How to stave off a $ 20 billion fortune using a PSPC
By Antoine Gara, Katie Jennings and Eliza Haverstock
The new culmination of financial alchemy using Special Purpose Acquisition Companies, or SPAC, was unlocked this week with a deal that aims to raise tens of billions of dollars almost entirely out of thin air.
Monday morning, a SPAC called Lionheart Acquisition Corp. He unveiled a deal to take a company that pursues Medicare litigation, called MSP Recovery, public with a whopping $ 32.6 billion enterprise value. PSPC says it values the MSP at around 10.5 times expected revenue in 2023. If the deal goes through and the market agrees with Lionheart’s valuation, the founder’s estimated 70% stake and CEO John Ruiz would be worth more than $ 20 billion, while his partner Frank Quesada’s estimated 24% stake would be around $ 7 billion, at least on paper. .
MSP’s business model is to buy medical claims and identify those paid for by government-funded health care programs when it believes that another insurer, such as an auto policy or workers’ compensation, is. really responsible. The MSP then seeks to recover the full amount billed – there is usually a huge difference between what the government has paid and what the health care system has claimed – plus double the damages for some cases. The company says it has put in place a unique big data infrastructure and Moneyball-like analytics to sift through millions of medical claims for valuable cases to pursue. “The government ends up paying bills it shouldn’t be paying because there is no system to identify who should be the correct payer,” Ruiz said. Forbes. “This is what we revolutionized in America.
MSP assumes that 11% – or roughly $ 177 billion – of the $ 1.6 trillion spent each year on Medicare and Medicaid is actually related to accidents, fraud, and malpractice, which means that someone someone else should have footed the bill. He positions himself as the taxpayer’s champion by arguing that government-funded programs – Medicare for the elderly and Medicaid for low-income people – end up paying health care bills that should have been paid by people. other insurance companies. For example, if a person is injured in a car accident or at work, these bills should not be paid by Medicare but by auto insurance, Workers’ Compensation, or an employer.
MSP says it has nearly $ 50 billion in claims billed by its customers, including doctors, hospitals and Medicare Advantage insurers, and projects it can generate a 12-fold return on collections, then earn extra money from interest and fines. In one slideshow for investors, MSP suggests that it can eventually recover up to $ 27 billion from its debt portfolio. “By discovering, quantifying and resolving the gap between billing and payment in the mass financial scale, MSP is able to generate substantial annual recovery revenue with high profit margins,” the company said.
But here’s the catch. These are just projections, hopes and dreams. The PSPC deal is based on intoxicating estimates of the potential value of its claims, and its entire income statement is hypothetical in nature. In fact, MSP will generate precisely $ 0 in revenue this year, according to its own projections.
Currently, MSP has rights to a portfolio of receivables that Ruiz said cost nearly $ 1 billion to purchase, including the construction of the data infrastructure, and $ 1.4 billion. additional dollars in commitments from institutional investors to acquire more debt. MSP says the amount paid of these potentially recoverable accident, antitrust or product liability claims is currently $ 20 billion and will grow to $ 49 billion by 2026. It predicts a rate recovery of 51% on the face value of its claims by 2026, generating approximately $ 24 billion in gross revenue. In addition, he expects to pay attorneys on assignment to try his claims of more than $ 16 billion for recoveries. Therefore, its collection margin will be approximately 30% and generate $ 7.2 billion in net revenue for MSP. After expenses and taxes, this represents a net profit of $ 5.2 billion by 2026.
The firm was established in 2014 by Ruiz, an attorney from Coral Gables, Florida, as a medical reimbursement litigation firm. Its inception coincided with the pooling of capital by institutional investors to pursue asymmetric lawsuits, an industry now referred to as “litigation finance”. Numerous litigation funds have emerged in recent years as a means of generating returns uncorrelated with the stock market (which has returned an annual average of 15% over the past decade).
Ruiz focused on a 1980 law known as the Medicare Secondary Payer Act (hence the name MSP), which Congress voted to shift costs away from the government and on a private insurer in some cases. While the government lacks the resources to sift through billions of claims and advocate who is responsible, Ruiz has spotted an opening to combine legal expertise with claims mining data algorithms. “We are in a space that is virtually unoccupied,” he says. In 2018, with $ 440 million in backing from hedge fund Virage Capital Management, MSP began pursuing what now represents more than $ 50 billion in paid claims against insurance companies and a billed amount of $ 243 billion. dollars.
The fact that there is even money to be made here is a result of the fragmented healthcare payment system in the United States. It starts with the hospital’s list price – think what’s on the menu – but no restaurant ever pays full price, and the government only pays a fraction of what the hospital charges. The simplified example used by MSP in the investor presentation is as follows: A hospital receives a Medicare fee of $ 100 for a service, even though it has charged $ 600.
MSP purchases the rights to claims from healthcare providers or agrees to represent them for a 50/50 split of any product. Another group of clients are the private insurers who administer the Medicare Advantage program who may have paid claims for which another insurer was actually responsible. MSP then sues other insurance companies it believes should have paid in place of Medicare, and attempts to recover the full price billed, or, in some cases, double the damages. “Imagine providing a service and instead of getting the amount you charged, you get a reduced rate because the government pays you,” Ruiz explains. “There is a huge delta from which they are collectively swindled by billions and billions and billions.”
Ruiz’s confidence stems from his experience as a trial attorney securing class action judgments against companies including American Home Products and its Fen Phen diet pills and Merck Pharmaceuticals’ anti-inflammatory drug Vioxx, in addition to claims against companies such as Bayer, Shell, Toyota, and ConAgra Foods.
One of the benefits, says Ruiz, when MSP buys the rights to the claims, “it’s ours forever and it can never be taken away. No one can cancel our contract. Similar to situations where a financial institution purchases debt from another party, MSP has the right to collect debts. Claims are the “meat and potatoes” of the business, but Ruiz has plans for expansion, including a product that would help clients identify the responsible insurer when the patient shows up at the doctor’s office, as well as a complaints audit service.
But past performance in the courtroom does not guarantee future results or generate tangible income. And the PSPC agreement itself has a number of red flags.
In August 2020, sponsor Lionheart listed his SPAC on the Nasdaq, raising $ 230 million in cash to buy a stake in a company and go public by February 2022.
With just seven months to close a deal or return his money, Lionheart buys a microscopic 0.7% stake in MSP with his money. PSPC investors now have to decide whether they like the deal and participate in the merger, or buy back their shares and get their money back. But, it is almost irrelevant that shareholders approve the deal as there is no minimum threshold of support for it to pass. Even more telling is the fact that Lionheart is offering shareholders who do not redeem their shares an unprecedented 35 warrants per share if they participate in the merger, up to around one billion warrants. MSP says in a footnote that the exercise price of its existing warrants could be reduced to “as low as $ 0.0001 per share”, a warning sign that it could trade badly on the market. secondary market.
The intoxicating incentives and almost nonexistent milestones make it seem like Lionheart wants to strike a deal at all costs. If Lionheart manages to get his MSP contract to cross the finish line, his rulers will get rich. As a sponsor, Lionheart is poised to raise $ 64 million in “promotion” for its efforts, on top of a good chunk of those billions in additional warrants.
For his part, Ruiz disputes the idea that MSP’s $ 32.6 billion valuation is fanciful, even suggesting in a telephone interview that it was a “conservative figure” given the $ 3.6 billion. in US healthcare spending dollars in 2018. Claims are a gift that keeps on giving.
“It’s not a set of assets that is sold or settled and that’s the end of the story,” he says. “These problems are perpetual in nature because people keep going to the hospital. This business includes all Americans in the United States of America who have health care. “