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Happy Thursday, Hospitalogists!

Before the Fourth of July, I have a firecracker of my own to pop off.

Today we're taking a bit of a thought-provoking dive into a company that raised some alarm bells in my valuation analyst brain: Nutex Health, a small, publicly traded micro hospital operator.

Let's dive in!

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BLAKE'S BREAKDOWN: NUTEX HEALTH

Going deeper on an interesting topic, theme, or trend 

Something caught my eye the other day. My stock tracker flashed that Nutex Health, a $710M market cap, ~$1B enterprise value company in healthcare is up 300% on the year! 

So naturally I had to take a look under the hood to see what’s going on. 

But let’s back up for just a second. Who is Nutex Health?

Nutex Health owns and operates micro hospitals. The firm went public via SPAC (red flag #1) in April of 2022 and now operates 24 micro hospitals in 11 states, mostly in dense, suburban areas to capture commercial populations. Nutex also operates a small population health segment consisting of a few IPAs and around $31M in annual revenue as of FYE 2024.

Their long-term strategy, so they say, is to create an integrated delivery network between their physicians and IPAs and micro hospitals and wants to continue to build out both segments - opening IPAs each year and a few micro hospitals as well.

But here’s where the short-term problems lie. Today, Nutex Health runs a purposeful, purely out-of-network reimbursement strategy for its micro hospitals. The reality is, once you peek under the hood for a second, there are a lot of eyebrow-raising fact patterns surrounding this company which present major red flags for me (beyond being a SPAC). Hear me out and decide for yourself.

With this backdrop, let’s examine Nutex’s strategy more critically, focusing on reimbursement, ownership structure, and financial reporting practices.

Nutex Health’s recent profitability surge masks underlying strategic risks: heavy reliance on aggressive out-of-network billing practices, questionable accounting changes, and significant regulatory vulnerabilities.

Here’s a quick breakdown of several troublesome trends with Nutex’s company strategy and financials.

Commercial Cherry-Picking: Nutex builds micro hospital in commercial-rich populations in hopes of attracting commercial patients to its EDs. To be fair, everyone does this so it’s more of a yellow flag. Health systems are even engaging in building micro hospitals with companies like Emerus. It’s a growing trend (but I fail to see the difference from a freestanding ED if a micro hospital isn’t full service either). So it’s a nascent strategy to build these facilities and plug into commercial rates to get closer to patients in their neighborhoods. But the next bullet point is not normal and is where my major beef with Nutex lies.

Out-of-Network Strategy: As mentioned, Nutex purposefully goes out of network for its micro hospitals. Why? Doing so allows the company to attach itself like a parasite to the in-network median rates for facilities within its markets (so, attaching itself to higher health system negotiated payments). As a result, it leverages the No Surprises Act’s independent dispute resolution process to get paid by health insurers rather than go in network with payors. Stated differently, it wields the No Surprises Act as a floor value reimbursement value and has no incentive to go in network or negotiate. And it has invested significant resources and capital to determine which claims it thinks it can dispute and win, achieving an 80% success rate. Savvy? Yes. Good for healthcare? Not so much.

If Nutex were really doing what they were claiming to do, which is improve access and patient satisfaction, then they wouldn’t be cherry-picking commercial-only patients like we see in the payor mix above. Commercial mix hasn’t dipped below 89% since 2023 for Nutex. In fact it sat at 96% in Q1.

And while I digress a touch, this dynamic brings up an interesting broader discussion around physician owned hospitals. I would argue that this dynamic seen above would become the future of healthcare were physician-owned hospitals allowed more broadly. You would see more payor mixes like the above situated in suburban, commercial-rich areas which I’d guess would exacerbate health disparities further. Not a policy expert and not opposed to experimenting with POH’s - just my two cents on this isolated Nutex case study. 

• “Yes. I think the answer is that if the insurance company pay better upfront and pay close to the QPA or the meeting in-network, then we don't have to submit anything to the arbitration process. And by the way, the arbitration process was designed as sort of like the last ditch effort so that the providers like us could use it to get a fair payment. It wasn't designed to be the first form of payment, if that makes sense. But unfortunately, because of the way that this whole thing came about with a low payment upfront, we have to use it as a last ditch effort.” - Nutex Health earnings call

It’s so unfortunate to be purposefully out of network! What other companies purposefully went out of network? Oh yeah…Adeptus and Envision, both of which operated in the ED space, and both of which…went bankrupt.

^^ “Yes, actually every single payor is disputing claims with us so that makes us payor agnostic!”

Related-Party Transactions and Physician Ownership Dynamics: Beyond the reimbursement strategy, Nutex’s ownership structure raises separate concerns. Nutex engages in related party accounting transactions, particularly with owned real estate involving its executive team. Related parties aren’t inherently bad but tend to be sketchy in this context given the potential for conflicts of interest, inflated lease payments to owned real estate, etc. and these arrangements need to be vetted at fair market value. For context, these are the kinds of arrangements private equity firms get in trouble for involving healthcare facilities we see every so often in the news.

