The final in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses physician alignment strategies. I am joined by my colleague Sarah Ahmed in authoring the column.

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Physician Alignment Strategies: Physician Autonomy, Equity and Compensation Models, and Leadership

By Sarah Ahmed and Geoffrey Cockrell

Consolidation of healthcare provider services practices continues at a remarkable pace. Increasingly, the structures of larger consolidated practices are focusing on various aspects of physician alignment. Indeed, finding creative structures of physician alignment can be the difference between a private equity fund winning or losing their bids to acquire these practices.

One panel at our 15th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20th explored the evolving structures and philosophies of physician alignment. Our expert panel included Daniel Brinkenhoff (Principal at Centre Partners Management LLC), Goran Dragolovic (Chief Executive Officer of Women’s Health USA), Jonathan Lewis (Partner at Sheridan Capital Partners), and Bill Southwick (Chief Executive Officer of QualDerm Partners). The panel was moderated by Geoffrey Cockrell (Partner at McGuireWoods LLP). The key take-aways from the panel included the following:

1. The most critical aspect of a successful physician alignment strategy is to understand what elements of the structure are most significant to a particular practice. For some, rehabilitating current income after the transaction is paramount. For others, some measure of autonomy over compensation is key. Understanding the physicians’ hot buttons is critical. Often that understanding involves educating the physicians on the various structural tradeoffs.

2. In all of these structures that involve future economics (income repair, rollover value in a subsequent sale, etc.) a choice has to be made as to whether those future economics will be more closely tied to local performance vs performance of the overall organization. The arguments for each approach tend to be more philosophical. Some sponsors prefer everyone pulling and benefiting together. Others prefer the physician’s economics to be more closely connected to the performance they can more directly influence.

3. Some of the newer structures allow physician groups to have autonomy over how current income economics are distributed among the leading physicians. Similarly, some current models move current income away from individual production to a sharing of local profitability. There is a mixed view among sponsors on whether connecting physician compensation to bottom line profit (vs top line revenue production) is a beneficial or complicating feature. The verdict is still out on those structures.

4. There are also varied approaches on physician equity ownership beyond rollover equity. Some sponsors favor wider physician participation as a key feature of physician alignment, while others are skeptical that physician interest is really that high and prefer to limit the availability of equity buy-in opportunities and the related dilution of the sponsor’s equity.

5. All sponsors recognize the difficulty of dealing with younger physicians who were nearly at partner level at the time of the primary transaction. The solutions are imperfect both in economic effect and tax treatment. Advance planning and strong current income plans for new doctors are key.