AHLA's Speaking of Health Law
AHLA's Speaking of Health Law
Private Equity Physician Deals: What Investors, Physicians, and Hospitals Need to Know
Jim Yanci, Principal, Pinnacle Healthcare Consulting, speaks with Anjana Patel, Partner, Epstein Becker & Green PC, and Kristen McDermott Woodrum, Partner, McGuireWoods LLP, about some of the trends and market conditions that are impacting private equity (PE) physician deals. They discuss reasons physicians are exploring private equity opportunities and what PE tends to look for in a physician practice, regulatory considerations for PE transactions, best practices physicians should keep in mind as they go into a potential transaction, and post-closing considerations. Anjana and Kristen spoke about this topic at AHLA’s 2023 Health Care Transactions Program in Nashville, TN. Sponsored by Pinnacle.
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Speaker 2:Hello everyone, this is Jim Yancy. I'm a principal with Pinnacle Healthcare Consulting. Pinnacle is a full service healthcare consulting firm specializing in strategy and operations, fair market value assessments, business valuation. Also do a lot of work in enterprise risk management, as well as professional fee revenue cycle services. And I spend a lot of my time in the transactional space representing health systems and physician practices across the country , um, in several types of transactions. And I'm joined today by two guests, Anina Patel and Kristen McDermott, wood Woodrum. And I would ask Anjana and Kristen to introduce themselves and tell us a little bit about your backgrounds. And Jona , how about you go first.
Speaker 3:Thank you, Jim. Hello, everyone. My name is Anina Patel. I'm a partner with Epstein Becker and Green in our Newark, New Jersey office. My practice focuses on healthcare transactions involving all types of healthcare providers , um, across the country, including physician practices in various specialties looking to sell and private equity sponsors looking to invest , um, in these types of physician practices. So thank you for having me here today. I am excited to join this podcast,
Speaker 2:Kristin .
Speaker 4:Thank you, Jim. I'm Kristen McDermott Woodrum, a partner in the healthcare department of McGuire Woods . I'm based in Atlanta, but work closely with our national healthcare team and clients across the country. I have focused my practice on healthcare transactions and regulatory matters, and over the years have been on all sides of these deals, working with physicians, private equity sponsors and hospitals . And thank you for the opportunity. It's great to be here with you and Anina .
Speaker 2:Great, thank you. We're really gonna focus our topic today , uh, based on a presentation at from the A H L A transaction event back in April of this year. And the topic of that was private equity physician deals , what investors, physicians and hospitals need to know. In 2023, I had the opportunity to sit in on this presentation, and I thought we would have some discussion and , and follow up as it relates to the podcast today. Anina , you had mentioned that in 2021 was one of the highest deal years recently in that 2022 was a tale of two years. H one started strong, but macroeconomics began to impact our H two and 22. Do we have any insights now that we are about seven, eight months into 2023 on how deal volume is looking and what other drivers may be impacting deal volume as we sit here of in August of 2023?
Speaker 3:Yes, I think everyone will acknowledge that 2021 was somewhat of an outlier year in terms of overall healthcare m and a activity for a number of reasons, including the pent up volume from the , uh, covid , uh, you know, delay in 2020. And as well as, you know, things like anticipated , uh, changes in the tax code, which never ultimately materialized, but that trend continued into the first half of 2022. But then we saw a number of , um, factors affect the volume levels, especially , uh, rising interest rates, inflation, fears of recession, things like that. And the second half of 2022 really , uh, saw volume go down. And, but at the end of the day, we saw that compared to the prior years, it still finished. Second overall compared to , um, like I said, the prior two or three years that slowdown in the second half of 2022 continued into the first and second quarters of 2023. And as we sit here in the third quarter of 2023, if you look at the most recently available data, which would be for Q two of 2023, it shows that the number of deals in the second quarter of 2023 was down 7% from the second quarter of 2022, and down 41% from