The Private Equity Playbook
PE firms have been buying up anesthesiology practices, raising prices and demoralizing doctors.
Good Morning!
Here are today’s highlights:
Ami Kassar says the SBA is missing the point about the alleged fraud in Covid lending.
As many as one in three online reviews may be fake.
Quit rates are returning to normal but some industries remain under-staffed.
Businesses are walking away from “useless lawns” and going natural.
PRIVATE EQUITY
Have you noticed that things don’t always go well when business owners sell to private equity? “The multibillion-dollar private equity firm Welsh, Carson, Anderson & Stowe took less than a year to create, from scratch, Colorado’s biggest and most prominent anesthesiology practice. The financiers created a company, U.S. Anesthesia Partners, which in 2015 bought the largest anesthesiology group in the Denver region. Then it bought the next largest. Then it bought a few more. The company employed 330 anesthesiologists in Colorado at one point, according to its website, making it the state’s largest practice by far. It obtained contracts at 10 of the region’s 15 largest hospitals, according to the hospitals.”
“The company raised prices for its services — one by nearly 30 percent in its first year in Colorado — and continued raising them for several years, according to interviews and confidential company documents obtained by The Washington Post.”
“The price hikes boosted patient bills and pushed up insurance rates, former company physicians and managers said. Eventually, some of the company’s own doctors became disillusioned, physicians said, with about one in three leaving the company over a three-year period.”
“As the United States struggles to control medical costs, however, private-equity firms like Welsh Carson have become critical players in health-care economics, with private-equity funds acquiring hundreds of physician practices across America and, according to multiple academic studies, raising prices while returning billions to investors.” READ MORE
FINANCE
A recent report from the SBA’s Inspector General blames most of the bad EIDL loans on fraud; Ami Kassar says it’s more complicated than that: “The EIDL loans issued during the pandemic were handed out without demanding proof of economic injury. Yes, some businesses that got the loans were genuinely decimated by Covid and needed every penny. But many companies thrived during Covid and jumped on these loans out of FOMO (fear of missing out). Who could imagine a business getting another opportunity to borrow a large amount of money with a fixed rate and a long payoff? It felt too good to be true—and this situation was exacerbated near the end of the pandemic by nonstop promotions from the SBA that encouraged borrowers to take the biggest loan they could get before the money ran out.”
“One entrepreneur I know, whose business was genuinely decimated by Covid, received $2 million of EIDL money. And while some of the money was used for working capital and to catch up on payables—as it should have been—some also went to replace and repair equipment that should have been replaced long before Covid.”
“But the company didn’t have the money back then, and now his bank is considering not renewing his line of credit and wants to know where all of the EIDL money went. Cash is low, and it’s a tough situation for everyone.” READ MORE
MARKETING
The FTC is targeting fake customer reviews: “The Federal Trade Commission announced Friday that it's proposing new measures to crack down on fake reviews and other practices used to mislead consumers trying to educate themselves about a potential purchase. The commission published a proposed rule that would prohibit companies from writing or selling fake reviews, buying positive reviews, illegally suppressing negative reviews and more. ‘Our proposed rule on fake reviews shows that we're using all available means to attack deceptive advertising in the digital age,’ Samuel Levine, director of the FTC's Bureau of Consumer Protection, said in a statement. ‘The rule would trigger civil penalties for violators and should help level the playing field for honest companies,’ Levine added.”
“Research shows people overwhelmingly consult online reviews before opening their wallet, but humans are also bad at telling which consumer reviews hold water and which are full of hot air.”
“That's potentially worrisome given that nearly one in every three reviews is fake, according to one estimate.”
“The emergence of generative AI could also supercharge the proliferation of fake reviews across the internet, the FTC said.” READ MORE
HUMAN RESOURCES
More than 80 percent of hotels nationally are short-staffed: “Honolulu-area hotels are currently looking to fill more than 450 job openings, according to postings currently listed on worldwide employment website Indeed. This comes as hotels nationwide are offering incentives to fill more than 100,000 open positions amid the busy summer travel season, according to a recent announcement from the American Hotel and Lodging Association. Among hoteliers nationwide, 82 percent say they are experiencing a staffing shortage, and to combat this, 75 percent of respondents are increasing wages, 64 percent are offering greater flexibility with hours and 36 percent are expanding benefits, according to a national survey conducted by AHLA.”
