The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by our colleagues Amanda Roenius and Helen Suh.

* * *

Market Trends on Physician Compensation & Alignment: Key Takeaways

By Amanda Roenius and Helen Suh

As competition in and consolidation of the healthcare sector continues to increase, so too does the importance of thoughtful, forward-looking approaches to physician alignment and compensation models. Experts who spoke on a panel titled “Advanced PPM Topics: Market Trends on Physician Compensation & Alignment” at the 17th Annual Healthcare and Life Sciences Private Equity & Finance Conference, held in Chicago on February 19 and 20, 2020, explored creative compensation structures and alignment strategies, providing important insights as to what potential investors should take into account to best align themselves for long-term success.

Experts included Paul Barrett, Managing Director at BelHealth Investment Partners; Chase Culberston, Vice President at Ridgemont Equity Partners; Mark Miller, Director at Susquehanna Private Capital, LLC; Bill Southwick, Chief Executive Officer at QualDerm Partners; and Barry Tanner, Chairman at Physicians Endoscopy. The panel was moderated by Helen Suh, an attorney at McGuireWoods.

Here are several key takeaways from the panel discussion.

1. Physician alignment should be explored as a front-end item at the outset of a potential transaction. Experts discussed how alignment is key to not only completing a transaction, but to a successful, long-lasting investment. As such, investors should take time and carefully diligence a target practice to ensure that it fits well within the existing platform prior to entering into that transaction. In doing so, investors should seek to understand the elements that are most important to a particular practice and its physicians, such as increased autonomy, and how those pieces look in comparison to the overarching platform/go-forward compensation and incentive structures.

2. Physician alignment is important across an entire platform, not just with regard to selling physicians. Experts noted that, during a transaction, the parties are primarily concerned with the selling physician shareholders; however, experts cautioned investors to ensure that alignment exists amongst the more junior, entrepreneurial physicians as well. This is (and historically has been) accomplished through a separate equity pool for partner-track physicians, but additional compensation and incentive models are becoming increasingly popular across markets, as further discussed below.

3. As competition in the market increases, so too does the need for creative incentive models. While rollover equity remains a frequently used structure for physician equity ownership, investors are looking to newer incentive models that provide greater autonomy over how economics may be distributed (e.g., pooled compensation) as well as incentives that draw in the younger physician pool (e.g., bonus pools). Having a solid understanding of the financial impact of various incentives models and planning for that in advance is key for long-term success.

4. For large platforms that cover several regions or states, experts note that it is important to determine whether compensation will be more localized in nature—tied to, for example, a physician’s productivity at a particular office(s)—or whether compensation and incentives will be tied to the overarching platform. There are pros and cons to each option. Experts note that physicians may be passionate about the particular office locations in which they work or those that they have a hand in expanding and can more closely influence, in which case, a more localized incentive structure may be helpful. On the other hand, some experts noted that, with the localized approach, it may be more difficult to draw in physicians from certain regions who prefer to pool and benefit across the entire platform.