the second quarter of 2021. And I was looking at those statistics from a report published by K P M G, but we're seeing that despite this , uh, slowdown in volume compared to the prior years overall deal volume in 2023 from the first quarter to the second quarter seems to have , uh, trended upwards according to some data from leaven Pro P P M or physician practice management deals in particular seem , um, to have gone up there were an overall 282 deals so far in 2023. So I think that overall, the deal volume, while not the same as the last two years, it's still a very active market, especially in the P P M space. And we're likely to see that volume stay at a steady pace throughout the end of the year , uh, and maybe even little , uh, rise a little towards the end of the year with the typical sort of end of year deal , uh, activity. I think the reason why there's this continued , um, demand and supply for these P p M deals is that first of all, there's still over a trillion dollars in dry powders sitting in the hands of private equity investors who are looking at these physician practices. Um, but at least from my experience, what I'm seeing is that the focus has been on smaller add-on acquisitions of high quality practices, which, you know, private equity sponsors can acquire by using their own capital instead of, you know, having to borrow at the higher cost in the marketplace. And in the recent past, it truly was a seller's market, meaning because of the competition for target practices and the pace of the activity, many , uh, buyers were willing to pay high multiples and high valuations. Now, the mar market dynamics seems to have shifted somewhat. Um, some would say it's normalized buyers have more leeway to offer lower multiples and valuations. They're becoming more creative in how they structure their deals to minimize buy-side risk, for example, by including more equity type components or earnouts or other forms of contingent payments. And we're seeing that some sellers, especially the smaller physician practices, are willing to transact on these terms. So that's why that someone explains , um, the continued , uh, increase or steady pace of these, of these deals. And also the focus on the smaller add-on acquisitions. Um, but I, I do see, because I practice across the country that this isn't across the board , um, in some geographies and in some specialties, we're still seeing some platform acquisitions with high multiples, high valuations. Uh , we're still seeing competition from health systems in some geographies that is also keeping up the, the higher valuations and the higher deal activity. So I would say that , um, it's not an across the board , uh, characterization, but um, it, it , it does explain why volume is trending upwards in 2023.
Speaker 2:Well, yeah, a trillion dollars in dry powder is definitely a force to be recognized with. Kristen , anything to add into what you're seeing in your practice?
Speaker 4:Yeah, thanks Jim. I would echo what Anina has described. I think 2023 has been challenging, but there has been a lot of interest and we're seeing deal activity. The P P M deal market is strong. It's not entirely clear what's going on with the broader economy. I wish I had a crystal ball. A lot of economists are tracking the macroeconomic climate, but there are a lot of variables and not much certainty. I think in PE to some degree we've seen a calibration of expectations. Um, valuations are still high, but there's more scrutiny of EBITDA adjustments and financial terms that increase in interest rates and debt financing terms is a challenge. Um , we're seeing more transactions primarily financed by equity or under existing credit facilities where there's a capacity. Um, but as Anina said, there is a lot of dry power powder. Um, so I think just the sheer volume of cash will drive deal activity. Um, although some, some may choose to stay on the sidelines, you know, maybe the bigger practices are there. The question is until when, you know, what's the signal on the green light , I think perhaps we will see an uptick in , in later in the year. Um, and I agree that 2023 so far has felt a lot like the year of the add-on with smaller practice volume. Um, and this year certain specialties are hot . I think we're seeing higher volumes of deal activity in some new areas. Um, McGuire was just released a white paper on healthcare investments, an updated review of selected niche investment areas that focused on 27 areas. And , uh, we collectively concluded that we would probably see more activity in nine specialties, steady activity in 13 and a slowdown in five.