“Regardless, 87 percent say they are still unable to fill open positions. The most critical staffing need is housekeeping, the survey noted.” READ MORE
Still, quit rates are returning to pre-pandemic levels: “The surge in Americans quitting their jobs has abated since peaking during the pandemic, another sign that the labor market is cooling from ultra-hot levels as the Federal Reserve raises interest rates. Americans voluntarily left 3.8 million jobs in April. That marked a drop of 700,000 from 4.5 million in November 2021, the highest level on Labor Department records back to 2000. May quits data will be released at 10 a.m. ET Thursday. The so-called quits rate—the number of resignations as a share of total employment—fell this spring to 2.4 percent, nearly matching the pre-pandemic reading and down from 3 percent as recently as April 2022.” READ MORE
More employers may want to consider offering a student-loan-payment benefit: “Payments employers make toward their employees’ student loans have a tax benefit. The CARES Act passed in March 2020 and the Consolidated Appropriations Act of 2021 allows employers of all sizes to offer tax-free student loan repayment assistance of up to $5,250 per employee per year through the end of 2025, according to Patricia Roberts, chief operating officer at Gift of College Inc. All it takes is an amendment to an employer’s existing education or tuition assistance program.”
“‘Since nearly 50 percent of employers have tuition assistance programs in place, this is a very light lift that can prove to be a win/win for both employers and employees,’ Roberts said in an email. ‘What’s great about this approach is that the employer’s contribution is not considered taxable income to the employee and the employer can take a business tax deduction for student loan contributions made.”
“Beginning in 2024, employers will be able to match employee student loan payments into their 401(k) accounts under certain circumstances. Essentially, employees might miss out on saving for retirement because they have to pay back student loans, but the legislation will let employers ‘match’ what workers pay toward their loans into a 401(k) account.” READ MORE
CLIMATE
Companies are walking away from manicured lawns and going natural: “The shift — mirroring what’s happening at public parks, on university campuses, and in homeowners’ backyards — is being driven by a growing awareness of the environmental costs of installing and maintaining lawns, clipped hedges, and tidy flower borders. New laws ban the use of water for ‘useless’ grass in drought-prone areas, and company sustainability programs encompass the land the buildings sit on. Apps calculate the carbon footprint of landscapes in much the same way that buildings are monitored for greenhouse gas emissions.”
“Landscape equipment emits nearly 27 million tons of pollutants a year, according to estimates. One gas-powered leaf blower used for an hour generates the same amount of emissions as a car driving 1,100 miles.”
“As the climate crisis has grown increasingly dire, many companies have turned to their landscapes to help them hit sustainability targets and vaunt their environmental bona fides.” READ MORE
There’s an unusual real estate boom on Maryland’s Smith island: “Ten summers ago, Maryland offered to buy residents off this iconic bit of land in the Chesapeake Bay known for picturesque watermen’s villages, famous cakes, and pyrotechnic sunsets. Hurricane Sandy had damaged homes and climate change models offered the direst of forecasts: Rising waters could virtually wipe it off the map. The four-square-mile archipelago was held up as a national example of what global warming could eventually mean to many more people living in vulnerable areas, and a way governments may respond. One article called residents ‘candidates to become the first climate refugees of the contiguous United States.’ But Smith Islanders rejected leaving, instead organizing to get tens of millions in government funding for infrastructure upgrades and fortifications against the waves. And in recent years, something improbable has trailed in its wake: a real estate boom.”
“More homes have sold on Smith Island in the last three years than in the previous 11 combined, according to sales data. Locals see a story of hope. Their efforts to rescue a 400-year-old way of life tied to tide and season are beginning to bear fruit. Many question the doomsday predictions for the island or hope they can find a way to ride out rising waters.”
