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Recent LEADERxBOARD Blog Posts

By Jeff Kahn 02 Mar, 2021
At TEAMWORx Health, our extended network includes some of the most thoughtful investors and innovators in healthcare, and we are privileged to exchange ideas and insights with them on a daily basis. In this issue of the LEADERxBOARD, we are honored to feature Tim Coan, CEO and founder of ALN Medical Management and a national speaker on physician practice management (“PPM) and operations. Here, he shares his perspectives on how sponsors can create the conditions for success when investing in physician-led practices. The healthcare industry has changed dramatically – the impacts of consolidation, technological advances, the Affordable Care Act and consumer preferences have all transformed the way healthcare is delivered. Today, people can receive urgent care at Walgreens, consult with a specialist in another state through telehealth, or have a hip replaced as an outpatient service.  Many of these changes have been spearheaded and accelerated by private equity sponsors who recognized the potential ahead of the curve, and these sponsors are continuing to invest in various multi-specialty physician-owned practices. With the potential to achieve greater efficiencies and deliver higher quality care to patients, private equity continues to transform this vital part of the healthcare system. To do so successfully, sponsors should consider the factors that make investing in physician-owned practices a very different proposition than in a classic owner-operated business, and be ready to navigate the factors that make it unique. The Economic Factor Successful partnerships require a balance between sponsor economics and the various physician's (owner/non-owner) compensation plans. In order to find this balance, sponsors need to recognize the impact of incentivization structures, cost management and regulatory requirements. Incentivization . Doctors who own their own practices are used to paying the bills and dividing up the remainder among the physicians. This, in turn, has set the perception of the fair market value and income expectations for those physicians. But when sponsors buy a physician practice, two things happen: first, the physician gets a big check and second, they often have to take a salary cut to get to the investment parameters aligned for the sponsors. Sponsors need to understand the impact this situation has on the physician's motivation and look for ways to structure the deal so that the cash flow is protected and the physician—who are usually the ones driving revenue—stays motivated and productive. Cost Management. Ordinarily, physicians are incentivized to manage costs because they receive whatever is left after the bills are paid. But that changes in a sponsorship scenario where the MSO pays all the bills. While the management service organization is focused on EBITDA, the physician will be focused on their compensation plan, and their behaviors will be dictated by that plan. If compensation is not tied to cost management, it often creates a conflict around the issue of expenses, with increased requests from doctors for more staff, more marketing and more resources in general. Sponsors cannot expect physicians to understand sponsor math and regulate themselves accordingly: instead, compensation must be aligned with the behaviors the sponsor want to encourage. Regulatory Requirements. The last element to impact the economics of the deal is the regulatory environment surrounding these practices. Sponsors—especially those that are relatively new to investing in healthcare—need to be aware of the regulations governing the incentivization and rewarding of physicians. Stark Law is perhaps the most onerous, and regulates referrals for Medicare and Medicaid services. Most common methods of rewarding producers in any other business environments risk contravening regulations set up to prevent fraud, kickbacks, and abuse of the system if done by physician practices. The Psychological Factor Adequately accounting for the psychology of the physician-led PPM— their need for and expectation of control over the business — is integral to the success of the sponsor-physician relationship. Independent physician practices are typically run by doctors, but these doctors are also entrepreneurs. It is their name on the door and their licenses at risk, which means their identity is closely bound up in their practice. Fundamentally, they ARE the business. Successful PPM deals start with a real awareness of these psychological dynamics and preparing for them. Sponsors need to initiate candid conversations with the physicians about how the management of the business will change, especially around hot button issues such as practice branding, hiring, training and compliance, and often switching to a different EMR. But once the deal closes, the sponsors are suddenly in charge. While they do not tell the doctors what to do from a clinical angle, the sponsors largely control every other aspect of service delivery. This often impacts physician behavior in one of two ways: they may slide into an "employee" mindset where they disengage from the higher-level decisions, or they may reassert their autonomy and challenge every sponsor decision. Neither state of mind is necessarily bad for business: it depends on what the sponsor needs from those physicians and the plans they have for the practice. Physicians are fundamentally scientists: they want to analyze data to understand the “why.” If the sponsor is prepared with ample datasets ahead of time, and can use this to help explain how their approach will help the practice scale and grow, it