Speaker 2:Thank you. We all know that healthcare macro trends are really impacting not only health systems, but specifically physicians. Everything from declining reimbursement to escalating labor cost . We all know there's a whole other host of factors that are forcing physicians to explore strategic partnerships with private equity junina . Could you maybe summarize some of the top three reasons that you're seeing physicians wanting to explore private equity opportunities
Speaker 3:Or I the top three reasons from my perspective , um, first, you know, doing a deal with a private equity sponsor enables physicians to monetize the true value of their practice. And what do I mean by that? Well, historically, when the founders of a group retired, they were bought out by their junior partners for nominal price. With a private equity sponsor transaction, they can exit with a much higher buyout price. And that's a , a very lucrative , um, feature of these, of these transactions. And while valuations have come down from the last two years, they're still quite attractive and it's still a good time for , um, physician practice to sell because you can still get the lower capital gains tax treatment and the doctors can take some chips off the table, get some cash now, which they can use to invest in other investment vehicles. So overall, you know, the financial terms is still quite attractive for physician practices to transact. And there's also that potential for the further payout down the road if the PE sponsor sell in a second bite transaction. There's also the ability to monetize other assets of the practice. For example, a lot of the physician practices own the real estate in which their offices are key . And often those leases are, you know, between friendly parties. So the rent rental payments are not fair market value or, you know, haven't been adjusted for many, many years. Doing a transaction with a private equity sponsor , uh, enables the physician practice to, you know, reassess those leases and , uh, restructure them with a PE sponsor to get a fair market value rent over a longer period of time. The second reason I see , um, and what you kind of mentioned, Jim, is just the overall uncertainty and risk , um, of running a medical practice in today's healthcare environment. Even before Covid covid changing patterns in reimbursement , uh, regulatory compliance burdens were some of the frequent complaints from physicians about running a medical practice. The shift to value-based payments, which initially was slow to start with, is now truly, you know, getting underway. And all of the infrastructure that that goes with , um, engaging in those programs has added to that burden and increased competition, not only from hospitals and other physicians, but you know, from peers like Optum and Anthem and the new, you know, disruptors and like retailers like Amazon, Walmart , Walgreen, all of these are putting more and more pressure on independent physician practices , uh, to compete in this environment. The third reason I see is that physicians are seeing the benefits of belonging to a larger corporate platform, which has a sophisticated back office infrastructure, has access to capital that could lead to expansion, cost savings. And you know, many physicians that I work with would rather just practice medicine than have the headaches of , of running a practice in, in this environment. So I think those are the three top reasons I see why physicians are willing to, you know, transact with private equity.
Speaker 2:Yeah, I think those are spot on. Kristen , you spend a lot of time on the private equity side and in our experience, we all have seen that private equity many times like to see a practice that is a little bit dysfunctional because they know they can turn it around , um, and make them more operationally efficient and be able to collect cash more effectively. Can you add any other best practices to share from what private equity buy side is really looking for in a physician practice?
Speaker 4:Yeah , sure. Um, Jim, I don't think from the investor's perspective that their investment thesis has really changed. Um, they see healthcare as offering an attractive internal rate of return better than other industries. Um, you know, they see that profits are projected to grow. We've seen consistent annual growth in the spend , um, and they see opportunity where there're highly fragmented sectors that present opportunity for roll up . And as you say, the efficiency , um, perhaps getting, you know, driving down costs , driving up revenues through growth , um, you know, and there's gonna be demand as the population ages are gonna see more demand for healthcare services, physician services, procedures, ancillaries. Um, as I noted at the AHLA transactions program, my parents are getting three new knees this year, and they're talking about trips to the cardiologist and cataract surgery, and at the same time I'm working on orthopedic deals, ophthalmology deals, cardiology. Um, so their , their generation has been a pretty good predictor of what's next. Um, and there's opportunity for integration across the care continuum. You know, healthcare is still relatively a safe bet . There's demand. It's largely local, so there's some insulation to external threats , not completely, and it's resilient, although not completely recession proof . Um, and there are developments out there. Um, we're seeing interest in new specialties. We're seeing a lot more shift of care to the outpatient setting pathways for value-based care strategies. Again, cardiology is a great example there. Um, and so I, I don't think the investment thesis has really changed. And , um, you know, those strong practices are always going to be in demand. And as you say that the ones where there's some room for improvement as well are , are great for kind of the add-ons.
Speaker 2:Kristen , while we've got you here , maybe you can tell us a little bit about some regulatory considerations you would recommend on a private equity transaction. And we know we can't really talk about a transaction without Stark, so feel free to kind of combine all of that into, to some of your thoughts on regulatory and Stark in a , in a PE transaction.
