Crucial Questions

Podcast 18.7: How Will An Acquisition Affect My Employees And Associate Physicians?

podcast_GEORGIA ARIAL 18.7Practice continuity is extremely important to the success of the new post-transaction entity. Physician-owners want to keep their patients and employees happy. They want to maintain and fulfill their business relationships with associate physicians. Potential buyers want that as well. They want  the operation to continue uninterrupted and successful.

The bottom line is, there is a lot of alignment in this area but it is important to understand the new means by which these goals are accomplished. 

  • How will a transaction with private equity affect my associate physicians working toward partnership?  0:55 - 9:21
  • The single biggest issue for the investor is practice continuity. We discuss three attractive associate physician buy-in options and post-transaction partnership opportunities
  • Won't a private equity acquisition reduce opportunities for my associate physicians?  9:22 - 11:22
  • Private equity partnership opportunities can be more attractive to young physicians
  • Can private equity help me with the important but difficult task of recruiting quality new physicians? 11:23 - 14:20


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 Transcript

Andy Snyder:

This is probably the single biggest issue for the investor is practice continuity. “I'm putting a lot of money in this. I need to make sure that it continues, and that means that the selling physicians can't just walk out the door day one.”

Speaker 2:

Welcome to PF Insights, hosted by the leadership of PhysiciansFirst Healthcare Partners. If you're a physician practice owner or an ambulatory surgery center owner and you're wondering how to navigate the mergers and acquisitions ecosystem, this is the podcast for you.

Andy Snyder:

Welcome to PF Insights episode seven, brought to you by the leadership of PhysiciansFirst Healthcare Partners. I am your host, Andy Snyder, partner at PhysiciansFirst, and with me today is Eric Yetter, managing partner and plane enthusiast.

Eric Yetter:

Yep.

Andy Snyder:

Welcome, Eric.

Eric Yetter:

Yes. Good morning, Andy.

Andy Snyder:

Good morning.

Eric Yetter:

Good to be with you.

Andy Snyder:

Yes. We are continuing today with our series about ophthalmology practice investments and acquisitions. We are answering crucial questions posed to us by our prospective physician clients. We've done a few of these so far, so if you missed some of the previous episodes, feel free to go to PhysiciansFirst.com/podcast to look at all of our past work. There's some great nuggets of wisdom in those past episodes. But today we are focused on the question, "What will happen to my associate physicians?" Often a concern for physician partners who are about to go through a transaction and they wanna know how it's gonna effect the employees, but specifically the associate physicians, so let's start there, Eric.

Eric Yetter:

The short answer is the same answer that applies to other employees, which is probably nothing. It's probably going to be the same for them post-transaction. Most of the investors will simply sign the associate physician's contract over, so they just keep the same contract.

Andy Snyder:

Right, they sign an employee agreement that's the same.

Eric Yetter:

Yeah. They keep working the same way. We've already talked about how these investors are very hands-off. In a lot of ways, life will be the same for those associates. The thing I think that's going to be different for them is what partnership means.

Andy Snyder:

Right.

Eric Yetter:

For those that are ambitious to get to that level.

Andy Snyder:

Yeah, I think some of the more interesting situations and common situations that we run into is we have an associate physician who's been with the practice five or 10 years and they're kind of on the brink of partnership and the owner physician, so physician partners don't wanna put that person in a bad situation. So how is that situation best handled?

Eric Yetter:

Yeah. It's an important question. Most good practices are gonna have this problem. Because they've planned, they have people underneath them supporting them, they have associates that are partner-caliber and are working hard to get to that place. They've done that succession plan, they're running a good business, so it's a problem, frankly, that you probably should have. Most of our clients do. But, it's not necessarily a problem. It's not that the partnership opportunity is gone, it's not that you're just now an employee forever and you have no upside and you're just working for a paycheck. It's not that. But it's also not partnership in the same way it used to be. I think there are some things about it that are more attractive, frankly, to young people coming up. Let me just kind of talk about the scenarios about how this can be handled.

Andy Snyder:

All right. How we gonna have an A, B and C here?

Eric Yetter:

Yeah.

Andy Snyder:

I know you're a fan of that.

Eric Yetter:

In order this time.

Andy Snyder:

Okay, let's start with A.