can go a long way towards heading these conflicts off at the pass. The Generational Factor A typical physician-owned practice might span three generations of physicians, and it is important for the sponsor to recognize the contribution each cohort makes to the practice. While the first generation typically built the practice that attracted the sponsor's eye, it is the second and third generations who will impact business outcomes in the immediate and longer-term future. That makes it incredibly important to understand how those generational differences impact culture and values so that each cohort's talents and needs can be factored into the strategy. While a sponsor may base their projections for the practice on the volume that the tireless efforts of that first generation produced, they must also factor in the knowledge that this generation will be retiring very soon. The second generation will need to pick up the slack, take the lead, and create the economic value needed for a successful exit for the sponsor and an attractive payout for themselves. But it is the third generation—recent residency graduates and early-career physicians—who will drive continued growth. They have very different priorities and outlooks than the other cohorts, and recognizing and accommodating their needs is critical. Bringing new physicians to the practice requires creativity to accommodate the variety of work-life scenarios. As an example, a CEO had to convince his sponsor to buy out two first-generation physicians and replace them with five younger doctors, all of whom would work a four-day week. While replacing two seasoned, hard-working physicians with more than twice as many doctors—none of whom were willing to work full time—initially seemed like a step backwards, it was actually the best thing for the practice. By offering shorter work weeks, the clinic can attract the best of the newest generation of physicians, and because these doctors do not mind rotating the weekend shifts, the practice is also able to offer more attractive hours to consumers. Set a Foundation for Success As the healthcare system continues to evolve, physician-led practices hold tremendous potential to deliver value and support significant growth. But once an equity sponsor and a physician practice have shaken hands and done a deal, they will find themselves sitting in a boardroom together trying to figure out how to navigate the next steps. This is where an understanding of the unique economic, psychological and generational factors that shape these practices will go a long way toward setting both parties up for success. --- Tim Coan is CEO and one of the founders of ALN Medical Management, a company that provides outsourced revenue cycle management and information technology services to privately-held and private-equity sponsored physician groups. He has served as Chief Executive Officer since inception in 2000. He is a regular writer and speaker on healthcare topics and maintains a regular blog on a variety of topics relevant to independent physician practices.
By Jeff Kahn 01 Dec, 2020
As an executive search firm dedicated to healthcare-focused private equity sponsors, TEAMWORx Health works with investors and portfolio company leaders to build exceptional executive teams for high-velocity healthcare companies. TEAMWORx Health is privileged to partner with a wide range of privately-held companies and private equity firms that are changing the way healthcare is delivered. On a daily basis, we are in discussions with some of the most exciting innovators in the sector. These conversations give us a window into the emerging areas where healthcare innovation is poised to transform the quality and efficiency of care. This first release of the LEADERxBOARD highlights some of the private equity investment trends that have incredible potential to transform healthcare in the coming years, and the key talent considerations that need to be top of mind for every sponsor and private company in the healthcare sector. Private equity will continue to be instrumental in effecting this transformation and finding the right talent to fuel the required growth and innovation will be critical. Trending Healthcare Services Investments Our network continues to buzz about consolidation opportunities in healthcare services and physician practices. In 2017, the purchase and aggregation of medical practices topped $15 billion in transactions; in 2018, that number rose to $23 billion. In 2019, it approached $60 billion—nearly a 3X increase over the previous year. The first investment cycle focused on services such as urgent care, dialysis and infusion services, dermatology, and ophthalmology — largely high-demand, high-billing procedures. As we enter a second cycle of platform development in healthcare services, sponsors continue to focus on specialty practices including orthopedics, urology, and gastroenterology. Here are some examples of new sectors receiving investment from sponsors. Women's Health Services. Consolidating fertility, OB-GYN, and other specialty services in one place will be transformative for women's healthcare. Primary Care and Pediatrics. The prevalence of obesity, metabolic disorders, and mental health issues among kids and adults has increased the need for integrated services that bring together with primary care, psychiatry, sports medicine, and other specialties for fast, convenient, efficient care under one roof. Orthopedics and Sports Medicine. The U.S. orthopedics and sports medicine surgery market generates more than $25 billion in revenue, and services for both adults and children are expected to grow significantly. Relocating surgeons and other specialists