Speaker 4:Yeah. Well , um, as a healthcare lawyer, I'm always focused on, you know, the Federal Stark Law. There've been some developments there. Um, you know, obviously we're talking about physician group practices, and so ownership of the physicians in a medical practice, their employment, and then their ownership in the M S O , if we have an M S O PC model through rollover equity, create financial relationships. And typically the groups will rely on satisfying the definition of a group practice , um, which allows the physicians to utilize the in-office ancillary services exception to protect the referrals within the group practice. And so , um, that is key. There's a lot of pressure on this group practice compliance and compliance with the an office ancillary services exception. You know , both are very technical multi part rules , um, that, you know , I focus on not only on due diligence, but in transactions and adding physician practices together , um, to form a single legal entity to be that group practice , um, which needs to be a unified business, centralized decision making , consolidated billing, accounting, financial reporting. Um, there are some requirements on compensation to the physicians. We have to make sure that neither directly nor indirectly it's related to the volume or value of referrals. Um , we have some flexibility with special rules on comp to the physicians that are pretty flexible, but you have to follow all the rules. Um, keep up with the times. C m s clarified some of the , the rules effective January of , um, of last year. And the in office ancillary services exception can triple a lot of people up to , um, you know, it's how , um, physicians are referring all D H Ss and being able to profit from that D H Ss within their groups. And we have to look at who's furnishing it, the location test , um, some other different requirements just focused on , um, making sure that this is an extension of the group's practice and not sort of a , um, a referral scheme. I would say that there are a couple of developments in this area . Um, know the a q that came out on where D H SS is considered furnished , um, caught a lot of people off guard in September of 2021, and it came up in the context of mailing , um, prescription drugs . And CMS explained its position in that F A Q that if items are mailed to the patient from a location, even if it qualifies as a same building or centralized building , um, it does not satisfy the , um, requirement the D H s is furnished , um, where the services performed item is dispensed , um, sufficient to meet, you know, Medicare payment coverage rules in Stark. So that was huge. There's been, I think last month a lawsuit filed , um, by the Community Oncology Alliance against H H SS and C M Ss alleging that the F A Q is an unlawful rule and that the clarification was a substantive amendment to the rule without proceeding with the required formal notice and comment , um, violating the Administrative Procedures Act and Medicare. So keep an eye on that. Uh , it's always difficult to add on ancillaries and distribute dollars within groups, especially as they grow through these PE transactions. Um, but I think more broadly than that, Jim , uh, you know, keep an eye on antitrust and state law review of deals. The , um, antitrust agencies have been super duper active. Um, in late June, the FTC and D O J jointly released a notice to proposed rulemaking of sweeping proposed changes to the pre-merger filings under H SS R. Um, this is sort of a , a really hard look in more than 50 years, they haven't looked this hard at the requirements, and they've indicated that the current process is just not sufficient to conduct an efficient and effective evaluation of a transactions likely competitive impact. Um, and then maybe more relevant for some of the smaller transactions or state laws , um, Washington, Oregon, Nevada, Minnesota, Massachusetts, Illinois, New York, California, it's a growing list. Um, and a number of states are forming new agencies charged with monitoring, managing healthcare costs , um, promoting public transparency , um, of transactions, looking at consolidation and market power . And that requires filings. It can delay a transaction. Um, it's very public, so keep keep an eye on that non-competes. Um , another area where we've seen the FTC really a proposed rule , um, we've seen similar sort of discussions and other state legislatures. Um, certain states already have bans either complete like California and Oklahoma or partial. Um, that can be huge considerations for employment arrangements and even in the transactional context. Um, corporate practice of medicine is like another really key regulatory area for these deals . Um , in a majority of states , there is not direct investment into the medical practice . And so it's common to set up an M S O PC structure , um, where the physician practice that controls the clinical aspects of the group practice are housed in a professional entity controlled by the physicians. And more of those, like back office and management functions are in the M S O , the management organization where the physicians can also have equity. Um, and that's very prevalent. Um, but we've, we've seen it sort of attacked over the years and most recently in a lawsuit filing California , um, by the American Academy of Emergency Physicians , uh, group Emergency Medical Physicians Group against Envision . And , um, it's been stayed because of the Envision bankruptcy, but the plaintiffs there have said, you know , we're not asking for money, we're not gonna drop the case. We really just want the court to ban the M S O PC model. So that's not a attack on sort of how the clinical and nonclinical services have been allocated, but really just asking to bust up the whole model, which, which would be huge. Um, so keep an eye on that. And then , um, you know, obviously always fraud and abuse and , uh, privacy, security insurance, all the other laws, chow provider enrollment certificate of needs , um, a huge list of regulatory <laugh> considerations in doing these deals . Um, so they're not easy, but they're, you know, they're fun and it's doable.
