More and more physicians are considering selling their practices and becoming employed by either a health system, a larger practice or through the vehicle of a private equity transaction. Why? We have the usual suspects – reimbursement uncertainty, pandemic fear, heightened competition, overhead cost increases in technology, increased regulation, and lack of interest in administration of the practice. All good reasons to consider selling. But when considering options, physicians need to decide what is most important to them and, based on that, prioritize their goals and strategies:
- Is purchase price most important? If so, private equity (PE) might be the best option. PE firms generally pay a multiple of EBITDA, which will often result in a nice check for the physician at the closing of the sale. But that payment comes with certain handcuffs, of course, namely a long-term employment agreement, a significant restrictive covenant, and generally a haircut on compensation going forward, which may be subject to productivity incentives. But, it also means that if the physician’s interest and focus strongly favors the practice of medicine rather than the operations of practice administration, the physician could do very well and the PE option might be worthwhile. If this is a serious contender, the physician should not shy away from doing their diligence on prospective firms – the firms won’t shy away from gathering all the information available to them. This is a long-term, no-turning-back decision for a physician and all rocks should be looked under.
- Is security most important? If so, a health system might be the best option. Health systems own and operate hospitals. They also generally employ a large number of physicians and run physician practices. They have infrastructure in place. They have good benefits, like physicians, and strive to work with physicians. While health systems need to adhere to anti-kickback and Stark rules, they pay fair market compensation. There is stability by being employed by a health system. While a health system generally limits the payment of a practice to that of the fair market value of hard assets, with the possibility of some minor intangibles (e.g., workforce in place, active charts, etc.), they offer fair employment arrangements, generally assume space leases, and offer employment to staff (in good standing). Provided the health system has a good reputation and is financially stable, and if job security is the physician’s prime goal, a health system may be the best choice.
- Is entrepreneurship most important? If so, joining a larger physician group may be the way to go. In this day and age, a one-, two-, or even five-person practice may be difficult to sustain. But a 50-person group might just survive – and thrive. The smaller practices are more vulnerable when it comes to meeting all regulatory requirements, are in need of capital, and have significant staff turnover, among other challenges. Larger practices have more leverage with banks, vendors, and recruitment and retention. And, group practices can (if they meet applicable regulatory requirements) provide ancillary services and have opportunities for additional income. If a large group is well-run, provides quality services, and remains innovative, there are significant opportunities for the physician group to survive in the long run.