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 myself and my colleagues Tim Fry and Amanda Roenius.

* * *

Physician Perspectives on Finding the Right Investment Partner — 6 Key Points

by Amber Walsh, Tim Fry, and Amanda Roenius

Physician leaders continue to seek the right investor to partner with in a transaction, according to experts who spoke on a panel titled “Physician Leadership Perspectives on PPM Business: Finding the Right Partner, Closing the Deal and Executing on Strategy” at the 17th Annual Healthcare and Life Sciences Private Equity and Finance Conference, held in Chicago on February 19 and 20, 2020.

Experts included Dr. Michael Conroy, Chief Medical Officer, Dermatologists of Central States; Dr. Peter Lafferty, Riverside Radiology; Dr. John Murphy, CEO, NavaDerm; and Dr. Michael Weinstein, Capital Digestive Care. The panel was moderated by Amber Walsh, a Partner in the Chicago office of McGuireWoods LLP and chairwoman of the firm’s healthcare department.

Private equity funds and other investors should internalize the following six key points to better approach potential target physician practices to secure their next deal:

1. Physicians feel significant pressures to grow. Each of the physician experts recognized that the healthcare industry is changing, with market forces pushing independent groups to grow. Physician practices face hospital systems—often the largest regional employers—and national third party insurance payors, which are acquiring competitive healthcare provider businesses. Meanwhile, clinically integrated network relationships, advanced payment models and population health are being forced on many independent groups and solo practitioners. Each of the panelists noted that a certain size may be necessary to address these new models appropriately. Thus, growth is necessary to achieve certain market penetration as a condition to maintain independence. These goals may necessitate financial backing and including an investor.

2. Independent physicians want autonomy. Particularly for independent groups that have valued independence (and likely rejected purchase offers from local hospital systems), most physicians fear loss of autonomy from a transaction and want to maintain past clinical schedules, clinical oversight, and aspects of their practice. While state law necessitates that physicians maintain control and oversight of patient care, investors need to reassure physician groups that they will continue to control their care protocols and provide patient care as they were trained. Many pre-letter of intent discussions focus here, and many deals include contractual covenants to ensure comfort in the post-closing period. Here, one panelist discussed how platforms formed with multiple practices can consider retaining separate brands and clinical protocols to ensure physician trust with one another and the investor partner.

3. Physicians want reduced administrative, compliance and other business costs. Although physicians desire clinical autonomy, groups are often tired of the industry’s non-patient administrative burdens, such as billing requirements and legal charge. Physicians desire investors with proven records in successfully handling and navigating these administrative burdens. Similarly, investment costs can also be a significant burden where investors can help. For example, the panelists discussed the need that often exists to expand new technologies and IT platforms. Compliance burdens, including achieving alternative payment models discussed above also, necessitate strong partners with healthcare experience. Finally, while the panel was prior to the onslaught of the 2019 novel coronavirus (COVID-19) public health emergency, the pandemic caused new costs and may drive more providers to seek partners.

4. Investors and physicians want long-term relationships. According to experts, both investors and providers alike want to enter into transactions that have a long-term relationship, with several panelists noting that a two to five year long-term relationship is critical. Investors seek such a relationship to make the deal financing work; physicians seek such a relationship to enhance their career. But, it takes time to build two-way trust. We often see providers selecting a bidder/buyer that did not offer the most money but, instead, who they believe will be the best long-term partner.

5. Clinical practice is changing, which may create new opportunities. The panel’s experts acknowledged that even five years ago, many post-resident physicians had their own practice as the goal, but, this is not the case anymore. Most new physicians want to join stable practices, including private equity or investor-backed practices for many of the reasons discussed above (e.g., ability to delegate administrative burdens). Newer doctors still want growth and partnership opportunities, but they understand the stability and support an investor-backed company can bring, particularly as they pay their student loans. Similarly, many specialties, like dermatology, are more open to using nurse practitioners and physician assistants than they were even a decade ago when physicians viewed such non-physician providers skeptically as mere cost-saving efforts, and not to enhance patient care. Such changes reinforce the need to build a relationship and for an investor to demonstrate ways to navigate these trends.

6. Sometimes building strong relationships means walking away from certain opportunities. Being the right partner for a physician group likely means declining opportunities when you may be the wrong partner. An investor is not the right fit for all physician groups. Growth for growth’s sake may saddle a platform with the wrong fit and without a strong relationship. A lack of alignment amongst providers and investors can make an acquisition undesirable, but at its worst, could harm the relationship with current providers at the platform level and harm potential future deals. Such acquisition push can thus be counterproductive, if not balanced with being the right partner.