The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses investing in designated primary market makers and private placement memorandums. It is authored by our colleagues Tamara Senikidze and Gerald Thomas as well as George Douvris of RSM US LLP.

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Advanced Issues for DPM & PPM Transactions and Platforms: Business Tax Issues in Light of Tax Reform – Key Takeaways

By Tamara Senikidze, McguireWoods LLP; Gerald Thomas, McguireWoods LLP; and George Douvris, RSM US LLP

In light of the 2017 tax law, commonly known as the Tax Cuts and Jobs Act (TCJA), it is important for a private equity firms investing in DPMs and PPMs will need to evaluate each business its invests in to determine what type of entity should be utilized, according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 21 and 22.

Experts included George Douvris, Tax M&A Partner, RSM US LLP, Linda Epstein, Controller, Silver Oak Services Partners, LLC, and Shane Goss, Managing Director, Huron Consulting Group. The panel was moderated by Gerald Thomas, a partner at McGuireWoods LLP.

Here are five key points from the panel discussion.

1. The key components of tax reform affecting PE-backed health care companies include the pass-through tax deduction, interest expense limitation and bonus depreciation.

2. Healthcare pass-through companies performing medical services and employing physicians, nurses, medical assistants, or healthcare professionals are generally not eligible to receive the benefit of the new pass-through tax deduction. Yet, some companies are exploring ways to restructure their businesses to take advantage of the deduction in limited settings.

3. Many of the elements of tax reform (e.g., repeal of the interest stripping rule, adoption of limitations on deductibility of interest, limitation computations at partnership level, exclusion of certain trades and business from limitations, and expanding the definition of “qualified property” in the context of business depreciation) continue to evolve as additional regulations and guidance are issued by the IRS, leaving practitioners and taxpayers in a bit of flux as the new rules are navigated this current filing season.

4. The general consensus is that more proactive planning and collaboration between taxpayers and their tax return preparers/attorneys is necessary to understand and properly navigate the new rules.

5. The new tax rate structure is generating significant discussion related to tax entity choice (corporate vs. pass-through). While current entities are ultimately not making any changes to their entity status, new platforms and funds are spending considerable time determining what type of entity makes sense for them.

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses dermatology investing. It is authored by our colleagues Royce DuBiner, Timothy Fry and Holly Buckley.

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Dermatology Investment: Getting Staffing, Compensation, and Physician Benefits Just Right – 5 Key Takeaways

By Royce DuBiner, Timothy Fry and Holly Buckley

Investing in a dermatology practice requires thoughtful programs to incentivize partner physicians and align care patterns. Focusing on patient and provider happiness is vital to the long-term viability of an investment in the dermatology space according to a panel of experts who addressed attendees at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 21 and 22.

Experts included Francis Acunzo, CEO & Partner – Acara Partners; Samarth Chandra, Managing Partner – Enhanced Healthcare Partners; Alejandro Fernandez, Chief Executive Officer – NavaDerm; Daniel Groisser, M.D., Medical Director & Executive Chairman – The Dermatology Group; and John Pouschine, Co-Founder & Managing Member – Pouschine Cook Capital Management, LLC. Timothy Fry, attorney at McGuireWoods, LLP moderated the panel.

Here are five key points from the panel discussion.

1. Get creative on compensating your clinicians. There is a great deal of competition out there from large practices for talent/physicians. Yet most compensation is within a fairly standard, market range. Creative alternatives may assist the physician recruitment process. Residents may be looking beyond a paycheck for other benefits such as a down payment on a home or help with their family care. Investor-backed practices need to consider the unique attributes within a compensation and benefits package. What can the platform provide different from the recruit’s other options? Additionally, consider non-physician employees. What is in it for them? Some investors are actively considering models where physician assistants can also participate in the platform’s upside, through either stock investment or bonuses.

2. Research attracts talent. Many physicians are looking for something more than just a traditional office-based clinical experience. Some want to continue their academic interests and strengthen the practice of dermatology. Running clinical trials or rotations supervising residents can allow physicians to stay academically engaged. It can also help attract top talent and can boost the credibility of a practice in its community. Further, such programs may provide additional revenue for the practice.

3. Compensation is just one aspect of retaining talent. It may be cliché, but doctors coming out of school today are not the same as they were 20 or 30 years ago. Many physicians want some degree of work-life balance in order to raise a family and do not want to work a 12-plus hour day. Some practices create schedule flexibility for physicians to pick up and drop off their kids at school. Some physicians may want evening or weekend hours that can also benefit patients. At the same time, many physicians may be hesitant to invest their savings (or have significant student loans) right out of school to establish a new practice. Platforms may want to develop a schedule and practice around physician needs, as well as equity opportunities to retain key personnel long-term.