from hospitals and small private practices to sponsor- backed platforms creates greater efficiency and results in better care. This trend is likely to continue because it is economically viable and scalable, and it meets a clear consumer need for convenience and quality care. Emerging Specialties While some specialties, such as ophthalmology, have already seen tremendous growth in the market and received significant attention from sponsors, others are only just starting to gain momentum. Gastroenterology. The majority of the 350 million people in this country are affected by GI disorders, including Crohn’s Disease, IBS, metabolic disorders, ulcers, or one of a hundred other very common problems. Urology. Healthcare consumers in the US are projected to spend over $11 billion managing various urological conditions. Additional advancements in urological technologies are poised to have a positive impact on service delivery, as the urology devices market in the U.S. expected to reach $3.8 billion by 2025. PPM/ASC. Many physician practice groups own and operate networks of ambulatory surgery centers; ASCs have already proven to be a hugely popular consolidation target for private equity investment. There is now a growing recognition that aggregating practices with their own networks of surgical centers delivers even greater value. The more specialized those practices are and the more they lend themselves to being combined with complementary services, the greater the opportunity for high-value, high-quality, scalable service delivery. Pediatrics and Geriatrics. The far ends of the age spectrum are areas where private equity investment is starting to transform health outcomes. With the number of children with chronic health conditions on the rise and the percentage of the population aged 55 and over growing rapidly, healthcare will need to find innovative ways to serve the needs of these demographics. According to multiple studies, healthcare for the 55+ population consumes more than half of the country's healthcare resources. Finding a sustainable solution will need to be a priority in the coming years. On-premise, Home, and Mobile Care / Out-of-hospital Care Keeping a patient in a hospital bed is costly—approximately $2,000 per day—and in many cases, caring for patients outside of an institutional setting can save money, create a more comfortable experience, and deliver better outcomes. There is a growing interest among private equity firms in solutions that can extend the range of general and specialty services that can be delivered in settings such as workplaces, homes, and mobile clinics. Advances in technology have made it possible to deliver the highest quality at-home support for a variety of patients who do not need 24/7, hospital-level care. Another promising area is mobile delivery of healthcare services, particularly emergency services. More than 80% of hospital admissions come through the emergency room, and this is a vastly resource-intensive part of care. Yet many patients who enter through the ER can receive appropriate treatment in non-hospital settings. One of our clients is reengineering emergency care by offering a mobile ER staffed by nurse practitioners and other clinicians who arrive directly at your home, office, or any location requested. This is a very effective way to care for people with less critical issues who might otherwise take up valuable hospital resources and suffer through long waits in an overcrowded emergency room. This same company is now launching a comprehensive “hospital-at-home” platform to provide patients with acute and post-acute care at their own homes. The Healthcare Talent Crunch Finding the right executive and functional leadership for private equity-backed healthcare companies is always a challenge. Through this next cycle of innovation, companies will continue to battle for the best talent. Here are a few key considerations: Think about Human Capital sooner. We have seen that organizations that have the right team in place from day one are incrementally better at meeting their growth goals sooner and more efficiently. Team Due Diligence. Evaluate the full executive team and have a well-developed a human capital plan long before submitting your letter of intent. Bringing a human capital partner into the conversation earlier to analyze the leadership component of the deal at the outset is more essential than ever. Communicate Your Vision. Being able to identify individuals with the right mindset, backgrounds, and skillsets is a key step toward securing the necessary human capital and cultural elements needed to support high-velocity healthcare organizations. Sponsors and their operating companies and need to create a compelling story to effectively communicate the vision, including cultural, strategic, technological and operational improvements they are making and the philosophy that drives those innovations. Look for a "Velocity Mindset." A healthcare executive may come with the right industry and functional expertise, but are they capable of operating at an accelerated pace and working collaboratively within a lean, elite team? Explore their history of surpassing goals, exceeding expectations, and building teams that accelerate the investment thesis. Private Equity Drives Innovation Over the past two decades, private equity investments in healthcare have resulted in significant improvements and innovations in healthcare delivery, leading to a notable increase in accessibility and the quality of care for consumers. As private equity firms build on and learn from their early success, the future holds even greater promise.

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