Adding to this, Nutex seems to have created a workaround to a physician-owned hospital model, where the physicians hold equity ownership in Nutex ParentCo along with the locally formed real estate and professional entities which sit at the market level. This structure appears designed to circumvent traditional limitations on physician hospital ownership and thus potentially raises Stark or Anti-Kickback regulatory concerns. I’d appreciate some legal experts to chime in here to fully assess Nutex’s exposure to regulatory risk.

Nutex has plans to expand its other service lines (behavioral, etc.) so that raises some yellow flags for me personally.

• “A lot of the time, the specialists actually come to us because they are somehow either dissatisfied with their local hospital or they don't want to admit their patients to the local hospitals. And so they admit their patients to us, and we take care of them, right? So that's one. And then in terms of using a recruiter of some type, we do have an in-house recruiting team. However, the best way that we get specialists are through personal relationships with our local physicians. And so our local physicians are all sort of like superstars of the communities that they live in. And so they tend to know pretty much everybody in terms of the health care dynamics. And so through those relationships, we get a lot of specialists that want to send their patients to our hospital.” - Nutex Health earnings call

TL;DR Nutex has a recruiting advantage because of the ownership opportunities with physicians in their markets and leverages that to get referrals to their facilities…man oh man. Noted.

Wack Accounting: Nutex’s accounting practices are likely aggressive and the firm recently changed its accounting methodologies, essentially guesstimating how much revenue the firm will receive in payouts from the IDR process, increasing revenue by $170 million as a result of the methodology calc changes. Oh yeah, Nutex fired its old auditors as a client in April so its most recent financials are unaudited. That’s definitely a great signal.

Adding to the above, Nutex’s financials are incredibly unpredictable given the uncertain nature of the IDR process. Post-SPAC (which was and is always a money grab) it impaired its population health division by $398 million resulting in net losses of $424 million that year. Conversely in 2024 it reported net income of $52.2 million due to successful IDR resolution and the aforementioned pure accounting changes. Because IDR takes 3-5+ months, Nutex’s accounts receivable is insanely high and working capital requirements are exorbitant, which creates ever-present cash flow issues. It leans heavily into value-based care and population health language for the future of the Nutex business when in reality its population health division was 6% of its revenue in 2024.

Financial Breakdown:

Just take a look at its revenue segment growth for a better sense of where Nutex is allocating capital.

Again, I’m not necessarily saying anything nefarious is going on. But what I AM saying is that there is a ton of smoke here, with similar fact patterns to other healthcare companies that have been outed and are now bankrupt. So for that reason, I’m saying a business cannot continue to operate within the environment of facts above as they sit today. A reckoning is coming for this company.

Nutex’s outperformance has been driven entirely by reimbursement increases via IDR dispute wins. Patient visits are growing modestly…

…While net revenue per visit is skyrocketing. Shout out to that new IDR vendor implemented in Q2 2024.

…Resulting in an unbelievable turnaround in profitability. I HAVE to know who this mysterious unnamed vendor is who’s helping out Nutex with the IDR process.

…But also leading to potentially aggressive revenue captured

In 2022, Nutex recorded a massive $398 million impairment related to its population health division shortly after going public via SPAC in April. While not definitively fraudulent, this timing certainly raises credibility and disclosure questions regarding Nutex’s financial transparency and pre-IPO due diligence. In its 10K for 2022 Nutex listed INTERNAL ACCOUNTING weakness as its first risk factor for its business, followed by the potential risk of restructuring and impairment charges! It’s still the first risk factor listed today.

As we’ve seen, Nutex’s profits are incredibly unpredictable, and there’s a clear historical lack of integrity. Nutex has already engaged in two reverse stock splits (a terrible sign for a publicly traded company) and it’s leveraging somewhat of a loophole within legislation as its primary business strategy. Nutex Health is a symptom of a larger issue in healthcare, and in a system run on capitalism (which I am generally a fan of) these worms always seem to wiggle their way into the spots where arbitrage exists or markets are created through artificial means rather than actual competitive forces.

And why is that? Because the CEO and Chairman owns the real estate - and the Nutex model is to have physician and executive ownership in the real estate vehicle along with the professional entity - which is a huge conflict of interest for public shareholders in Nutex. What better way to secure long-term leases on your owned real estate than by doing it in a sticky industry like healthcare and then placing your company’s hospitals on top of them? Related party real estate screams parallels to Steward Health or greater possibility of abuse.

And let’s not forget the significant ongoing hidden administrative cost burden with engaging in the IDR process over and over again. In its 2024 10K, Nutex lays out no fewer than 10 bullet points on various ‘strategies’ the company has tried in order to improve its collection rate given the out of network reimbursement strategy including adding a new vendor to optimize its engagement in IDR disputes. Side note…these kinds of consulting firms or vendors or whatever are the true middlemen making absolute bank.

