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Selling and Becoming Employed

Now might be the last chance

Now might be the last chance to get the most money from selling your practice. This latest buying cycle is starting to slow, at least for hospitals buying practices. Market saturation occurs when most of the perceived top physician groups have already been purchased in a market, and hospitals are seeing the impact of purchases on their bottom line are contributing reasons.

However, we are now seeing an increase in consolidations where regional groups are looking to become national in scope, and national groups are buying regional or specialty/ service line groups to create economies of scale and strategic dominance, positioning themselves to influence federal policy, gain the leverage to better manage client turnover risk, and to maximize shareholder wealth. So is now the time to strike? Will being employed suit you? You probably have everything to gain and not much to fear.

This article is not intended to be a deep dive, but rather an overview of insights, considerations, and key elements one should be aware of when contemplating the sale of your practice and joining the buyer as an employed physician.

Though the Patient Protection and Affordable Care Act has taken a fairly good hold this go-around, the jury is still out as to where it will end up. Trends have come and gone, and it will likely continue to ebb and flow for many more years. The first wave came with the introduction of Managed Care in the early 1990s when hospital began to buy primary care practices and employing physicians, it was definitely a sellers’ market for nearly 10 years. For the next 10 years, many hospitals figured out that their operational model wasn’t working and, in typical fashion, hospitals began divesting themselves of the practices. According to the Medical Group Management Association, the mean annual loss was over $175,000 per employed physician.

Next, in preparation for the Affordable Care Act (colloquially known as ObamaCare), the buying frenzy by hospitals began again in 2009 and hit its peak in 2011. It is still going, albeit at a slower pace.

This time, however, physicians are more eager to sell, resulting in lower pricing than seen in the first wave of acquisitions. Buyers have also become more sophisticated in their valuation methods and have applied improved business processes from the lessons learned in the initial round. According to Moody’s, physician employment salaries are now one of the largestmargin pressure points of hospitals. If you have been waiting for the value of your practice to go up, you might indeed be on the downward curve at this point. Today, there are basically three types of primary buyers—hospitals, large medical groups, and to a lesser extent, health plans testing the waters again.

Since we are still in a very inefficient and uncertain healthcare reform market, your greatest opportunity might indeed be right now to get the most value from the sale of your practice. One certainty is the increasing pressure to reduce reimbursement, and it doesn’t look like costs will be going down. These market pressures have created correspondingly heightened mergers and acquisitions activity in the sale of practices or groups to hospitals or larger regional (or national) medical group companies.

National medical groups focus on one or more medical specialty lines and are rapidly expanding the scope of specialties within which they can apply their operating model. Both hospitals and larger groups are actively trying to reshape the delivery of care within their specialties and subspecialties, using evidence-based modeling, quality improvement, and research to improve patient outcomes and provide high-quality, cost-effective care. Growth creates market dominance to gain leverage when negotiating with payors, vendors, and clients.

You may benefit from thinking strategically to determine how you position yourself to be viewed a critical player, even if your specialty is not currently considered the specialty du jour to buy right now. The year 2011 saw a spike in cardiology sales, followed by hospitalists and internal medicine. Oncology and cardiology practices are likely to have felt significant pressure to sell as reimbursement changed. It wasn’t long ago that it was inconceivable that a large community cardiology group would ever be employed by a hospital. The Affordable Care Act changed that practically overnight.

Getting the Right Deal

One offer is no offer - it is a better idea to create an auction. Always try to create a competitive environment with at least two prospective buyers.

Hospital systems generally buy practices for local market reasons, where national groups have additional aspirations. Local hospitals purchase solo or larger practices because they simply want to direct patient traffic, add needed service lines to the team to support a larger initiative, or to complement their accountable care organization (ACO) plans. Their typical primary focus is to secure local area market share.

