A SPAC deal expects to make billions of dollars wading through medical bills and charging insurers. (AP Photo/J. Scott Applewhite)
ASSOCIATED PRESS
By Antoine Gara, Katie Jennings and Eliza Haverstock
The new high watermark in financial alchemy using special purpose acquisition corporations, or SPACs, was unlocked this week with a deal that aims to conjure tens of billions of dollars almost entirely out of thin air.
On Monday morning, a SPAC called Lionheart Acquisition Corp. II unveiled a deal to take a firm that pursues Medicare litigation, called MSP Recovery, public at a whopping $32.6 billion enterprise value. The SPAC says it values MSP at about 10.5-times expected 2023 revenues. If the deal goes through, and the market agrees with Lionheart’s valuation, it would make founder and CEO John Ruiz’s estimated 70% stake worth over $20 billion, while his partner Frank Quesada’s estimated 24% stake would be around $7 billion—on paper at least.
MSP’s business model is to buy medical claims and identify those paid by government-funded healthcare programs where it believes another insurer like an auto policy or worker’s compensation is actually responsible. MSP then seeks to collect the full billed amount—there’s usually a huge difference between what the government paid and what the healthcare system asked for—plus double damages for some cases. The company says it has built 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 that it should not pay for because there is no system to identify who should be the proper payer,” Ruiz tells Forbes. “That’s what we’ve revolutionized in America.”
MSP is operating under the assumption that 11%—or around $177 billion—of the $1.6 trillion spent on Medicare and Medicaid each year is actually related to accidents, fraud and misconduct, which means that somebody else should have paid the bill. It positions itself as the champion of the taxpayer arguing that the government-funded programs—Medicare for seniors and Medicaid for low-income people—end up paying healthcare bills that should have been paid by other insurance companies. For example, if a person is injured in an automobile accident or on-the-job, those bills shouldn’t be paid by Medicare but by auto insurance, worker’s compensation or an employer.
MSP says it owns nearly $50 billion in billed claims from its clients, including doctors, hospitals and Medicare Advantage insurers, and projects it can generate a 12-times return on recoveries and then earn extra cash from interest and fines. In a slide deck for investors, MSP suggests it can possibly recover up to $27 billion from its portfolio of claims. “By discovering, quantifying, and settling the billed-to-paid gap in mass financial scale, MSP is positioned to generate substantial annual recovery revenue at high-profit margins,” the company says.
But here’s the rub. It’s all projections and hopes and dreams. The SPAC deal relies on heady estimates of what its claims are potentially worth, and its entire income statement is hypothetical in nature. In fact, MSP will generate precisely $0 in revenues this year, according to its own projections.
Presently, MSP has rights to a portfolio of claims that Ruiz says cost nearly $1 billion to purchase, including building out the data infrastructure, and a further $1.4 billion in commitments from institutional investors to acquire more claims. MSP says the paid amount of these potentially recoverable accident-related, antitrust, or product liability claims is presently worth $20 billion and will rise to $49 billion by 2026. It projects a 51% recovery rate on the face value of its claims by 2026, generating about $24 billion in gross revenues. Furthermore, it expects to pay lawyers on assignment trying its claims over $16 billion to win recoveries, therefore its recovery margin will be about 30% and yield $7.2 billion in net revenues for MSP. After expenses and taxes, that works out to $5.2 billion in net income by 2026.
The firm was created in 2014 by Ruiz, a Coral Gables, Florida-based attorney, as a medical reimbursement litigation firm. Its creation has coincided with institutional investors pooling capital to pursue asymmetric legal claims, an industry now called “litigation funding.” Numerous litigation funds have cropped up in recent years as a way to earn returns uncorrelated with the stock market (which has returned a 15% annual average over the past decade).
Ruiz zeroed in on a 1980 law known as the Medicare Secondary Payer Act (hence the name MSP), which Congress passed to shift costs away from the government and onto a private insurer in certain cases. While the government doesn’t have the resources to sift through billions of claims and litigate who is responsible, Ruiz spied an opening to combine legal expertise with claims-mining data algorithms. “We’re in a space that is pretty much unoccupied,” he says. In 2018, with $440 million in backing from hedge fund Virage Capital Management, MSP began to pursue what is now over $50 billion in paid claims against insurance companies and with a billed amount of $243 billion.
The fact that there is even money to be made here is the result of the fragmented payment system in U.S. healthcare. It starts with the hospital list price—think of this as what’s posted on the menu— but no diner ever actually pays full fare, and the government only pays a fraction of what the hospital asks. The simplified example MSP uses in the investor presentation is: a hospital gets paid a Medicare rate of $100 for a service, even though it billed $600.
MSP buys the rights to claims from healthcare providers or agrees to represent them for a 50/50 split of any proceeds. Another group of clients are the private insurers that administer the Medicare Advantage program who may have paid out claims that another insurer was actually responsible for. MSP then files lawsuits against the other insurance companies it believes should have paid instead of Medicare, and tries to collect the full billed rate, or, in certain cases, double damages. “Imagine if you were providing a service and instead of getting the amount that you billed for, you got a reduced rate because the government’s paying you,” says Ruiz. “There’s a huge delta they’re being cheated out of collectively of billions and billions and billions.”
Ruiz’s confidence stems from his experience as a trial attorney securing class action judgements 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, Ruiz says, when MSP buys the rights to the claims, “it’s ours forever and it can never be taken away. Nobody can cancel our contract.” Similar to situations where a financial institution buys another party’s debt obligation, MSP holds the right to collect on the claims. The claims are the “meat and potatoes” of the business, but Ruiz has expansion plans, 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 claims auditing service.
But past performance in the courtroom doesn’t guarantee future results—or generate concrete revenue. And the SPAC deal itself carries a number of red flags.
In August 2020, the sponsor, Lionheart, listed its SPAC on the Nasdaq, raising $230 million in cash to buy a stake in a company and bring it public by February 2022.
With just seven months left to strike a deal or return its cash, Lionheart is buying a microscopic 0.7% stake in MSP with its cash. SPAC investors now have to decide whether they like the deal and participate in the merger, or redeem their shares and get their money back. But, it is almost irrelevant whether shareholders approve of the deal because here is no minimum threshold of support for it to go through. Even more eye-opening is the fact that Lionheart is offering stockholders who do not redeem their shares an unheard of 35 warrants per share if they participate in the merger, up to about a billion warrants. MSP says in a footnote the exercise price of its existing warrants may be reduced to “as low as $0.0001 per share,” a warning sign that it may trade poorly in the aftermarket.
The heady incentives and almost non-existent milestones make it appear like Lionheart wants to do a deal at any cost. If Lionheart can get its MSP deal over the finish line, its executives will get rich. As the sponsor, Lionheart is set to collect $64 million in “promote” for its efforts, in addition to a juicy cut of those billion additional warrants.
For his part, Ruiz takes issue with the idea that MSP’s $32.6 billion valuation is fanciful, even suggesting in a telephone interview that it was a “conservative number” given the $3.6 trillion in U.S. healthcare spending in 2018. As healthcare costs outpace inflation, medical claims are a gift that keeps on giving.
“It’s not one set of assets that gets sold or are settled and that’s the end of the story,” he says. “These issues are perpetual in nature because people keep going to the hospital. This business encompasses every American in the United States of America that has healthcare.”
