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Summary

  • Conversion of non-paying uninsured to insured patients could add over 30% to earnings this year alone.
  • $1.9 billion in debt to private equity is still a concern.
  • Price remains elevated even with added earnings.

Envision Healthcare Holdings (NYSE:EVHC) is set to make a secondary offering of stock today, and I wanted to check if the ensuing price-drop would make an attractive entry point.

The prospectus states:

"We are a leading provider of physician-led, outsourced medical services in the United States with more than 20,000 affiliated clinicians. We offer a broad range of clinically-based and coordinated care solutions across the patient continuum, by which we mean the patient treatment cycle, from medical transportation to hospital encounters to comprehensive care alternatives in various settings. We believe that our capabilities offer a powerful value proposition to healthcare facilities, communities and payors by helping to improve the quality of care and lower overall healthcare costs. We market our services on a stand-alone, multi-service and integrated basis, primarily under our EmCare and AMR brands. EmCare, with nearly 8,000 affiliated physicians and other clinicians, is a leading provider of integrated facility-based physician services, including emergency, anesthesiology, hospitalist/inpatient care, radiology, teleradiology and surgery. EmCare also offers physician-led care management solutions outside the hospital. AMR, with more than 12,000 paramedics and emergency medical technicians, is a leading provider and manager of community-based medical transportation services, including emergency (''911''), non-emergency, managed transportation, fixed-wing air ambulance and disaster response."

The company was private under equity group Clayton, Dubilier & Rice - who will still own nearly 50% after the offering - until August of last year. The stock is up nearly 40% since that IPO. While the IPO primarily paid down debt, Envision still has considerable debt related to CDR, and a total long-term debt of nearly $1.9 billion against a market cap of $6.3 billion. The new offering is primarily shares held by CDR and company executives and will not materially change Envision's balance sheet.

My first thought in looking at this company was how much affect the Affordable Care Act could have. As a provider of emergency transport and care, Envision in many cases is legally required to provide service regardless of the patient's ability to pay. To get an idea of the impact, non-insured patients account for 17% of service volume but only 3.4% of net revenue. Across non-payment from patients and insurers, Envision has a non-payment provision of 45% of claimed revenue. I guessed that a reduction in the number of uninsured might result in significantly higher profits for Envision and will look at that possibility here.

In Q1 2014, Envision had net revenues of $1,014 million of which about 83%, or $841.6 million, was billed on a per-patient-encounter basis. The remainder was billed direct to hospitals for services. Envision indicates 14.75 million weighted patient encounters per year. With those numbers and the percentage of volume and revenue for different payers - Medicare, private-insurance and self-pay - we can estimate the impact of patients moving from self-pay to insured. But first we need an estimate of the change in numbers of uninsured. Both Gallup and the Urban Institute have surveys for uninsured for June 2014. The Urban Institute shows a drop from 17.4% of adults in Q4 2013 to 13.9% in June 2014 (see here). The Gallup poll shows a drop from 17.1% to 13.4%, so essentially the same numbers from two reputable polls. In both, the number of uninsured has dropped by about 20%.

(in millions except per encounter numbers)

Self-Pay

Medicare

Weighted Patient Encounters

0.627

0.962

Net Revenue

28.6

181.8

Revenue per encounter (in $)

46

189

(millions except per encounter numbers)

Newly Insured Percentage

20.0%

Change to Insured Encounters (in millions)

0.125

Added revenue per insured encounter ($)

143

Added net revenue (in millions)

18

(in millions except per share numbers)

Added net revenue

18

Added expenses

0

Added tax

7

Added earnings from ACA

11

Added EPS

0.057

New P/E

44

The above shows that net revenue rates from Medicare patients is more than four times self-pay patients (and private insurance pays even more). Given that the ACA surveys suggest 20% of the uninsured are now insured moves 125k patient encounters from self-pay to insured. Conservatively placing all of those newly insured patients review into the Medicare bucket results in an additional $18 million review per quarter. While that's a very small change in revenue, the key is that it is also all added earnings. These are services that were going to be provided, but with more patients insured, more of the services will be paid for instead of being involuntarily "pro bono". Envision's pre-tax earnings were $38 million in Q1 2014, so an extra $18 million is very significant. Accounting for Envision's net 40% tax rate, it adds $0.057 earnings per share every quarter, or about $0.197 per share.

However, Envision is pretty expensive. Trailing P/E is around 169. P/E based on just Q1 (which was better than previous) is still 63. If we add in the extra earnings and project forward for one year, then forward P/E will still be 44 - not crazy, but still expensive.

The prospectus also gives us an estimate for Q2 earnings we can use to cross check my figures. Envision filed a projected adjusted EBITDA of $129-133 million. After ITDA and a $50 million bonus to CDR for early debt extinguishment, leaves $7-9 million. If we put back the $50 million one time payment, we get $63.5 million before tax. Taking out tax leaves $38 million or $0.20 per share - right about the post-ACA estimate.

Some of the Q2 improvements come from growth and contract improvement. And some of the ACA affect should take a little longer to kick in. Additionally, the ACA should create an even better ratio of insured to self-pay patients in future years. However, the cost reduction measures may take a bite from operating margin. Still, I suspect ACA will be good for Envision's revenue and earnings. My concern is that PE 44 is a lot to pay for that much leverage and the uncertainties of medical pricing.

Source: Envision Healthcare Holdings: Big Profit From ACA, But Still Expensive