While Moody’s concluded Duly’s outlook is still stable, the ratings agency said it expected Duly to continue to struggle with weak liquidity and elevated leverage over the next 12 to 18 months.
The primary drivers for the spike in financial leverage stem from a surge in operating expenses, like higher medical claims costs associated with value-based plans as more patients use services, a phenomenon that healthcare providers everywhere are experiencing, said Jaime Johnson, a vice president and senior healthcare analyst at Moody’s.
Duly’s high leverage is also related to recent expansions, including acquiring competitors and opening new medical offices.
“As they add new practices, there will sometimes be startup losses,” Johnson said.
“We anticipate that (Duly) will continue to burn cash,” she continued.
Crain's Data Center: See the financials that put Duly at the top of our Largest Physician Groups list.
Duly’s revenue grew 28% to $2.5 billion last year, according to data that the company previously provided to Crain’s, but as a privately held company, it does not have to publicly disclose full financial performance metrics. Even still, the Moody’s report shows Duly’s adjusted debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio was about 7.8x in the 12 months ended Sept. 30, a modest improvement from about 8.3x at the end of March 2023.
Both ratios, however, are up from pro forma leverage in the mid-5x range when Los Angeles-based private-equity firm Ares Management put a $1.45 billion investment into the company in 2017, a separate report shows.
As is common in many private-equity buyouts, Duly borrowed money to help finance the transaction. At the time of the 2017 deal, Moody’s gave Duly a B2 rating — its first-ever rating — but later downgraded it to B3 in July 2023.
In the most recent report, Moody’s downgraded Duly’s corporate family rating to Caa1, its probability of default rating to Caa1-PD and its senior secured first lien bank credit facilities to Caa1.
The downgrade yields insights into the precarious future of Chicago’s largest physicians group, which provides care and jobs to thousands of local residents. It also raises questions about the effectiveness of the financial strategy installed, in part, by Ares during a time when criticism of private equity’s influence on healthcare is escalating.
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In March, the U.S. Department of Justice and other federal agencies launched a probe to examine if private-equity interests are hurting healthcare workers, quality of care and affordability. Separately, a report published in April from the advocacy group Private Equity Stakeholder Project found that PE-owned businesses accounted for a high number of healthcare sector bankruptcies.
Turnaround mode
Moody’s downgrade comes amid a year of significant change for Duly. Last June, the company quietly replaced CEO Tami Reller with Dan Greenleaf, the organization’s third new CEO in the last four years. Soon after, several longtime executives left Duly, including its chief financial officer and chief operating officer.
By September, Crain’s reported Duly was showing signs of financial distress as it shed staff, cut compensation and reduced services. In November, the organization announced the appointment of three new executives, who at the time were said to help the company navigate “challenges.”
Ares declined to comment and Greenleaf declined an interview for this story, but Duly spokeswoman Maria McGowan confirmed that Duly, in more recent months, has closed locations and instituted a new patient billing policy, moves that suggest the organization is continuing to look for ways to optimize the business.
The group closed at least three facilities in the Chicago area, including an immediate care center in Oak Lawn, a medical office in suburban Blue Island, and an oncology and infusion office in Joliet, she said.
Duly also instituted an updated billing policy on Feb. 1, which requires patients to pay co-pays, co-insurance, deductibles and other out-of-pocket costs at the time of service. In the past, Duly had first billed patients’ insurance plans after appointments before seeking additional payments from patients.
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“With current insurance information on file for each patient, we are able to see accurate billing estimates and patient responsibility for each visit,” according to a Duly webpage about the billing policy. “We need your assistance and understanding of our financial policy to continue to provide the best health and care for you and your family.”
If patients are unable to pay outstanding balances, Duly will either reschedule the appointment or offer patients a payment plan.
The practice of billing at the time of service can sometimes result in patients overpaying for services, but the method has become more widely adopted by physicians groups and hospitals alike.
“While it's common, there's a lot of people that don't do it, or didn't do it, until probably when the pandemic hit,” said Munzoor Shaikh, vice president of healthcare at the Terry Group, a Chicago-based consultancy. “When the pandemic hit, a lot of folks were starting to struggle with something called revenue cycle management, which is getting paid on the services they have created.
“So, people started to tighten up a lot of those loose policies they had in terms of when (patients) pay,” Shaikh continued.
The new billing tactic could help improve Duly’s financial picture. Moody’s said it would upgrade Duly’s ratings if it improves operating performance and profitability and lowers its leverage ratio. Aside from the new payment policy, Duly has renegotiated contracts with payors to offset low reimbursement rates, Johnson said.
But more downgrades could be on the horizon if Duly’s financial policies become more “aggressive,” according to the Moody’s report, pointing to Duly pursuing a large debt-funded acquisition or giving a shareholder dividend, as it did in 2021.
In the 2021 deal, Duly paid a $209 million dividend to Ares investors, funded in part with borrowed money, a move that prompted criticism from Moody’s in a report at the time.
“(Duly) will be meaningfully reducing its cash balance to fund the dividend,” the report read. “Combined with higher gross financial leverage, this will leave (Duly) more weakly positioned to absorb any unexpected operating setback or incremental debt.”
This story first appeared in Crain's Chicago Business.
