accepting their insurance when they’re having a medical emergency. This practice also unnecessarily increases the financial burden to patients as balance billing grows and insurers pass along higher ED costs through premium increases.

 We aren’t alone in our belief that these practices are unsustainable; the new CEO of Envision agrees with us though differs on the potential financial impact to the business.  Here are his comments from a recent conference regarding commercial payers and coverage:

Q: I'm going to ask one more maybe and you might hit me for asking this, but since I've spent the last year talkinga bout it with people, just one question on balance billing. So, you gave this long-term outlook, believing that the combined company can be a mid-teen EBITDA growth story. That's either without absorbing much of a headwind because you don't see one or really fantastic growth in absorbing a headwind and there certainly are investors that fear that some of the incremental balance billing legislation means out of network, goes away or collapses back to in-network rates and in-network pricing power gets hurt. Why do you not see it as a material headwind?

A: For a couple of reasons, one is it's – and I think, most importantly, I think, philosophically, we think that the right answer is to move in-network over time and this is really an issue just about theEmCare services, not with – AMSURG isn't, not a network, AMR isn't, Sheridan isn't. So, it's just that one isolated book of business. And before that conversation with the payers was, sort of, a commodity conversation. Now, we're differentiated. We have more elements, more opportunities to work collaboratively with the payer because I could – this is easily argued that the freestanding ASCs are grossly underpaid. Hospital service needs total remediation to get that corrected and balance and out of network and ED needs to be corrected.That needs to be one conversation. We need to fix it that way. And that's the way we're handling it at the highest level swith the payers. And ultimately, we all want the same thing. We want predictability on the relationship. We want predictability on rates and inflation control and those types of things, and they are onboard with that. But before, it was a very isolated market-by-market, center-by-center conversation. It's moved to a whole another level. And I think there's enough pieces there that worst case, it's neutral. Best case, it's a pickup. So, that's [how]  I view it.




The CEO suggests headwinds to Emcare’s EBITDA (as they shift to more in-network coverage) will be offset with growth in Sheridan and core Amsurg – and could even boost profits.  But this doesn’t check out if you ask many large hospital systems about the rationale. Simply put, Emcare believes hospitals will want to single-source all their physician management needs and so combining Sheridan and Emcare will allow for an easy and powerful cross-selling opportunity across a hospital and give them more leverage with commercial insurers.


However, our conversations with executives at Emcare’s largest for profit hospital partners (HCA and UHS) suggest otherwise.   To massively over-simplify, these hospital operators believe it’s NOT prudent to concentrate so many core physician management services with one vendor across more than one or two departments. Their common refrain was “it just doesn’t make sense to put all your eggs in one basket” from a medical and business stand-point. These companies highlighted another big issue: that one of the biggest threats to hospital industry profitability today is the rapid growth of ASCs (ambulatory surgery centers).   The CFO of a large non-profit hospital operator noted that ASCs have lower operating costs and are negatively impacting admission rates at hospitals across the country. This leads to siphoning off important revenue on high margin acute-care specialties to ASCs and makes it even more difficult for hospitals to maintain slim profit margins.   Several of these executives asked why would they give more business to Envision when they own Amsurg, one of the hospital industry’s largest and most aggressive competitors.   Another executive suggested they may move away from Emcare as they don’t want to financially support a company that owns a business that is the biggest threat to the hospital industry, away from ACA repeal.

In the comment above, the Envision CEO is also suggesting they could go to 100% in-network at EDs if they could convince payers to increase reimbursement to ASCs, in markets where they run both types of businesses (so where Amsurg and Emcare both operate).  In theory, the insurer may prefer this as ASCs are lower cost settings than hospitals, though we believe this could lead to bigger problems. The CEO is basically saying:  if insurers help boost unit economics on the Amsurg side via higher reimbursement rates then they should be able to better manage the payment pressures they are seeing on the Emcare side as they go to 100% in-network.  But this would put enormous downward compensation pressure on Emcare ED doctors, most of whom are already paid below the industry average. We wonder what Emcare’s current base of ER physicians would think of this, as the unit is already experiencing record high attrition rates due to poor work conditions/pay, excessive over-time, and a general loss of morale due to Emcare’s  quota system. The NY Times wrote about this last point (https://www.nytimes.com/2014/01/24/business/hospital-chain-said-to-scheme-to-inflate-bills.html) and we believe there will be more coverage forthcoming with several new stories.

We also understand hospital administrators would NOT be thrilled to see more dollars flow to ASCs, as that would clearly incentivize more of their in-house physician specialists to join ASCs and compete with the hospital directly for the same patients.  This would further exacerbate the secular issues hospitals are facing from ASCs and strain Emcare’s ability to keep its current customers.  This speaks to the broader issue of the questionable wisdom behind the Amsurg/Envision merger.

