The bankrupt North Texas-based operator of First Choice Emergency Rooms fell victim to a flawed business model and, to a lesser extent, the coronavirus pandemic. Now, it faces a rocky road to liquidation, according to an expert.
That’s the picture painted by bankruptcy filings and legal experts of Irving-based Adeptus Health LLC, the parent company of First Choice ER, which was the oldest and largest freestanding emergency-room network in the country. Adeptus filed for voluntary Chapter 7 bankruptcy protection on Dec. 18 in the Northern District of Texas.
Adeptus Health, First Choice ERs and Adeptus’ other entities have ceased operations, according to the company’s website.
Adeptus and its lawyers, Louis Strubeck Jr. and Laura Smith of Norton Rose Fulbright in Dallas, did not respond to a request for comment from the Dallas Business Journal.
‘They’re getting crushed’
Adeptus and companies like it suffer from a faulty business model, said Wade Emmert, partner at Carrington Coleman Sloman & Blumenthal and a board-certified health lawyer.
“A lot of freestanding ERs are getting crushed,” said Emmert, who is not directly involved in the case. “They’re getting crushed from a regulatory perspective. They’re getting crushed because of poor patient PR because they’re charging patients more than patients would otherwise be charged if they went to a hospital ER.”
A freestanding emergency department or freestanding ER is a licensed facility that provides emergency care but is structurally separate from a hospital. Unlike urgent care clinics, which can only treat minor injuries and illnesses, they can treat most of the conditions handled in hospital-based ERs.
Critics say freestanding ERs are treating patients who could be seen less expensively in other settings. Critics also say the independent ERs often aren’t clear with patients upfront about pricing or insurance coverage.
“Their business model in large part is based on a misunderstanding by patients,” said Emmert, who is also an adjunct professor at Texas A&M School of Law in Fort Worth, where he teaches a health care transactions course and others.
Hospital ERs are typically in-network for health care coverage, but freestanding ERs usually are not in insurance companies’ networks, he said.
“Freestanding ERs will tell the patients, ‘We take every insurance,’ and that’s true,” Emmert said. “But the insurance only pays in-network rates and then the patient has to pick up the rest.”
Many patients are now figuring out the difference between hospital ERs and freestanding ones, which is one reason the latter are struggling, Emmert said.
Bankruptcy filing offers details
In the bankruptcy filing, Adeptus listed roughly $6.8 million and debts of about $278.2 million. The filing’s largest creditor was listed as Deerfield Partners LP, with an outstanding claim of slightly over $209.9 million.
This isn’t the first time Adeptus has filed for bankruptcy. In 2017, the company filed for Chapter 11 bankruptcy protection, and New York health care-focused hedge fund Deerfield Management bought outstanding bank debt totaling $212.7 million from Adeptus.
Chapter 11 offers companies protection from creditors while they reorganize, whereas Chapter 7 typically provides for the liquidation of a business’ assets to satisfy creditor claims.
On the asset side of Adeptus’ new Chapter 7 filing, just over $1.1 million is real estate and about $5.7 million is equipment and other personal property.
The Adeptus Board of Directors met Nov. 18 and considered the company’s financial and operational condition, as well as its historical performance, before directing CEO Steve Bussey to file the bankruptcy petition, according to a board resolution contained in the Chapter 7 filing.
What happens to the real estate?
More than 250 unsecured creditors were listed. They are owed amounts totaling about $68.3 million. More than half of that dollar amount was for real estate leases throughout Texas and the U.S.
Asked what typically happens to the real estate in the case of a bankruptcy filing by a freestanding ER, Emmert said, “It sits there.”
“Freestanding ERs are built in a unique, centralized way that does not lend them to easy remodels or retrofits,” he said. “Oftentimes, they’re built with a central hub where the nurses’ stations and physicians’ desks are, with patient rooms around the hub like a spoke. Unless you gut the whole thing, it’s not easily convertible to something else.”
As a result, the former ERs sit vacant for years or are sold for pennies on the dollar so the next buyer can retrofit the facility, he said.
In addition to real estate leases, big-ticket unsecured categories in Adeptus’ Chapter 7 filing include physician compensation, medical equipment leases, equipment repairs and maintenance, medical supplies, utilities, accounting, consulting, marketing, advertising, deferred payroll taxes and other taxes.
Declining revenue
Adeptus’ gross revenue declined sharply to about $62.5 million in 2020, the bankruptcy filing says. That compares to gross revenue of $172.7 million in 2019 and $229.7 million in 2018.
While COVID-19 didn’t cause Adeptus’ Chapter 7 filing, Emmert said it’s likely a contributing factor.
“Since last March, I have a lot of health care clients that are nervous about the prospect of the outlook for health care, so they’re looking to branch out and diversify into other areas, which is an option that many freestanding ERs like Adeptus don’t have,” he said. “COVID likely played a role in the conversion to Chapter 7 because it brought them to a conclusion sooner that they don’t have a path forward.”
Nationwide, corporate bankruptcies reached their worst levels in 10 years in 2020 as the coronavirus pandemic took a toll on many industries, according to an analysis by S&P Global Market Intelligence.
A total of 630 U.S. companies declared bankruptcy in 2020, surpassing the number of filings every year since 2010 when 900 companies filed. Like Adeptus, 57 of the companies that filed in 2020 were in the health care sector.
Adeptus was recognized as one of the fastest-growing locally based middle-market companies in 2015 by the Dallas Business Journal. The company went from 15 freestanding private emergency rooms in Texas in 2012 to about 120 of them in four states, plus five full-service hospitals, by 2015.
The company filed for an initial public offering in 2015 and debuted at $22 a share. Within a year, the stock price hit $100 and Adeptus’ market cap neared $1 billion.
The Chapter 11 filing, however, came in April 2017, amid a sharp decline in the company’s earnings and the departure of top executives.