At TEAMWORx Health, our extended network includes some of the most thoughtful investors and innovators in healthcare, and we are privileged to exchange ideas and insights with them on a daily basis. In this issue of the LEADERxBOARD, we are honored to feature Tim Coan, CEO and founder of ALN Medical Management and a national speaker on physician practice management (“PPM) and operations. Here, he shares his perspectives on how sponsors can create the conditions for success when investing in physician-led practices. The healthcare industry has changed dramatically – the impacts of consolidation, technological advances, the Affordable Care Act and consumer preferences have all transformed the way healthcare is delivered. Today, people can receive urgent care at Walgreens, consult with a specialist in another state through telehealth, or have a hip replaced as an outpatient service.  Many of these changes have been spearheaded and accelerated by private equity sponsors who recognized the potential ahead of the curve, and these sponsors are continuing to invest in various multi-specialty physician-owned practices. With the potential to achieve greater efficiencies and deliver higher quality care to patients, private equity continues to transform this vital part of the healthcare system. To do so successfully, sponsors should consider the factors that make investing in physician-owned practices a very different proposition than in a classic owner-operated business, and be ready to navigate the factors that make it unique. The Economic Factor Successful partnerships require a balance between sponsor economics and the various physician's (owner/non-owner) compensation plans. In order to find this balance, sponsors need to recognize the impact of incentivization structures, cost management and regulatory requirements. Incentivization . Doctors who own their own practices are used to paying the bills and dividing up the remainder among the physicians. This, in turn, has set the perception of the fair market value and income expectations for those physicians. But when sponsors buy a physician practice, two things happen: first, the physician gets a big check and second, they often have to take a salary cut to get to the investment parameters aligned for the sponsors. Sponsors need to understand the impact this situation has on the physician's motivation and look for ways to structure the deal so that the cash flow is protected and the physician—who are usually the ones driving revenue—stays motivated and productive. Cost Management. Ordinarily, physicians are incentivized to manage costs because they receive whatever is left after the bills are paid. But that changes in a sponsorship scenario where the MSO pays all the bills. While the management service organization is focused on EBITDA, the physician will be focused on their compensation plan, and their behaviors will be dictated by that plan. If compensation is not tied to cost management, it often creates a conflict around the issue of expenses, with increased requests from doctors for more staff, more marketing and more resources in general. Sponsors cannot expect physicians to understand sponsor math and regulate themselves accordingly: instead, compensation must be aligned with the behaviors the sponsor want to encourage. Regulatory Requirements. The last element to impact the economics of the deal is the regulatory environment surrounding these practices. Sponsors—especially those that are relatively new to investing in healthcare—need to be aware of the regulations governing the incentivization and rewarding of physicians. Stark Law is perhaps the most onerous, and regulates referrals for Medicare and Medicaid services. Most common methods of rewarding producers in any other business environments risk contravening regulations set up to prevent fraud, kickbacks, and abuse of the system if done by physician practices. The Psychological Factor Adequately accounting for the psychology of the physician-led PPM— their need for and expectation of control over the business — is integral to the success of the sponsor-physician relationship. Independent physician practices are typically run by doctors, but these doctors are also entrepreneurs. It is their name on the door and their licenses at risk, which means their identity is closely bound up in their practice. Fundamentally, they ARE the business. Successful PPM deals start with a real awareness of these psychological dynamics and preparing for them. Sponsors need to initiate candid conversations with the physicians about how the management of the business will change, especially around hot button issues such as practice branding, hiring, training and compliance, and often switching to a different EMR. But once the deal closes, the sponsors are suddenly in charge. While they do not tell the doctors what to do from a clinical angle, the sponsors largely control every other aspect of service delivery. This often impacts physician behavior in one of two ways: they may slide into an "employee" mindset where they disengage from the higher-level decisions, or they may reassert their autonomy and challenge every sponsor decision. Neither state of mind is necessarily bad for business: it depends on what the sponsor needs from those physicians and the plans they have for the practice. Physicians are fundamentally scientists: they want to analyze data to understand the “why.” If the sponsor is prepared with ample datasets ahead of time, and can use this to help explain how their approach will help the practice scale and grow, it can go a long way towards heading these conflicts off at the pass. The Generational Factor A typical physician-owned practice might span three generations of physicians, and it is important for the sponsor to recognize the contribution each cohort makes to the practice. While the first generation typically built the practice that attracted the sponsor's eye, it is the second and third generations who will impact business outcomes in the immediate and longer-term future. That makes it incredibly important to understand how those generational differences impact culture and values so that each cohort's talents and needs can be factored into the strategy. While a sponsor may base their projections for the practice on the volume that the tireless efforts of that first generation produced, they must also factor in the knowledge that this generation will be retiring very soon. The second generation will need to pick up the slack, take the lead, and create the economic value needed for a successful exit for the sponsor and an attractive payout for themselves. But it is the third generation—recent residency graduates and early-career physicians—who will drive continued growth. They have very different priorities and outlooks than the other cohorts, and recognizing and accommodating their needs is critical. Bringing new physicians to the practice requires creativity to accommodate the variety of work-life scenarios. As an example, a CEO had to convince his sponsor to buy out two first-generation physicians and replace them with five younger doctors, all of whom would work a four-day week. While replacing two seasoned, hard-working physicians with more than twice as many doctors—none of whom were willing to work full time—initially seemed like a step backwards, it was actually the best thing for the practice. By offering shorter work weeks, the clinic can attract the best of the newest generation of physicians, and because these doctors do not mind rotating the weekend shifts, the practice is also able to offer more attractive hours to consumers. Set a Foundation for Success As the healthcare system continues to evolve, physician-led practices hold tremendous potential to deliver value and support significant growth. But once an equity sponsor and a physician practice have shaken hands and done a deal, they will find themselves sitting in a boardroom together trying to figure out how to navigate the next steps. This is where an understanding of the unique economic, psychological and generational factors that shape these practices will go a long way toward setting both parties up for success. --- Tim Coan is CEO and one of the founders of ALN Medical Management, a company that provides outsourced revenue cycle management and information technology services to privately-held and private-equity sponsored physician groups. He has served as Chief Executive Officer since inception in 2000. He is a regular writer and speaker on healthcare topics and maintains a regular blog on a variety of topics relevant to independent physician practices.