4. Know your market before adding cosmetic services. Self-pay cosmetic and spa service models do not work everywhere and may not work for all practices. Not knowing the practice’s patient base could create a large cash outlay on new equipment and marketing a service that will not work well. Additionally, consider what practice physicians want. If a physician group is not on board with cosmetic and spa services, it will be hard to derive a return on investment by adding cosmetic services. Instead, ask what physicians want to offer their community through practice offerings, which could be sub-specialty practices or linking dermatology with podiatry and other primary care offerings.

5. Physician assistants work well, but not all the time. Physician assistants, particularly those with dermatology training, can help practices give patients faster access to care and more available follow up appointment times. Such employees are cheaper to recruit but not all practices need a physician assistant and not all physician assistants are the same. Some physician practices do not have the volume to justify hiring many physician assistants. Having too many physician assistants may limit the ability for a patient to get to know the physicians – making the patient more likely to leave for care from a different practice. Further, some doctors do not want to work with a physician assistant and may not utilize one if assigned. Worse, many physicians worry investor-led practices will seek to replace them with this cheaper alternative – creating skepticism of intentions. Significant communication may be necessary for a practice to use this tool to improve care access and so it should not be seen as a simple fix for not having enough physicians on staff.

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses reimbursement trends for healthcare facilities. It is authored by our colleague Ben Petitto and Matt Wolf of RSM US LLP.

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Reimbursement Trends for Facility Investments: New Ways to Look at Shifts in ACOs, Bundled Payments and Value Based Purchasing and Other Developments – 3 Key Points

By Ben Petitto, McGuireWoods LLP, and Matt Wolf, RSM US LLP

Investors in healthcare facilities – namely health systems, hospitals, long-term care facilities, surgery centers and behavioral health facilities – face many challenges in the current march towards value based care and payor integration but healthcare facility investments can still succeed in this environment if healthcare facilities diversify their specialty practice areas and commit to a forward-thinking payor contracting strategy, according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 20th.

Experts included Tushad Driver, Vice President at Gray Matter Analytics, Inc., Conor Green, Partner at TT Capital Partners, LLC, Brian Fortune, President at Farragut Square Group, and Michelle Werr, Principal at HealthScape Advisors, LLC. Matt Wolf, Director and Health Care Senior Analyst at RSM US LLP moderated the panel.

Here are three key points from the panel discussion.

1. Successful healthcare facilities are moving quickly to build strategies around value-based payor contracting. Blue Cross Blue Shield of North Carolina recently announced they would be instituting value-based contracts with all five major hospitals in North Carolina. Due to the dynamic nature of this new wave of value- based reimbursement and narrowing networks, healthcare facilities must critically evaluate which payors to target so they do not end up in a losing arrangement. The most successful value-based or bundled programs are excellent at standardizing care across an episode of care. Coordinating providers and facilities throughout the patient’s episode of care is key to achieving this crucial standardization. The panel agreed that while fee for service contracting is not going away anytime soon, the time is now for healthcare facilities to be evaluating potential relationships with payors for value-based care.

2. Payors are demanding that healthcare facilities provide more than just scale and a contractual partner; they want to see facilities adding value in other areas of the relationship. They want facilities to develop a varied reimbursement stream, provide risk management, and increased clinical effectiveness and efficiency. All these value-added functions are especially able to drive synergies in the bundling and population health arrangements and they can assist in aligning goals between the parties.

3. Healthcare facilities must continue to focus on high performing providers and diversity of specialties in order to receive the best possible reimbursement contracts with private payors. As younger physicians enter into private practice, they are less interested in the hassle of owning their own practice and more likely to seek out employment by a large group (either a physician group or hospital-based group). Healthcare facilities must be able to attract these doctors to their platform by offering a more balanced lifestyle and long-term incentives. Having a wide diversity of specialties is also attractive to payors when negotiating with healthcare facilities. The diversity of reimbursement streams is desirable for the facility investors, and the payors value the choices they can provide to their members in these networks. Some specialties such as dermatology, allergy, and ophthalmology may even allow healthcare facilities to break into cash pay and completely bypass the payors in some cases.

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses approaches to alternative lending. It is authored by our colleagues Carmelo Chimera, Mark Kromkowski and Donald Ensing.