Eric Yetter:

Scenario A, and this is probably the most generous thing that you can do. Sometimes people do this, is that they let the associate buy in before the transaction happens. So they buy in; they are now a partner and they can sell to the investor the same way that the other partners do. They're gonna get a lot of money for that. They weren't a partner as long, so it's kind of up to you guys if they do or don't deserve it. It's up to the physicians to make that for their own situation. But, that can be a really attractive thing if somebody's right on the cusp or if somebody has really earned it, it might make sense to let them buy in and be part of that sale event, if they've contributed to building a practice and making a practice have the value that it has, which is the reason that physicians have this opportunity anyways, because they have a valuable practice. So that's option A.

Andy Snyder:

I can already tell that the associate physicians out there are gonna try to select A.

Eric Yetter:

Yeah.

Andy Snyder:

If they're listening to this podcast.

Eric Yetter:

I would.

Andy Snyder:

Yeah.

Eric Yetter:

It's a great option. Now the other options are good too.

Andy Snyder:

Yeah. Go to B.

Eric Yetter:

That's scenario A. Scenario B is that the associate can buy in later at the local level. We're talking about that.We're talking about scenarios where the physician sellers, the owners, are going to retain some ownership in the local practice. In a previous episode, we talked about the difference between retained ownership versus ownership in the global company, et cetera. This scenario B is that the physician can buy into the practice at the local level. Basically what's happened is the selling physicians have retained some ownership in the practice and they have the opportunity to sell that to the younger physician when they want to, and probably on the terms that they want. They can probably pick when, they can probably pick how much, et cetera. So there's some equity left there that they can transfer to that new owner. Again, it's different than what it used to be. It's not just split evenly among the partners, or it's not split by some other means among the partners. There's a big investor from somewhere else who's not a physician that has ownership as well.

 

That's scenario B. Scenario C, again, is that the physician has the opportunity to buy in later, post-transaction, but in this instance, they're having the opportunity to buy some equity in the global company. Buy equity in the global ophthalmology practice management company. That can happen a couple different ways. The first way it could happen is that the physicians who did the original sale, the partners could sell some of what they have received, the equity that they received as part of the transaction to that associate physician. They could sell that; they could probably sell it directly. Again, could probably sell it on their terms, but there's a little bit ... might be a little more restriction about that, just based on what the transferability of those shares is, and that's something that the physicians need to talk about with the buyer, is what would be their options there. But, probably have some opportunity to do that. That's option one.

 

Then option two … again this is C1 and C2, just to be clear.

Andy Snyder:

We're gonna put a diagram in the sheet notes.

Eric Yetter:

Yeah. C1 is they get sold by the partners to the associates ... equity interest, we're talking about. Then C2 is that the physicians, the associate physicians that is, have the opportunity to buy into the global ophthalmology company under some program that the ophthalmology company has put in place. For example, let's say that the ophthalmology company has a program in place where an associate, when they get to a certain productivity level, they have an opportunity to buy equity interest in the global ophthalmology company at a certain price, and it's likely that the buyer or the investor would finance that. Excuse me. That can be an attractive option too.

Andy Snyder:

How is the price set?

Eric Yetter:

It depends. It really depends. It's kind of something that has to be set by a person, frankly. There may be a formula behind that. There may be ... probably a formula that gets adjusted as things grow and as the financial structure of the ophthalmology company changes, but it's too complicated to communicate, and also situation-specific.

Andy Snyder:

But either way, I think a good point from this is just like after the partner physicians have been acquired and moved from an owner to an employed physician, they still are incentivized by having a percentage of their production going forward.

Eric Yetter:

Yeah, yeah.

Andy Snyder:

They're also even more so, the new owner of the practice wants the associates to be well incentivized to stick around ... Buy into an equity portion. It's not just an option, so to speak. Oh, here-

Eric Yetter:

No, they want it.

Andy Snyder:

They want it.

Eric Yetter:

Yeah.

Andy Snyder:

They want you to be bought into the success of the platform moving forward.

Eric Yetter:

Yeah, this is important. This is probably the single biggest issue for the investor, is practice continuity. “I'm putting a lot of money in this; I need to make sure that it continues.” That means ... We talked about before that the selling physicians can't just walk out the door day one. They have to keep things going. But number two is they have to be replaced. It has to be perpetuated. That means new people buying in. So investing a lot of money into recruiting, we'll talk about that later, but also paying a lot of attention and developing sophisticated programs to allow associate physicians to have equity. I think an important thing too, is that there are a lot of components about this type of "partnership," this post-transaction partnership opportunity that is attractive to people that are associates right now. This is based on conversations that we've had with physician owners about their associates and about their interest and about their trepidations in terms of being an owner.

