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Value Line Coverage Initiation: Team Health Holdings
Team Health Holdings (TMH) has recently been added to The Value Line Investment Survey. The staffing provider describes itself as providing outsourced healthcare professional staffing and administrative services to hospitals and other healthcare providers in the United States. While other publicly traded companies that offer similar services have a broader customer base, Team Health’s focus results in a company that borders between outsourcing services and health care providing. This can be a benefit, or a negative.
As of the end of 2011, Team Health’s customers included approximately 730 civilian and military hospitals, clinics and physician groups in 47 states. It held over 7,000 “affiliated” healthcare professionals, including physicians, physicians assistants, nurse practitioners, and nurses with which to fulfill its customers’ needs. It can provide both temporary and permanent staffing solutions, and its “affiliates” can work on a fee-based schedule or bill end users (patients) directly. In fact, the company’s broad scope can, for the most part, allow its customers to outsource entire departments.
It is worth noting, though, that the payment models the company works under have vastly different risk profiles. For example, dealing directly with patients opens Team Health up to bills that go uncollected. In fact, in its financial reports, it notes that revenues are “less provisions for uncollectibles.” Moreover, changes in third-party bill payments, including Medicare and Medicaid, could have a material impact. Conversely, fee-based deals can lead to the risk of misjudging expenses and, thus, unprofitable contracts.
Team Health traces its roots back to 1979, when a team of doctors started a service to provide doctors to emergency rooms. This division is still the largest, representing just under three-quarters of the company’s revenues in 2011. Since that beginning, however, it has branched out into other services, including such mundane tasks as bill collection. The inpatient services (hospital specialists), military staffing, and anesthesiology groups were the next largest segments, accounting for 9%, 7%, and 5% of the top line, respectively. Clearly, the emergency room division is the company’s most important.
Since its founding by doctors, Team Health has made a point of keeping doctors in charge. Although this may or may not be beneficial from a business perspective, it clearly provides benefits when dealing with customers, since a doctor is going to better understand the difficulties a customer is experiencing than a representative with little-to-no hands-on experience. Still, finding doctors both willing and capable of taking on such managerial and business roles could be an issue in the future, should expansion or departures require new managerial “blood.”
It is also important to note that the health care industry is one of the most highly regulated industries in The United States. Team Health must meet or exceed all regulatory expectations and keep on top of any changes to existing regulations. Failure to be compliant would have a material impact on the medical staffing provider’s business.
The health care staffing market is fragmented with many smaller, regional or even local players. Thus, Team Health is not alone in the health care market, but it is easily among the largest providers. Most in this space are not publically traded. The fragmented nature of the industry is negative in that it increases competition, but also positive in that it allows for a larger player to acquire smaller participants to more quickly grow its reach. Team Health has made effective use of this tactic and is likely to continue doing so. While there can be risks associated with acquisitions, the generally small (bolt on) nature of such transactions for a larger player reduces them somewhat.
Team Health’s capital structure is worth noting. For starters, it has a material amount of debt on its balance sheet (representing over 90% of the capital structure at the end of 2011). Such a high level of debt could cause problems if revenues falter for some reason, as making interest payments could become more difficult. In addition, at year-end 2011, Ensemble Parent LLC owned over 50% of the company’s outstanding equity. This could create a situation in which management makes decisions that benefit Ensemble Parent LLC over other shareholders. However, it could also provide Team Health with the shareholder support needed to work toward long-term goals without as much need to worry about meeting Wall Street expectations.
Health care has historically proven to be less susceptible to economic fluctuations than other industries. Moreover, the focus on urgent care provides even greater protection, since economic weakness isn’t likely to stop a person from visiting the emergency room. Assuming that Team Health can successfully manage its debt, this company appears to be well situated in a unique niche of the staffing market. Interested subscribers should monitor Value Line’s quarterly coverage of the company, while keeping an eye out for Supplementary reports highlighting late-breaking news.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.