Find the right experts to help you. It doesn’t matter if you are selling directly to the buyer, whether local hospital or group, or to a national group. Find an experienced attorney and accountant with deal structure and negotiation experience. Get help. “The physician who treats himself has a fool for a patient” is a well-known-Oslerism, and definitely important to keep in mind. An experienced attorney will make sure appropriate claw-back and other clinical and administrative control provisions are well thought out and addressed.

A must read book, also available as an audio book, is Venture Deals: Be Smarter than Your Lawyer and Venture Capitalist, by Brad Feld and Jason Mendelson. Though not focused specifically on the sale of a practice or group, the insight gained will prove valuable as you move through this process. The payout provisions are often complex. Understanding stock options, vesting, claw-backs, escrowed funds, and such should be second nature to your attorney, and they’re included in the book. Make sure you know enough to ask the right questions.

If you are a small group or solo practitioner, you may be too small for a venture capital (VC) firm to help. If your group consists of 10 or more physicians, the experience and other assets VC’s bring to the table could literally add millions to the final purchase price. If your group is large enough, sell-side venture capital firms will have an interest in representing you. One of the value propositions of working with a firm is that they will shop your deal to their network of prospective buyers which can be extremely important. Review their portfolio, ask to speak to current and former clients, even the ones that didn’t work out — in both cases, you need to know why and how. Find a sell side venture capital firm to work with and an experienced loyal attorney dedicated to you. Typically, fees range in the 5%-8% range. Even on a national basis, the VC community is small, but is also extremely interconnected, so keep information on who else you are talking to close to your vest. Never tell one VC who else you are working with until you have selected them. They need to compete for your business as well.

Large national groups looking for acquisition prospects typically look for four or more physicians in the group to expand their national network and control a service line to gain leverage with payers, hospitals, and vendors. Again, if you are large enough, you should explore if a VC can bring more value to you than just what your attorney alone can deliver.

The valuation can range widely, and the final purchase price is ultimately a conglomeration of what the financial valuation model shows based on past performance. The price will then fluctuate based on factors such as management team and cohesion, the intrinsic value (if any) to the buyer of having your group join to the moniker of the buyer, and skills sets and other assets your group will add beyond clinical capabilities, to name a few. Can you be of value to buyers in their future growth? Will the buyer be able to grow faster because of your reputation locally, regionally, and nationally? Even if you are not sure at this point how you can help beyond the clinical scope, invest an hour in thinking outside the box on this. Not only can you increase the price, but also you can secure more control and autonomy by inserting yourself as a valuable leader in your new organization.

For valuation, get your house in order. Even if your overhead, coding, patient mix, patient workflow, or collections had been less than optimal in the past, it will be important to your valuation and future positioning to be able to demonstrate you took the initiative to fine tune and fix things. Make sure all partners need to be on-board, so everyone speaks as one voice.

Negotiation is an art and a learned skill. Again, let the experts handle this. Your attorney must have this skill in abundance. Ask them to explain their philosophies in negotiations and share a few experiences that went well and explain the ones that didn’t. Ultimately, you will always have the final say, and you might even be required to be the one to come in to save the day. Make sure they are adroit at educating you as to what is and what isn’t really important in the negotiation. Be clear on their fee structure and set a cap.

Being Employed

Being employed is what you make of it. More private practice doctors want to enjoy steady salaries and hours as employees. Physicians have always been the MVPs for hospitals, and that’s not expected to change anytime soon. Physicians still influence where patients are admitted and go for procedures, which is why buyers want you. With a successful organization, employees earn the right to contribute and demonstrate value by being part of the solution.

The key word is “earn.” Buyers demonstrate how much they believe in you with the price they paid, and it will be up to both parties to prove it was well worth it. Hence, earning respect and influence is a continuous endeavor that starts all over again after the purchase, and those who exhibit accountability and relevance in the business world are rewarded. Those who don’t contribute remain stagnant or are replaced. The greatest good for the greatest number, to borrow a basic triage premise. If the organization lacks leadership, that might be a fantastic opportunity for you, or if that isn’t an option, go somewhere else. With the right partners, you really won’t lose control because they will want to tap into your expertise. If this is the case, how you define control has just changed.