 

There are a lot of things about these new structures that can be preferential. For example, not having to go into debt. Physicians right now, young physicians, have way more debt than their older counterparts, no question about that. I mean, anybody would agree with that, unless you're lucky enough to have a scholarship, you probably have a lot of med school debt still. Your home was probably a lot more expensive than the home that your partner bought 30 or 40 years ago. Your home was probably more expensive, you probably have more debt on that. It's just a different environment. It's harder to get a loan, et cetera. It's harder to buy into a practice. It's not an appetite that a lot of associates have. They also don't necessarily have an appetite to do the management, to do the day-to-day management, the headaches that are associated with owning a practice.

 

What these new opportunities do is they allow the physician to have that upside, and it's probably an upside that's greater than just in the individual practice because it's part of this global company and they don't have those headaches, and they don't have to take out loans.

Andy Snyder:

They have a piece of the pie, but they're focused on patient care and their own production.

Eric Yetter:

Yeah. It can be better. I think a lot of people come at this and say there's no way this is gonna be as good for the associates as what I have now, but it's really worth a second look because a lot of these things are good. I think that thinking about who these people are, what they want, you may come to the conclusion that this is really better for them in the long run.

Andy Snyder:

Yeah. You brought up recruiting new physicians earlier, and that's a good next topic because many of the physician partners that we come across, they either say one, they don't have any associates yet; it's just the physician partners and they need help recruiting the next generation to carry forward their practice. Or two, after I ... “We've had this program where we bring in associates that we do it this way. The partnership goes this way once we have a new ownership and how are you guys going to help and continue the recruiting process?”

Eric Yetter:

Yeah. The reason that physicians do these transactions is threefold. One is they want to monetize the value of their practice; that's obvious. They wanna be paid for the value that they've created. Number two is that they want upside. They want help growing, they want investment from the outside to grow organically through improvements and through patient volume, et cetera, but also inorganically through acquisition. Then number three is they have some kind of problem they're trying to solve. That problem could be fear about future reimbursements, it could be regulatory burdens. Another common one is that it's recruiting pressures. It's extremely difficult to recruit a young ophthalmologist right now … very hard. Some specialties are extremely hard.

Andy Snyder:

We do not have an oversaturated ophthalmologist market right now.

Eric Yetter:

No, that's-

Andy Snyder:

We talked about that in the supply and demand scenario from episode one.

Eric Yetter:

It's why the investors are interested, and it's why all of you med students listening should look at ophthalmology. It has a great supply and demand story behind it right now. That being said, it's why the investors are interested, but it's also a risk point for them. They need to make sure that they can keep these practices going. They need to be able to recruit physicians to come in and take ... not only take over existing volume for people that are leaving, but grow. They need to have more people to do the patient volume they're gonna generate. They're developing sophisticated recruiting solutions. Probably one of three different things. Number one is some of them are looking to just buy recruiting firms.

Andy Snyder:

That's been my favorite answer-

Eric Yetter:

Bring 'em around.

Andy Snyder:

-in management meetings so far, "How are you gonna recruit?" "Well, we're acquiring a recruiting firm."

Eric Yetter:

Yeah, we're gonna buy one. That's-

Andy Snyder:

Shouldn't be as hard as you think.

Eric Yetter:

Yeah. That's happening. Number two is that they are hiring and developing their own recruiting departments. They're cherry picking the best people and bringing them in-house to do that. Number three is that they're just creating partnerships with the best people where they have established relationships with those people always looking for 'em. It's probably more than a physician can do on their own, what the investors are going to do to help with recruiting. There's some attractive options to working ... some attractive properties, excuse me, to working with one of these companies. There's security for big organization, et cetera. A little bit different, but I think a value add.

Andy Snyder:

All right, I'm gonna wrap us there for this episode of PF Insights. We went over what will happen to my associate physicians, we talked about what about associates who are close to partnership while others have the chance to buy in and “Can I get help recruiting new physicians?” Thank you for your time today, I'm Andy Snyder; he's Eric Yetter, coming to you from a basement somewhere in Nashville, Tennessee.

Eric Yetter:

Thank you.

Andy Snyder:

Thank you for your time. We'll see you next time.

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