Consolidation Transactions with Concierge Medicine Practices and Practical Recommendations for Concierge Practice Physician Owners
Most physician owners of concierge medicine practices do not have experience going through a practice sale or major partnership transaction -- here are some helpful and practical recommendations to consider.
By Dana Jacoby and Gary Herschman[1]
Over the last several years there has been a growing trend of consolidation and partnership transactions involving concierge medicine practices.[2]
The purpose of this article is both: (A) to educate concierge medicine physicians on why concierge medicine practices have been transacting with increasing frequency; and (B) to provide practical recommendations for owners of concierge medicine practices who are exploring the possibility of entering into such a transaction.
Why Are There So Many Concierge Medicine Practice Transactions?
[caption id="attachment_97378" align="alignright" width="300"][1] Dana Jacoby is the Founder and President/CEO of Vector Medical Group, a strategic healthcare consulting firm that advises concierge medicine practices across the country on improving operations and profitability, and the pros and cons of various strategic transactions. Dana’s email is: djacoby@vectormedicalgroup.com (Photo used with permission)[/caption]
There are at least six (6) key drivers of the increasing transactions in the concierge medicine industry. Some deals are the result of all of these factors, but others are driven by only a subset of these factors.
Accelerated Growth and Geographic Expansion.
Entering into a transaction that involves joining a larger concierge medicine company will provide greater access to outside capital (vs. from the practice’s physician owners) to enable the practice to expand and become more profitable. This includes funds used for the following:
Opening new locations in affluent or underserved urban markets;
Acquiring other concierge or high-end primary care practices to expand reach and market share; and
Investing in more marketing and brand positioning to attract high-net-worth patients and employer contracts.
Technology and Infrastructure Investment.
Joining a larger concierge medical organization also provides access to its existing technology and infrastructure, such as:
Electronic medical record systems, patient portals, and telehealth platforms;
Enhanced data analytics and care coordination capabilities; and
Advanced CRM systems and digital onboarding tools to improve member experience and retention.
Operational Scale and Efficiencies.
Larger concierge medical companies also provide the benefit to their affiliated practices of a team of experienced executives and departments to improve operations & efficiencies, including:
Centralized billing, human resources staff, and legal & compliance resources;
Seasoned professionals to improve recruitment and training of top-tier physicians and support staff; and
Economies of scale in purchasing goods and services, including: health benefit plans, medical malpractice insurance, medical equipment, vaccines, clinical tests, and other supplies.
New Services and Revenue Streams.
Being part of a larger organization also provides capital, and more importantly, expertise with regard to new services, such as:
Launching ancillary services like diagnostic testing, executive health, IV therapy, mental wellness, and longevity programs;
Offering corporate health programs and direct-to-employer contracts; and
Developing new subscription tiers or premium add-ons to maximize lifetime patient value.
Increasing Challenges.
Concierge practices are facing mounting pressures that are reshaping the competitive landscape and putting strain on independent operators, which make the benefits of joining a larger organization more compelling than ever. These challenges include:
Accelerating inflation (making just about everything more expensive – e.g., staff compensation, health benefits, and malpractice insurance), and thereby reducing profits to owners; and
Increasing competition from large concierge medicine companies (e.g., MDVIP, Castle Connolly, SignatureMD, One Medical, and PartnerMD), as well as hospital systems which employ most physicians in many communities.[3]
Liquidity and Wealth Diversification for Founders & Owners.
Entering into a strategic transaction allows for the “monetization” of the value of the concierge practice that its founders and other owners have developed and grown over the years. Physicians should (but do not always) view their ownership in their medical practice as part of their personal wealth portfolio. Some benefits of such monetization include:
“Cashing out”, in whole or in part, so that part of the value paid to you can be invested in other sectors for purposes of financial diversification, such that if things turn south for concierge practices in general, or your practice, you will not be financially impacted as much;
Partnership transactions that provide consideration in part in cash and in part in “rollover” equity in the larger, growing platform company, allow owners to turn years of their hard work into cash while retaining upside in future growth; and
If you retain some equity via the transaction, it is not uncommon for the value of such equity to grow (potentially 2-3 times or more over a period of time), and to then enjoy additional liquidity (cash) in one or more future transactions, and also when you retire.
Practical Recommendations for Physician Owners of Concierge Medicine Practices
Notwithstanding the growing trend of consolidation in the concierge medicine industry, a partnership or sale transaction is not right for every concierge medicine practice.
[caption id="attachment_97379" align="alignright" width="300"]Gary Herschman, Esq. has been advising physicians on strategic positioning and major transactions for over 30 years and is the Co-Chair of the Health Care Transactions Group at the national healthcare firm of Baker Donelson. He represents many concierge medicine groups on growth strategies and strategic partnership and sale transactions. Gary’s email is: gherschman@bakerdonelson.com (Photo used with permission)[/caption]
The following are practical recommendations for physician owners of concierge groups to consider if they are exploring the possibility of entering into such a transaction.
Make an Informed Decision.
Some physicians are “allergic” to any discussions regarding a potential transaction, private equity or otherwise. But, before making a fully informed decision about what (if anything) is right for your concierge medical practice, fully educate yourself about each potential option you may have, and the pros and cons of each.
Culture is Key.
Regardless of the purchase price being offered by a potential partner/buyer, make sure that you are very comfortable with the “culture” of the other party – a hospital, PE platform, national company, or otherwise – such as:
Do you trust them as your future partner?
How confident are you that are experienced and likely to improve and expand your practice?
Do you agree with their future plans for your practice?
Plan for Achievable “Income Repair”.
