In this episode of PF Insights, we discuss the key differences in consolidation and acquisition of health care practices in the 1990s compared to the current state of PE backed consolidations and acquisitions. We look at key similarities and differences of the acquisition time periods and focus on the fundamental change that has made acquisition models more successful for both physicians and buyers.
Eric: The old model, was for companies to buy some portion of the practice's operating profit. The problem with that was, there wasn't really anybody in charge.
Narrator: Welcome to PF Insights, hosted by the leadership of Physician's First Healthcare Partners. If you're 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: Hello everyone, welcome to PF Insights, this is your host Andy Snyder. I'm managing director at Physicians First Health care Partners, and with me, as always, I have Eric Yetter, the managing partner.
Eric: Good morning, Andy.
Andy: Good morning. Today we have episode nine, and we are going to compare and contrast the consolidation and acquisitions in the ophthalmology specialty with acquisitions and consolidations, movements of the past. A lot of physicians we encounter want to talk about consolidation in the '90s with Physicians Resources Group and similar companies and some of them have negative feelings with how they at went and went through some trying times during that consolidation. They want to understand how is it similar and how is it different and we're going to give something insight on that topic. So with that I will kick it to you Eric.
Eric: Yeah. It's an important topic and what happened in the '90s really was a disaster. It was a disaster for investors, these were mostly republic companies. And there were normal people and pension funds and all those types of investors who lost a lot and then in physicians lost a lot in it too. A lot of them went through very contentious legal battles. Just difficult times for practices in the '90s, kind of the really late '90s and started the 2000s is when it really unraveled.
And a lot of the physicians that we work with, were a part of that. If they weren't a part of it, they were in kind of in their fellowship or they were young associates when it happened and then they saw the partners above them going through it. And they remember that. And nobody wants that to be repeated.
Andy: And in some cases it seems like they had to maybe fight to get the practice back-
Andy: ... from the senior partners that had gone through the acquisition and then subsequently retired and then now these who were associate physicians go into the partnership, where they only had to kind of fight to get it back.
Eric: Right. They inherited that.
Andy: It's true.
Eric: And the investors don't want to repeat this. The physicians don't want to repeat this. Nobody wants to repeat this. So it's important to think about what's so different? Why is this not going to happen again? And Physicians Resources Group was a speciality, ophthalmology focused investor or practice management company and most of the others were really more general. FiCore was a huge one here in Nashville and there are kind of scars from that company all over the place here. Ultimately that company ended up going away. AMSURG bought a lot of its assets, its surgery center assets. It was just an interesting time.
So and I think there's a fundamental difference and thankfully it's a pretty clear difference and that is that the old model was for companies to buy some portion of the practices operating profit meaning that it bought some of the cash flow that the practice produced before the physicians got paid. So when you collect a million dollars, you have 50% overhead, you have 500,000 dollars, the physicians prior to that date were splitting, whether that be a salary or distributions or whatever it is.
And companies like PRG were coming in and say, "We will buy a portion of that. Let's say we buy 10% of that so we buy 50,000 dollars a year of profit. And we get to keep that. We get to keep that percentage but we promise you that we're going to make up for that. We're going to improve this practice. We're going to improve the profitability through contracting, through cost-savings, through centralizing operations, was a big part of it. We're going to take over management of the practice and we're going make up for that."
And the problem with that was that there wasn't any really anybody in charge. The physicians still owned most of the profit. The company owned some of the profit. The physicians were on the hook if the profit evaporated. They had no contractual right to a certain amount of money. They just got to keep the profit if it existed. And the practice management company while they had responsibility for managing the practice day to day, they weren't on sight. They're trying to outsource everything, keep everything in a centralized model and save money and do all kinds of things like that. And I think a lot of people in health care have learned, doesn't really work. Most things in health care have to be done locally.
And it just didn't ... The whole model ended up not working. Physicians didn't have an incentive to keep working hard. They didn't have control and it just kind of fizzled. And I think that we've seen that, too. You know in our experience, we've seen mistakes made that often are centered around a corporate buyer, trying to do things at a corporate level that really shouldn't be done at a corporate level.
And the way that I would sum up what's different now is that this is an employment model. That's what it is. People are buying a 100% of these businesses and they're employing the sellers. That's what private equity does all the time, especially smaller private equity firms. They come in, they buy a manufacturing company that's doing really well and its owned by a family, it's owned by a guy or a woman, and they come in and they buy that and that person stays but they become an employee. So it's a clear distinction. You are now an employee. You are responsible for running this company and we will pay you. We've come to some agreement about what we will pay you to do that and you're going to have an incentive to do it well, but we own the company. And it's our responsibility and if we run the company into the ground, that's our problem.