Speaker 2:Yeah, that's a whole, whole world in of its own and lots of details there. So , um, thank you for that. In many cases, we always see our physician practices will engage with a business advisor as well as a legal advisor. Pinnacle often represents physician practices , uh, either on sell side or buy side , but just keep it with sell side , uh, for this conversation and looking to understand how they should plan and prepare for a potential transaction , uh, system with doing some preliminary valuations so they have a general idea of what their practice value is worth. Um, sometimes sell side Q Q O E and strategic options in addition to what maybe private equity would be looking for. I'd like to see if each of you could give your perspectives on, on what you're seeing as best practices of physician practice preparation. Um, I always like to call increasing the value of your enterprise , um, as you go into this, and John , we , we'll start with you , uh, first to see what kind of best practices , um, physicians should be thinking about as they go into a potential transaction.
Speaker 3:Sure. Um, you know, as I am approached by potential physician practice clients who want to sell , you know, I can't stress enough to them the importance of getting their house in order, as you just mentioned. Um, you know, private equity sponsors , uh, will do a diligence review. Um, they will do a very deep dive review of the practices, finances, operations, legal compliance, and sellers need to be prepared. Most of these physician practices have never done a transaction of , of this type or size. This is their , you know, once, almost once in a lifetime type of , um, event for them. So they have no understanding, sometimes no exp you know, very high expectations of, of how the process will unfold. And so it's really important, at least from my perspective, that they're educated. And part of that means being surrounded by, you know, good advisors who can guide them through the process. And they need to be prepared for the deep dive diligence review by the private equity sponsor. They, they should be proactive. Uh, they, they should, like I said, get their house in order. And, you know, this is, this means focusing on things like their for an abuse compliance , um, their contracting, their employment practices, their HIPAA compliance. There's a whole list and it touches upon some of the same regulatory , uh, considerations. Kristen was just describing that they need to make sure that, you know, they are on top of, they've identified any potential issues, they've tried to correct them , um, ahead of engaging in the transaction. And this helps, you know, set expectations. It helps , uh, reduce any unpleasant surprises that might be uncovered during due diligence that could lead to a reduction in purchase price or even worse, killed the deal. And especially after the seller has spent, you know, a lot of time and effort and money in the, in the whole process. So , um, one of the things, and you mentioned this , uh, sell side Q of E Jim, I think that is , uh, an important consideration for a physician practice to think about. Um, because most PE sponsors are on the accrual basis of accounting, and most physician practices in this country are on the cash basis of accounting. And so there , there needs to this walkway between the two needs to happen. And the private equity sponsor will do their buy-side Q of V , uh, they'll need to do that to determine and verify the practices EBITDA to which they then apply multiple, and which then results in the, you know, purchase price that they're willing to pay for the practice. A sell side q v can be especially helpful for a number of reasons. First, it helps identify potential red flags upfront that can be dealt with, you know, at least , um, or at least the seller has time , uh, ahead of a transaction to formulate an explanation for if it's , um, something that can't be fixed. It also helps set realistic expectations about transaction value. Like I said, many of these physician practices have never done a transaction like this. Um, they have some expectations about what their practices are worth, and it can be very upsetting when private equity does their buy-side Q of E and the numbers go down, they almost never go up. So it , it , it helps set realistic expectations about the value ahead of engaging in the transaction. It also pro promotes an efficient process, right? Because if you do a sell side Q O V , you can anticipate what the buyer's questions can be in advance, and you can formulate responses or you can try to fix things ahead of time. And as a result, it gives a, a seller more control over the process so they're able to better negotiate, you know, if their adjustments to EBITDA or things like that, they are more on a level playing field when it comes to , um, that kind of negotiation. And lastly, it also can help with setting a more realistic , um, networking capital peg, which is important also because the last thing a practice wants to do after they sell is to have some of the purchase price , um, taken back by the buyer because not enough was left in the practice to keep the lights on on the closing date. So I think overall, you know, a sell side Q v , uh, is really important and I recommend it , um, to, to my clients on the sell side. I think overall, just getting your house in order in all aspects, whether it's regulatory compliance, contracting, leases, employment , um, just being really prepared before engaging in a transaction , um, is really helpful to a seller to maximize value and again, set expectations and have control over the process.