“Environmentalists see a dangerous kind of denialism. They say Smith Island’s long-term survival is doubtful, so the only rational path is retreat. They see the recent interest in the island as part of an unsettling national trend — studies show more Americans are moving into climate danger zones.” READ MORE
The economic toll of Canada’s wildfires is becoming clear: “Canada’s wildfires have burned 20 million acres, blanketed Canadian and U.S. cities with smoke and raised health concerns on both sides of the border, with no end in sight. The toll on the Canadian economy is only beginning to sink in. The fires have upended oil and gas operations, reduced available timber harvests, dampened the tourism industry and imposed uncounted costs on the national health system. Those losses are emblematic of the pressure being felt more widely as countries around the world experience disaster after disaster caused by extreme weather, and they will only increase as the climate warms.”
“‘It’s come on faster than we thought, even informed people,’ said Dave Sawyer, principal economist at the Canadian Climate Institute. ‘You couldn’t model this out if you tried. We’ve always been concerned about this escalation of damages, but seeing it happen is so stark.’”
“‘We already think we’re teetering into a downturn, and this would just make things worse,’ said Tony Stillo, director of economics for Canada at Oxford. ‘If we were to see these fires really disrupt transportation corridors, disrupting power supply to large population centers, then you’re talking about even worse consequences.’”
“And the insurance industry is on alert, having watched the increasing damage in recent years with alarm. Before 2009, insured losses in Canada averaged around 450 million Canadian dollars a year, and now they routinely exceed $2 billion.” READ MORE
And yes, it really is hot: “Global temperature maps have become dark red as rising temperatures capped the world’s warmest day since record-keeping began in 1979, while last month was the hottest June, according to new data from U.S. and European scientists. The global average atmospheric temperature on Tuesday, July 4, was 62.9 degrees Fahrenheit, breaking the previous record of 62.6 degrees on July 3, according to data that is collected daily by the National Oceanic and Atmospheric Administration and compiled by the University of Maine.”
“Climate scientists at the Copernicus weather service, a scientific agency funded by the European Union, say the record temperatures are the result of industrial emissions of carbon dioxide and other greenhouse gasses that have accumulated in the atmosphere over decades and a powerful El Niño weather pattern—a natural phenomenon—that has developed in the Pacific Ocean.”
“Texans felt the heat more than most, as hundreds of people got sick and more than a dozen died from heat-related causes. Floods, hail, and tornadoes compounded the misery and caused power outages for hundreds of thousands of customers.” READ MORE
LEADERSHIP WEBINAR
Chris Hutchinson and Trebuchet Group offer a fresh perspective on leadership: Leadership is tough. You (or someone who works for you) may be wondering if you are cut out for this leadership stuff. And you know there are hundreds of models, books, and styles of leadership to follow. How do you sort through all of the noise to get the support you need while striving to make a positive difference? The good news is you aren’t alone, and we can help.
Join members of the Trebuchet Group team on July 20 as they dive into six things that Ripple Leaders do differently. You’ll celebrate what’s already working and gain new perspectives on how to continue to improve in your own leadership journey. At the end of the hour, you’ll walk away with a new perspective on how to build purpose-driven leadership that actually works, regardless of where you’re at in the organization. LEARN MORE HERE
THE 21 HATS PODCAST
Why Do You Pay What You Pay? This week, Paul Downs, Jay Goltz, and Sarah Segal talk about where the dust has settled after years of turmoil in the labor market. As you know all too well, we’ve been through Covid, supply-chain issues, inflation, labor shortages, the Great Resignation, minimum-wage hikes, new pay-transparency regulations, and countless rumors of recessions that have yet to come—all of which has had an impact on wages. And that’s why I decided to ask Paul, Jay, and Sarah where their thinking has landed. The consensus here is that leverage is shifting back to employers, but Paul, for one, remains committed to paying his people more than they can find elsewhere. “It's worth it to me to have the team I want,” he says. “And sure, it affects profitability, but turnover affects profitability, too. And I'd rather not have that.”
Plus: We also talk about whether Lululemon was right to fire two retail employees who tried to stop a robbery, and we answer the following listener question: If something’s not working, how do you know when it’s time to walk away?
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren