- Envision Healthcare is getting slaughtered. That means activist hedge funds Corvex Capital and Starboard Value are feeling the burn too.
- They were warned, though. Envision has caught ire from Washington and the media for its billing practices.
Envision Healthcare fell as much as 35% in Wednesday’s trading day after missing analyst earnings per share estimates ($US0.73 vs. consensus of $US1.88) and cutting guidance for Q4.
Now maybe you’ve never heard of this healthcare company, which operates ambulatory and billing services, but it’s caught the attention of both Wall Street and Washington.
Two of Wall Street’s biggest activist names are getting walloped as the stock plumets. Both Keith Meister’s Corvex Capital and Starboard Value, founded by Jeff Smith, have stakes in the fund and have been agitating for change at the company. Starboard especially believes that if it improves its margins, it could be a nice takeover target.
That’s all very good, but Washington sees something totally different when it looks at this stock. This summer the New York Times highlighted a Yale study that showed EmCare, the billing division of Envision, was pushing patients to out-of-network services and overbilling them.
Here’s a slice from the NYT piece:
The researchers focused on 16 hospitals that EmCare entered between 2011 and 2015. In eight of those hospitals, out-of-network billing rose quickly and precipitously. (In the others, the out-of-network rate was already above 97 per cent, and it did not go down.) They also looked at a larger sample of 194 hospitals where EmCare worked and found an average out-of-network billing rate of 62 per cent, far higher than the national average.
Senator Claire McCaskill (D-MO) then started making noise about the company on Capitol Hill, and launched an investigation into the company.
Now there are some on Wall Street who saw this coming. That’s because McCaskill isn’t the only one sick of Envision. So are all the insurers, medical professionals, and hospitals that work with the company and have seen costs go up.
Here’s how a short analyst report posted on Value Investors Club put it back in February [emphasis ours]:
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.
Cat’s out of the bag.