Andy: Whereas in the past, you were saying it was a little bit more of a partnership but with that word partnership and splitting profits is a little blurry.
Eric: Yeah, it was a blurry partnership. That's a great way to say it. It was a partnership where really there wasn't ... and it didn't work well. There wasn't good defined roles. And here the roles are very, very clearly defined. And this is has worked well and talked about how it's worked well historically for private equity in global industries, in manufacturing and software. They do this all the time, buy companies and move people, move the seller an employment model. But it's been done really well in health care too.
And we saw this more historically I think with the acquisition of more hospital ... why don't we call it a hospital based practice, anesthesiology, radiology, some of these emergency medicines, some of these bigger groups that were physician-owned have been acquired and the physicians have been moved to more of an employment model and that's been successful.
It's been done more recently in dermatology, and now it's being done in ophthalmology. But the reason that we're getting so much more momentum on this, is that PE firms have tested it and its worked.
So one of the things that we always tell physicians is, "If you're going to do one these transactions, you have to be comfortable with their model. You have to be comfortable with selling 100% ownership, in most cases sometimes you don't, but we're generalizing here. So in most cases, selling 100% ownership of your practice and or surgery center and moving to an employment model." Though, we don't want to think about employment though, as a kind of pejorative thing. Employment doesn't mean that you do whatever your boss tells you to do and you have no autonomy and you lose a lot of that. That's not really what this is. The buyers are not interested in that. They're interested in very autonomous physicians who still have full clinical control for sure and still have a lot of operational control, particularly over day to day things, who can continue to keep running their practices they way they run them. Give up some of the management headaches but keep running them and earn as a percentage of production ... of clinical production.
Andy: It's an employment model with a hook as well. I mean you have to ... and most cases the hook being the equity in the global company.
Eric: Yeah, well-
Andy: Because they have to have some sort of align incentivization for ... you're not going to go in, tell the physicians your choice of latter stages, name of your career, we're going to pay you x times multiple and then you're just an employee going forward.
Eric: No. That doesn't either.
Andy: Probably not going work well.
Eric: Yeah. That's works terribly too. So if you come in and you buy 100% of a business and you say, "Okay, business owner now we're going to pay you $200,000 a year and it doesn't matter what you do," that person's not going to have a whole lot incentive to work, certainly not to work the way they've been working. So they've created models that have incentives. And the first obviously incentive is that they're paid a percentage of production, so the more that they do, the more they get paid.
But they also have equity ownership in the global company. Or some kind of other equity like structure that gives them ups time. If everything is successful, if the whole private equity investment is successful, they will be rewarded very well. And that's a key part of what this is. It's a sale of the business but in a sense it's also an investment in private equity because of the stock that physicians get as part of these transactions.
Andy: Right. And I don't know if there's any more to kind of compare contrast I think it's honest to put out there that if there's 20 different ophthalmology platforms being built right now, not all 20 of them are going to have the success that they want.
Eric: Probably not. No. I mean but history is a lesson in that, I think ... We think there will be consolidation among the consolidators, the ones that don't grow as fast or don't run as well will probably get merged into the ones that do things better over time.
Andy: But I think the bottom line is when comparing consolidation 20 plus years ago, to consolidation today there is more defined boundaries about, this is 100% acquisition in a lot of cases. And it is moving at physician-owner to an employment model. I think that's the bottom line of this episode-
Andy: ... and the message that we want to be clear.
Eric: I agree. And I think one more thing I would add is that the private equity buyers aren't out there making the promises that were made in the '90s. They're not promising to replace the income that physicians are giving up.
You know if you're a physician, you own a really profitable practice and you make two million dollars a year, and you sell your practice, you're not going to make two million dollars a year any more. You're just not. Now whether the money that you get up front and the money you could get from a stock sale later, outpaces that buy a large margin, that's a different question.
Andy: And that's the decision.
Eric: Yeah, that's the decision you have to make and thankfully these deals are good enough where it makes sense. But they're not making promises to go out and just change everything. They're looking for practices that are run well, and they're generally going to keep running them the way they've been run. They're going to try to achieve some things through scale and we can get better reimbursement contracts. They can get better products on the buying side, better prices, excuse me, but they're not going change everything. They're looking for stuff that's done well.
Andy: All will thank you Eric. I think I'm going to wrap it up here with episode nine. For anyone who wants to look for more information, please go to physiciansfirst.com. Check out our advisory resources page for more information on topics like this and many others. Thank you for joining us today. We look forward to seeing you next time. Thank you.