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Alternative Lending Approaches: 6 Key Points

By Carmelo Chimera, Mark Kromkowski and Donald Ensing

Increased liquidity in financial markets has made the healthcare sector more attractive than ever to traditional lenders. But according to experts who spoke on a panel at the 16th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20th, small to mid-sized lenders and debt-focused funds have greater flexibility with transaction structures that can involve debt, equity, or some combination thereof. This flexibility allows these lenders to remain competitive, increases the number of potential transactions, and provides creative client-centered lending solutions.

Experts included Neil Johnson, Managing Partner at Lawrence, Evans & Co, LLC; Dave Philipp, Managing Director at Crestline Investors, Inc.; Todd Roland, Principal at GCM Grosvenor; and Brian Yoon, Principal at Corbel Capital Partners. Donald Ensing, a partner at McGuireWoods LLP, moderated the panel.

Here are 6 key points from the panel discussion:

1. Increased liquidity in the marketplace has led to more traditional lenders entering the healthcare space because it is considered “safer” than areas like retail or energy, which can be volatile.

2. The healthcare market continues to grow along with scientific advancements in areas like anti-aging, health and wellness, behavioral health, substance abuse, and any area where tech-enabled solutions are innovating care.

3. Mezzanine loan structures with sponsor level support allow capital to reach portfolio companies that need it most despite being the least credit worthy.

4. Incorporating aspects of private equity into lending structures creates added value for clients, like long-term relationships in which lenders can be brought in at a pre-deal stage in anticipation of financing requirements.

5. Utilizing Small Business Investment Company (SBIC) leverage allows small to mid-size funds to deploy capital more quickly and easily.

6. EBITDA is a traditional screening method, but doesn’t capture everything relevant to making a lending determination, particularly with respect to free cash flow. EBITDA is especially unhelpful in cases with certain project-based or CapEx heavy businesses.

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses the success of DuPage Medical Group. It is authored by our colleagues Scott Becker and Diana C. Castro.

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Analyzing DuPage Medical Group’s Success as a Multi-Specialty Practice Platform: 4 Key Points

By Scott Becker and Diana C. Castro

Formed in 1999, DuPage Medical Group (“DMG”) has since grown into one of the largest and most successful multi-specialty physician groups in the United States with annual revenues of a billion dollars. At the 16^th Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 21 and 22, a panel composed of Craig Frances, Managing Director at Summit Partners, who is widely regarded as a pioneer and godfather of healthcare private equity investing, Michael Kasper, Chief Executive Officer at DuPage Medical Group, and Scott Becker, Partner at McGuireWoods, presented an introspective look at DMG’s multi-specialty practice platform success story, analyzed various physician practice trends in the market, and discussed a wide range of healthcare investing issues.

Here are four key points from the panel discussion.

1. Physician leadership is key. In reflecting upon the characteristics that have contributed to DMG’s growth and continued success, Michael Kasper and Craig Frances identified physician leadership as an essential component, noting that it is critical for the physicians in an independent multi-specialty medical group to believe in the mission and objectives of the group.

2. A tilt in growth strategies towards organic expansion. In addition to engaging in platform acquisitions and aqui-hire strategies in the Chicagoland area, DMG is focusing its growth strategies on hiring physicians who share in the mission and values of DMG. To do so, DMG has invested resources to develop a pipeline of recent medical school graduates to join the organization and enhanced its recruitment efforts by, in part, emphasizing DMG’s partnership approach and opportunity to work outside of a hospital umbrella to physicians. DMG credits the focus on investing in physicians while they are still learning and training with a higher return on investment than other traditional growth strategies, especially given that consolidation opportunities in certain markets may be more limited.

3. A shift to value-based healthcare. In preparing for the future, healthcare providers should consider investing resources to prepare for value-based care models. Value-based programs are designed to reward physicians and healthcare organizations for the quality of care they provide to patients, as measured by higher-value outcomes and a reduction in unnecessary interventions. In order to adjust to succeed under value-based reimbursement programs, healthcare providers will need to implement changes in their operations and work strategies. Stressing the importance of value-based care in the future of healthcare, the panelists offered their opinion regarding the greater value to patients in the long term resulting from a shift to provider-based care, as opposed to increased consolidation for improved payor leverage.

4. The future role of telehealth, technology, and creating a transformative patient experience. In closing, the panelists forecasted the ubiquitous role that telehealth in the coming years and the important role that technology companies and social media platforms will continue to have in patients’ daily habits and health considerations by, among other things, encouraging people to consume healthier foods, engage in physical activity, and communicate with healthcare providers. With these changes in mind, Michael Kasper noted that DMG will continue to strive to create a transformative patient-centric experience for its patients by increasing its service lines, sites of care, and physicians who share in DMG’s values and deliver high quality care with excellent customer service.