Private equity funds that invest in healthcare companies hoped to piggyback on venture capital's bid to get a share of COVID-19 small business bailout funds, but the Trump administration has snubbed them so far.
Congress set aside $350 billion for small business assistance in the Coronavirus Aid, Relief, and Economic Security Act. Qualifying companies must have 500 employees or fewer. Under a set of standards called "affiliation rules," the administration determined that most private equity-owned companies, including healthcare practices hard hit by cancellations of elective procedures, won't qualify.
The original rules left out both venture capital-backed startups and private equity-owned businesses. But venture capital had an odd couple of heavyweight allies on their side from California: House Speaker Nancy Pelosi, the most powerful Democrat in the country, and conservative Republican House Minority Leader Kevin McCarthy.
Pelosi and Rep. Ro Khanna (D-Calif.) penned a letter dated March 31 to Treasury Secretary Steve Mnuchin, her negotiating partner from the Trump administration through rounds of COVID-19 relief legislation, and Jovita Carranza, administrator of the Small Business Administration, asking them to relax the affiliation rules for startup businesses with equity investors.
The letter caught the attention of private equity firms that invest in healthcare companies. The Healthcare Private Equity Association, which has 80 member funds, posted the Pelosi-Khanna letter on the homepage of its website.
Ira Coleman, McDermott Will & Emery chairman and HCPEA general counsel, said making a distinction between companies backed by funds from venture capital and private equity is "splitting hairs."
"It's silly to say there is a big difference if you are partnered with a venture fund or if a health system wants to partner with a private equity fund," Coleman said.
He also said Pelosi may have asked to waive rules for venture capital investors instead of private equity funds because her husband owns a real estate and venture capital investment and consulting firm.
Pelosi spokesman Henry Connelly said Pelosi urged the changes on behalf of the 1,300 startups in San Francisco with fewer than 500 employees to help them survive the pandemic.
"The speaker is opposed to the use of taxpayer assistance to reward the market behavior of certain firms that profiteer from layoffs, which runs contrary to the law's main purpose of preserving jobs," Connelly said.
Despite lobbying by private equity's advocacy group in Washington, the American Investment Council, the SBA ultimately chose to allow venture capital-backed firms to qualify for the Paycheck Protection Program, but the fix didn't apply to private equity-owned companies.
The Treasury Department could still issue additional guidance, but it's likely too late for healthcare practices owned by private equity, as the program's funds are quickly running out.
Private equity funds have bought an increasing number of physician practices in recent years, according to a research letter in JAMA published in February. Anesthesiologists and emergency physician practices represent 31.5% of the 355 acquisitions from 2013 to 2016, but the rest included multispecialty practices (19%), family medicine (11%), dermatology (10%), pediatrics (6%), internal medicine (3%), and ophthalmology practices (3%).
It's unclear how much private equity funds will choose to help their subsidiary physician practices fill gaps left by other forms of aid, and it may depend on how long shutdowns stretch, experts said.
Eileen Applebaum, co-director of the Center for Economic and Policy Research and a leading expert on private equity investments in healthcare, said some private equity funds may choose to use unspent cash reserves—"dry powder" in industry parlance—to help their practices get through to the recovery period. But others may choose to save funds for new investments.
"They may hold on for opportunities that may materialize when this all settles," Applebaum said.
Joseph Francis and Sailesh Konda, dermatologists at the University of Florida who have studied private equity investments in their field, said that some funds are asking dermatologists to sign contract addenda agreeing to suspend their base pay and only receive compensation through a collections-based model. That often means a big pay cut as patient volume decreases due to city- and state-wide lockdowns.
Konda said that the funds may have other options to potentially get money to pay the doctors, and are instead pressuring dermatologists into accepting pay cuts. Francis said that approach doesn't make a convincing argument that the federal government should pay salaries instead with forgivable Paycheck Protection Program loans specifically designed for companies that keep paying employees.
"It's another reason they shouldn't be getting the money," Francis said.
Dan Shoenholz, co-head of the healthcare practice of EY-Parthenon, said that private equity companies have an interest in keeping practices going because they have already sunk equity into them, and he expects demand for elective procedures to come back "with a vengeance" after restrictions are lifted.
But Bob Kocher, a partner at Venrock focused on healthcare investments, said that private equity funds that took out a lot of debt are going to feel pressure to cut costs, and may try to sell practices back to doctors at a loss.
Coleman, HCPEA's general counsel, called the idea that private equity funds have readily available reserve funds to save struggling practices "very easy and naive."
"There are not unlimited resources, and a certain level of return is expected even when the market is down. It's too simplistic to think we could put it all in the businesses," Coleman said.
A survey conducted by Pitchbook on March 31 and April 1 found that private market investors are taking a wait-and-see approach on new investments until the length of social distancing restrictions becomes clear.
If physician practices aren't able to access small business assistance, they still have other options to tide them over until the lockdowns relax. Any provider that bills Medicare received grant funding from a provider relief fund created in the CARES Act, and the CMS expanded eligibility for Medicare accelerated payments. Many providers are also trying to increase credit lines through existing relationships with lenders.
Lobbying certainly will continue as Congress pumps out more bills on coronavirus relief, and the regulatory process continues at a breakneck pace. Congressional leaders are currently tussling over an interim spending package to boost funds for small business assistance before the programs run dry. The Federal Reserve recently announced a midsize business loan program for businesses with up to 10,000 employees, and it isn't clear if or how affiliation rules might apply to those loans.
Trade groups including the Chamber of Commerce and AIC wrote the Treasury Department, SBA and Federal Reserve on April 10 asking for the affiliation rules to be relaxed. American Investment Council President and CEO Drew Maloney said that private equity firms aren't asking for special treatment in relaxing the affiliation rules.
"What we've highlighted is these employees are suffering just as much as other employees on Main Streets across America. The virus is not discriminating against businesses based on ownership structures," Maloney said in a statement.