Sure, Nutex Health may continue to thrive over the short term. Maybe lawmakers let Nutex pursue this strategy under the NSA indefinitely. But long-term, I have yet to see a model like this, predicated on what amounts to regulatory exploitation, sustain itself. My hope is that Nutex moves away from an out of network strategy once it establishes itself in these markets and its micro hospitals grow in maturity. It sounds like they want to head down that path, but based on that revenue segment analysis the financials don’t seem to line up anywhere remotely close to this vision:

• “As a reminder, our overarching strategy at Nutex Health is to build an integrated health care delivery system combining hospitals and medical groups, also referred to as IPA. Our IPAs are comprised of networks of primary care physicians and specialists located around our facilities. The IPAs enroll patients from different health plans and are responsible for the total care of these patients. By combining hospitals and IPA, we believe we will be able to deliver care that is more coordinated, cost-effective and with better outcomes for our patients. Our IPA send patients to our hospitals and our hospitals deliver more efficient and cost-effective care, reducing the medical loss ratios in our IPAs. This is a long-term strategy that will take several years to bear fruit, but we are in this for the long run at Nutex Health.” - Nutex Health earnings call

Nutex Health is the next evolution of the freestanding ER out of network strategy, except now based around micro hospitals. They are ENTIRELY reliant on the No Surprises Act median in-network guidance for profitability and stay away from most insurance negotiation. What’s the point of going in network if you can collect fees based on high-dollar health system fee schedules in your regions of operation? That’s how the business model works today.

Nutex has placed itself smack dab in the middle of the ongoing payor-provider spat associated with the No Surprises Act. And they’ll continue to build micro hospitals under that guise and with this pricing strategy in mind until the status quo of the law changes.

• “Once the previous administrations made arbitration process more streamlined, more efficient and more cost effective, beginning in late 2023 and early 2024, we took advantage of this tool to leverage our positions with the insurers…Since 2024, we have submitted roughly between 60% to 70% of our billable visits to the IDR or arbitration portal. Of these claims submitted, we have achieved a roughly 80% win rate. Of these over 80% plus arbitration wins, once again, which are binding, we expect the insurers to pay 60% to 70% in the first 60 days and the rest later.
• In terms of revenue per visit increase from the IDR process, we typically find a 150% to 250% increase in reimbursement on the facility collection side compared to the initial payment. And once again, this is all consistent with the public data and consistent with the data that are published by other providers that are also doing arbitration like we are. Once again, the goal of arbitration really is just to get to the QPA payment level as outlined in the No Surprises Act. And so far, arbitration seems to be working as it was designed to do.” - Nutex Health earnings call

Today, Nutex is profitable. But as we’ve seen with these companies built in healthcare around quick money grabs, this dynamic can change quickly.

Someone might read this writeup and respond “hospitals are doing the same thing and probably charging similarly reimbursement-wise to Nutex. So why do they get away with it?” And I hear that. It remains to be seen whether micro hospitals are actually good for healthcare and populations and I wouldn’t be surprised if they were outlawed in favor of freestanding EDs or preserved for rural communities.

While many traditional hospitals also strategically position facilities to attract commercially insured patients, Nutex’s explicit, purposeful reliance on out-of-network arbitration under the No Surprises Act differentiates it significantly. Traditional hospitals still predominantly rely on negotiated in-network rates, unlike Nutex’s aggressive IDR approach. A health system’s enterprise-wide payor mix is going to be closer to 50+% Medicare/government/Medicaid. Get what I mean?

As we saw with Adeptus and its aggressive freestanding ER balance billing and out of network surprise billing strategy, or Envision with similar goals, all it takes is for Medicare to poke its head in and refuse to certify a facility. Or payors to play hardball and take you to court and starve out your cashflow. Or a revision to the No Surprises Act ruling you’re reliant on. Nutex’s commercial payor mix, consistently over 89%, mirrors Adeptus’s pre-bankruptcy commercial payor dependency.

At the end of the day, today Nutex is a profitable business working within the confines of the No Surprises Act, but any company that even loosely relies on contentious regulation like this raises yellow flags in my head. Nutex holds significant stroke of pen risk in an area where we’ve already seen one similarly structured company, Adeptus, get burned and go broke. Is a purposeful out-of-network strategy sustainable or desired in healthcare - EVER? Either contract with payors and prove your worth, or go cash pay. Don’t give me this in-between out-of-network BS.

In summary, Nutex Health’s current profitability masks serious underlying risks, including aggressive regulatory arbitrage, questionable financial reporting, and a potentially problematic physician ownership structure. History strongly indicates that these strategies are unlikely to be sustainable long-term, placing Nutex at significant risk of regulatory backlash or financial distress.

Within 5 years Nutex will look materially different than it does today, and this is a ticking time bomb predicated on the next iteration of a strategy that has proven - time and time again - to be unsustainable and a cash grab at best. History doesn’t repeat itself, but it often rhymes, and this thing stinks of predecessors like Cano, Adeptus, Envision, Steward, and plenty of other notable companies who have gone down similar paths. If looks too good to be true, it often is.

I happily invite anyone from Nutex to refute any of the above or provide additional context for anything I may have misrepresented.

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MISCELLANEOUS MADDENINGS

Happy 4th! Enjoy the holiday fam. At times things may seem bleak, but we really do live at one of the greatest moments in human history. Show gratitude this weekend.

Alright, that was a doozy. Thanks for the read! Let me know what you thought by replying back to this email.

— Blake  

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