Speaker 2:Yeah, I can't agree with you more. We see high expectations many times, and just that level setting of reality is something that's pretty important in that, you know, physicians take out their value every year in their distributions, <laugh> . So , um, Kristen , anything to add as it relates to practice preparation?
Speaker 4:Yeah, I agree with what you all have outlined. Um, initially in these deals, there's a lot of focus on financial diligence. Generally, we hold off on really digging into legal diligence until the parties figure out whether the numbers add up , um, and they're doing the real math, less rounding, a real scrutiny of that quality of earnings. Um, and so by the time the deal gets to us, there's been probably more discussion and focus than in prior years. Um, I'd say in the area of financial diligence, our clients are looking at payer mix in network contracts with key payers, looking at the position group, who's there, who's staying, how, how are they growing, what are the opportunities there? Um, and on the legal diligence, I agree it's absolutely a good, good idea to get your house in order, be ready to respond to a detailed diligence request, produce disclosure schedules, answer questions about physician compensation, your compliance program, billing and coding matters. Um, there may be a billing and coding audit, potentially a self-disclosure to clean things off if a problem's discovered. Um, you know, and a focus on kind of the future. And I guess I would also caution groups, you know, against making a bunch of investments they think are gonna look good to a potential private equity sponsor. Um, you know, like software buying something expensive when your buyer might wanna integrate you into their E H R . Um, so, you know, make investments that are sound kinda like selling a house, you know, adding a roof is gonna add value, but, you know, putting some money on paint and other things that are really not gonna work with your buyer's overall plan, probably not, not a wise investment. Um, and, you know, note that the sophisticated sponsors, the kinds that positions, you know , wanna be in business with will be detailed in their diligence. Um, and so be prepared. Have your practice manager prepared. Somebody's gonna have to dedicate, you know, time and resources to getting the deal done. And, you know, think about other things, you know, some of that paperwork that you've signed and set aside. Do you have, you know, for example, non-compete that will limit your ability to invest in surgery centers or lithotripsy or other ventures that may be part of the plans for you to get that income repair with your private equity , um, sponsor. So , um, a a lot to focus on, but as long Jenna said, you know, once in a lifetime, dig in and , um, you know, it's not meant to be , uh, a adversarial process. Um, so hopefully everyone can collaboratively work together to get these, these deals done quickly.
Speaker 2:I'd like to discuss deal structures a bit. We're seeing a lot of structures in the private equity physician transaction space that include an M S O investment opportunity for the physician practices. Could each of you discuss , um, the benefits of these structures for , uh, for the physicians and how this can become an additional revenue stream for the practices angenette , we'll start with you.
Speaker 3:Sure. In , in a typical , um, PE sponsored transaction , uh, the overall enterprise value is typically , uh, comprised of two, two piece , uh, two components. One is cash. Um, that's usually between anywhere from 70% to 80% of overall value is paid out in cash to the physicians at closing. And then the rest is typically in the form of rollover equity, which is really equity in the buyer or the buyer's platform , uh, depending on how they're structured. And what that means is that at closing the physicians and receiving equity that , um, that may or may not have value down the road , um, hopefully it will when there's a second bite transaction. And what I mean by that is a typical PE sponsor, you know, invest in these practices , uh, and then once they get , uh, to a certain size, they, they usually flip them and sell them to another buyer. At that point, the rollover equity , um, gets cashed out. And so there's an opportunity for the physicians to, you know, like I said earlier, have an additional revenue stream in the future based on the second by transaction.
Speaker 2:Kristen , anything to add?
Speaker 4:No , I think Anina laid out the typical structure and having that equity is a key part of these deals and hopefully will be valuable and, you know, be a recruiting tool if you can bring in new physicians and find a way to get some equity to them, which is a challenge. Um, but you know, in it's important for the physicians to keep in mind that because they're getting equity and they're getting an upfront payment, there is gonna be a dip in their comp initially. And, you know, part of the promise I think of these deals is that the M s O partner will work with them on income repair through growing the practice and developing ancillaries and centralizing operations , um, driving down costs. And that takes time. And, you know, it takes some willingness on the part of the physicians to kind of be flexible and follow their lead in terms of , um, changes. And , um, you know, when when done effectively, it can be a great financial opportunity for physicians.