“Income repair” is the term of art that refers to restoring and otherwise increasing compensation of physician compensation in the years following the closing of a partnership or sale transaction. This is most important if joining a private equity platform, because these partnership transactions usually involve an initial “compensation reduction” (sometimes referred to as the “scrape”), and therefore, restoration of such reduction in the short-term following the closing is usually a key term for physicians in order to agree to proceed with the deal.Therefore, if income repair is important to your transaction, then you need to do “reverse diligence” on your potential partner/buyer to assess how likely it will be for you to experience meaningful income repair in the few years following closing of the deal. Some of this reverse diligence could include asking for details about the extent to which the following factors will enhance your post-closing compensation:
higher payor rates with commercial insurance plans;
the addition of new and profitable ancillary services;
efficiencies through overhead reduction (e.g., billing, human resources, IT services, call centers, etc.); and
cost reductions via group purchasing (e.g., supplies, malpractice premiums, health plan cost for staff, etc.).
Success in Recruiting New Physicians.
If hiring new physicians is an important factor for the growth of your practice, then you should investigate the extent to which your potential partner/buyer has been successful recruiting new physicians for other offices that it previously has partnered with (e.g., do they offer competitive compensation and benefits, do they offer equity participation, etc.)
Talk to Your Colleagues!
Before deciding to enter into a major strategic transaction, talk with other concierge physicians you know who have partnered with the same company. It’s very important to objectively verify your understanding of the company’s culture and success at recruiting new physicians and buttressing your compensation post-closing. And in this regard, call colleagues you know and trust, and do not only speak with physicians who the company tells you to call.
Avoid Partnering with Over-Leveraged Companies.
Through input from your accountant or investment banker (if you have one), an assessment should be made regarding whether your potential partner/buyer has “over-leveraged” – meaning they have more debt than may be reasonable considering their size, revenues, and other factors. Having too much debt could be a harbinger of joining a company which has significant challenges in expanding and being profitable long-term.
Get Your “House in Order” In Advance of Considering a Potential Transaction.
It is highly advisable to address certain key issues in advance of starting to speak with potential partners/buyers. This will save you a lot of headaches when you are deep in a transaction process, and will help to maximize the value of your practice. The following are the key issues that should be assessed (and if needed, addressed) in advance:
If you are not the sole owner of your concierge practice, then it is crucial to confirm that there is clear consensus among all physician owners to move forward first with exploring, and then entering into, a strategic transaction.
If you are not the sole owner of your practice, then it is also important to have consensus with your co-owners as to how proceeds of a transaction should be split – and whether the practice’s governing documents and tax status allow for such intended allocation or require modification.
Further, you should consult your practice’s accountant regarding whether there could be tax advantages to a corporate restructuring before starting to explore options (e.g., in a prior tax year).
With the guidance of your healthcare transactions attorney, an assessment should be made regarding basic regulatory compliance matters, and whether any items need to be remedied immediately, which could avoid devaluation of your practice, and lead to a smoother overall transaction process.
Do You Own Your Practice’s Real Estate?
If you own your concierge practice’s medical office, then an assessment should be made regarding whether the lease between your real estate entity and practice contains key terms that will ensure maximal valuation of your real estate in the event that you decide to monetize the real estate at some point following the closing of your strategic transaction. For example, the lease should contain triple net terms, a term of 10-15 years, and market rent which escalates each year (e.g., 2-3%).
Advance Planning with Your Personal Wealth Advisor.
It’s also highly advisable to get input far in advance of partnership/sale transaction of your concierge medicine practice to obtain input from your accountant and personal wealth advisor. This is important because they may have ideas in order for you to best achieve tax-efficiency and estate planning goals via structuring the transaction in a certain manner.
Important Advisors.
You spent years building your concierge medicine practice to become very reputable and profitable. Thus, it is important to engage professional advisors who have successfully advised several (i.e., 5-10) similar medical practices on strategic partnership transactions. In this regard:
If you decide to have an investment banker “market” the practice and obtain various offers to transact with the practice, then you should interview a few experienced investment bankers before deciding which one to engage. (You should also speak with a few experienced attorneys and accountants before hiring them too).
Moreover, it is also highly advisable to have an experienced healthcare transactions attorney review a draft of the Letter of Intent (LOI) before signing it. Even though LOIs are “non-binding”, a signed LOI will be in connection with the ongoing transaction process, the LOI will be it will be constantly referred back to as reflecting the “core” agreed upon terms of the deal. As a result, before signing an LOI, you should be confident that it terms set forth are acceptable, and that no other terms that are crucial for your decision to move forward with the transaction are missing.
In sum, most physician owners of concierge medicine practices do not have experience going through a practice sale or major partnership transaction.
We hope that these practical recommendations are helpful both: (i) if you decide to explore the universe of potential strategic options that may be available for your practice, and (ii) in the event that you decide to pursue a partnership transaction to achieve your long-term professional and financial goals and for your practice’s long-term success.
Citations and References
[1] Dana Jacoby is the Founder and President/CEO of Vector Medical Group, a strategic healthcare consulting firm that advises concierge medicine practices across the country on improving operations and profitability, and the pros and cons of various strategic transactions. Dana’s email is: djacoby@vectormedicalgroup.com. Gary Herschman, Esq. has been advising physicians on strategic positioning and major transactions for over 30 years and is the Co-Chair of the Health Care Transactions Group at the national healthcare firm of Baker Donelson. He represents many concierge medicine groups on growth strategies and strategic partnership and sale transactions. Gary’s email is: gherschman@bakerdonelson.com
[2] Concierge Medicine Market - Global Industry Size, Share, Trends, Opportunity, and Forecast, 2020-2030F
[3] Hospitals cash in on a private equity-backed trend: Concierge physician care - ABC News