Aligning expectations of both parties in areas such as productivity, growth, management control of the practice, and leadership roles prior to the sale is important. Find out how physicians are engaged in management and operational decision-making for the group as a whole, as well as the autonomy physicians have within their own practice in areas such as patient scheduling or staffing decisions. Since compensation, reimbursement, collections, and overhead management are the ecosystem that must always be balanced, determine how physicians participate and what opportunity there is to insert yourself in your specific areas of interest.Many look forward to being able to just focus on medicine again after the sale but, clearly, there is more to it than that. The biggest difference physicians experience right away is a huge sense of relief of the daily heavy administrative and financial burdens of being completely and solely responsible for everything. Now, they have a team, security, and in many cases, the opportunity to be part of something bigger than themselves.

For instance, don’t necessarily expect to be able to spend more time with patients than you do now. Although you may have fewer administrative hassles keeping you up at night, the patient volume and mix must enable the organization to remain profitable. It could very well be that improved reimbursement and cost controls are realized in the new group, but don’t let that give you a false sense of security. Patient volume is still the key to realizing the income you want.

Don’t let yourself become less productive—join a group that pays for productivity, effectiveness, and efficiency. Most compensation models are based on the RVU system, but the problem with RVUs is that they are not good measures of productivity or any premium perhaps associated with such things as being a pioneering, leadingedge, internationally recognized physician. RVUs only measure the consumption of physician resources (time, effort) in performing given tasks. The RVU model may be fine for your clinical time, but if you are the “Dr. Jarvik” in your field, a premium should be reflected in your base salary or additional stipend/bonus. Make sure you understand the total compensation package value and that you are compensated based on your productivity for clinical work and compensated fairly if asked to allocate time administratively. If you work harder and smarter than others, your compensation needs to reflect that. Obviously, your salary history and that of your colleagues is the most accurate basis from which to negotiate your future salary. Your specialty society probably also has surveys you can use, and there are other physician compensation surveys available online if you search. Don’t be surprised if the buyer offers you a lower salary.

The buyer has to recover the price paid for your practice today over a period of time going forward, usually three to five years. If it is a large, publically traded national group, for example, growth and profits may increase price per share, which adds to the bottom line. They may be able to realize expense reductions in the overhead associated with your practice, they may be able to increase reimbursements, and they may be able to introduce new efficiencies, but that may not be enough. Remember, they are paying you today and gambling on a return-on-investment over three to five years, so the time-value of money, cost of capital, and risk must be part of the calculus.

Among other things, the contract is likely to include a noncompete clause, and if it doesn’t work, you may have to move. So what?

Conclusion

Strike while you can, and take advantage of industry uncertainty and chaos that could equate to a once-in-a-lifetime opportunity. Even if being an employee doesn’t work out after a few years, so what? Do what every other person does and find another job, or worst case, start your own practice again. Physician shortages will remain an issue in the United States for years to come, so demand will remain high. Finding a new position shouldn’t be difficult.

If you think about it, many of our most important beliefs have no evidence. Faith and love would be hard to associate with hard evidence. You just have to believe. The final price you negotiate also includes a premium on top of the past performance numbers, so make the buyer a believer to get the best price possible! The illusion of validity is the art and the science of human behavior.

With the right offer, pull the trigger. You absolutely can’t predict the future. Sell now, make money, and in the worst case, do it again or get back to where you are now or perhaps better than where you were. You will start with a clean slate with both the knowledge of what not to do next time, and as well as with the business experience you gained from being employed the last time.

Everything usually makes sense in hindsight. What makes sense in hindsight was predictable yesterday by pundits. The easiest job in the world is being a pundit, creating the future and taking calculated risk is hard. One fact is certainif you do nothing, you won’t uncover opportunities or affirm your current opinion.

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