Speaker 2:So we've been on this journey of why physicians should want to do it, some due diligence , uh, some deal structures, some regulatory issues. Kristen , maybe talk to us a little bit about some post-closing considerations now that we've consummated a relationship and a potential transaction. What should , uh, the practices consider?
Speaker 4:Yeah, sure. I mean, post-closing, there's a focus on integration. Um, if it's an add-on transaction, integrating that group into the single group practice that we talked about when we discussed the Stark law requirements . And as the group tries to achieve that income repair and adding ancillaries, there's gonna be a focus on compliance , um, billing and coding, fixing any issues that came up during diligence, during training and education, including on the buyer's compliance program. Um , on the financial side, there are typically networking, capital adjustments, calculation of earnouts, if that's part of the deal structure. Um, you know, keeping in mind any timelines or limitations that were part of the transaction , um, you know, focusing on retirement or early termination penalties that may require a purchase price repayment . Um , and again, focusing on on growth recruitment and other opportunities. Um, I've seen this year a lot of focus on adding ancillaries , um, looking at joint ventures, certain management arrangements for ancillaries and even hospital relations. Um, you know, physicians typically have a pretty good relationship with hospitals. And I think, you know, there's, there's a sort of competition between hospitals and PE in some circumstances for physician groups, but increasingly we're seeing collaboration and transactions involving , um, physicians who are backed by PE and hospitals on surgery centers, on co-management agreements, clinically integrated networks, just various methods where there's alignment , um, between the parties and sort of a win-win.
Speaker 2:Angen . And Kristen , as we close out our session today, what are some key takeaways, recommendations, lessons learned from the trenches for our audience as it relates to private equity physician transactions and anina ? We'll start with you first.
Speaker 3:Sure. Um, as I mentioned before, for many groups, this is a once in a lifetime type of transaction. And so, you know, being surrounded by qualified advisors who can guide you through this process from beginning to end is really key. Uh, 'cause it can be a long process , uh, from start to finish. It's, it can be time consuming, it will be time consuming. It's, it , it can be expensive. Um, there's a lot of fatigue from just the diligence production part of it. Let , let alone negotiating the actual deal points. Um, and so it's, it's really key if you're on the sell side, to surround yourself with really good advisors who can, you know, really educate you and help you through the process. Um, and it's important that they identify for you, you know, early on some of the things that you should be thinking about so that you know, you're not surprised. For example , um, there's certain things like tax planning or wealth planning that, you know, know should be part of the discussion early on because a lot of times , um, physician practices are set up a certain way from a tax code perspective and doing a transaction means there needs to be some pre-closing or pre-transaction restructuring and things like that. So just kind of being aware of the issues and you can't be aware of them if you've never gone through a process , um, unless you have the right type of advisors guiding you.
Speaker 2:Kristen ?
Speaker 4:Yeah, I agree with Anina . She made some great points. Um, I think so many factors are contributing to physician transactions and we're gonna see more. Um, payers are big, there's rate pressure, we're seeing labor shortages, just the time and money physician practices have to spend on running their practice. Administrative tasks, prior authorization, quality reporting, regulatory compliance. I think we underestimate that and private capital can help relieve some of this pain. Um, and I think we're gonna see practice models potentially shift with value-based care use of more physician extenders as physicians age, and we kind of face shortages in the future. Um, but if you're a physician group or representing one, you know, definitely due diligence before you jump into a transaction with a potential PE partner, they're not all the same. Um, but I, I don't think they're the bad guys. Um, I would say if you're a hospital, we're seeing PE and health systems aligning and a number of interesting and some new ways, not necessarily easy, but um, that there's not a one size fits all . There are opportunities for joint investments and position alignment there. Um, so lots of activity and opportunities for us all. Um, and thank you. This was so much fun. I appreciate the opportunity to speak with you, Jim and Anina , and thanks to a l and Pinnacle for this opportunity.
Speaker 3:Yes, thank you Jim. I'd like to add my thanks to you and a l a as well.
Speaker 2:Yes, thank you. And , and , and very well said team. And you know, as we always say, if you've seen one transaction, you've seen one transaction in this space, so , um, there's always nuances. And again, on behalf of Pinnacle, we want to thank a H L A and angina with Epstein, Becker and Green, as well as Kristen McDermott Woodrum with McGuire Woods for your time investment. And we hope you've enjoyed our podcast today. Thank you and have a great day everyone.
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