Amsurg:  Potential Fraud, Financial Damages and High Risk of Physicians Leaving

We recently spoke with lawyers that worked on an arbitration ruling that Amsurg lost related to hiding certain financial accounts of a faltering ophthalmology practice. The practice is based in Metaire, Louisiana and is controlled by Dr. Jeffrey Singer who sued Amsurg to reveal how much money was being improperly kept by Amsurg from group purchasing rebates that should have been passed through to the practice per the terms of the partnership agreements.   It’s worth noting that a significant amount of Ophthalmology ASC profits are driven by consumables and medicines given to patients and to which the practice is entitled to volume rebates; this can be a large driver of the ASC’s profits.  It was noticed by Dr.Singer and his partners that the practice co-owned with Amsurg was not in good financial condition while several others they owned in the region were very profitable with lower patient volumes – the only difference was Amsurg.   Upon further investigation they discovered a lack of sufficient rebates to their Amsurg ASC for volume rebates from companies like Alcon that make medical eye-care products. They requested information from Amsurg about this issue, but they were repeatedly denied access to documents and any information.


 After several requests went unfulfilled from Amsurg, Dr. Singer declared his partnership agreement null  and void, which invalidated his non-compete with Amsurg.  The company disputed this and it went to binding arbitration; the arbiter decided Amsurg didn’t perform under a partnership clause related to timely and clear disclosure of financial information to “partners” and allowed Dr. Singer and other partners to be exempt from their non-compete agreements.  They have all left and are starting new practices.   This is a very recent ruling, with the final decision being rendered on November 7, 2016.


Notably, the arbitration process did not have a formal discovery process compelling Amsurg to produce documentation and expose other potentially compromising information about their business practices.  However, the civil fraud charges that Dr.Singer and his partners are filing in federal court within weeks should have a formal discovery process that would compel disclosure by Amsurg.  Clearly this would create a strong incentive for Amsurg to settle but doesn’t rule out the possibility of potential criminal fraud charges if it turns out there was willful attempt to keep money that didn’t belong to Amsurg and conceal the act.  Also, there may be a risk that old Envision shareholders sue Amsurg for securities-fraud if they knowingly inflated their profitability in order to look more profitable and boost the stock price, which was used as currency for the Envision/Amsurg merger.


 Furthermore, Amsurg claimed their inability to provide the documentation requested by Dr.Singer was due to a co-mingling of purchasing rebates as they were being held in a “concentration account” with a single taxpayer identification number. If true this suggests that rebates to all of Amsurg’s ophthalmology practices may be held in violation of partnership agreements and that this issue is more widespread. Furthermore, are they doing the same thing on the gastroenterology side of the ASC business too?  The lawyers we spoke to said their agreement with Amsurg was a standard agreement that Amsurg uses for nearly all of their ophthalmology ASC practices.  If this is correct than this problem is not going away and will likely get worse. More importantly, this creates a potential pathway for Amsurg’s other ASCs to potentially walk away from their partnerships without being subject to a non-compete agreements.  It is unlikely that Amsurg will provide this financial information as it may implicate them in a type of behavior that could lead to more lawsuits and termination of non-compete agreements.   Amsurg may be in a tough spot.


 Some people have asked why would Amsurg’s doctor “partners” want to walk away from Amsurg’s ASC practices if they are gainfully employed by Amsurg as a doctor? The short answer is greed.  Even for profitable ASC practices, once a group of doctors monetizes an ASC they have spent years building (by selling a controlling stake to Amsurg), they are looking to do it again as soon as possible (over and over).  This is basically how doctors maximize their earnings over their career.  So the non-compete becomes very important to Amsurg because it helps them earn a sufficient financial return on the ASC they just bought. Otherwise doctors could sell a practice to Amsurg and then immediately open a new one with the same patients that had been going to the practice they just sold.  Obviously there’s a natural limit to this behavior, but if the experience of Dr. Singer and his colleagues are not unique than there are probably dozens of other Amsurg practices with these attrition risks.   We continue to do work on this issue, but here is a link to the final arbitration order: http://amsurgphysicianlawsuit.com/.


We attempt to quantify the impact of this potential issue below assuming their Ophthalmology practice falls apart:




Between all the issues we have identified at Amsurg and Emcare we believe there is potentially $460mm of EBITDA at risk of going away over the next 12-24months but are only assuming 50% of that for our base case.  Pls see valuation table below for EVHC equity.



Further reading:


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



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