Medical Practice Buyouts- Are We In A Bubble?

Physicians have been slow to catch on, but we are finally learning about the new marketplace. Wall Street and private equity financed companies; hospitals and large physician groups are competing for physician practices. Our past articles have explained why the market has changed. There is still a lot of confusion, however. The number one question I continue to get asked is, “Are we in a bubble?”. The number two question is, “What happens to me when it pops?”.   In this short article, I’ll give my opinion on the excitement in the market and what may happen if/when sentiment changes.

 

Despite growing financial pressures on practices, many colleagues are cashing in by selling.   Many of us are accustomed to the periodic irrational exuberance of the stock market and worry about something similar happening in medical practice valuations. The answer, as always, is a very personal assessment of risk and benefit.

 

Confused? Start with the concept of the bubble itself. Many economists have attempted to answer this question. There is never a straightforward answer. The basic idea is that when excitement leads to an increase in asset prices or valuations beyond traditional metrics, you may be in a bubble. Notice I used the word “may”. There is no accepted straightforward definition of a bubble. More important: on an individual basis, as a famous investor once said, “the market can be irrational much longer than we can stay solvent“.

 

Getting beyond the “bubble” really changes things around. The question becomes an individual one rather than a macroeconomic one.   Is the price someone is willing to pay for my practice high enough now that I am willing to accept future risk to my practice? What are the opportunity costs of not selling now?

 

What are the future practice risks? This is somewhat nebulous. Let’s look at one scenario. The large entity you sell to may be better at managing expenses and risk in an era of health reform. For some time, you may benefit from practice efficiency, technology and income stability/repair that the new entity provides (see previous articles for more details). Is there a point at which they maximize efficiency? What point will growth cease to impress the capital markets and multiples (price above earnings the market will pay) start to come down? What affect will that have on operations? When companies leave the rapid growth cycle, it creates pressure to decrease costs. Salaries and staff are reduced.

 

In our past articles, we argued that corporations are buying practices at earnings multiples of 3-9 and “reselling” them to the capital markets at multiples of 15-30. They use the money raised to purchase more practices. As corporate valuations go up, they can easily fund more practice acquisitions (of note, they also use the free cash flow of the practices to fund acquisitions as well). This means that practice valuations can be subject to the whims of Wall Street. Here is the 52-week chart of Envision Healthcare (EVHC), Team Health Holdings (TMH) and Mednax (MD). Notice the volatility. If their access to capital is decreased due to a declining valuation, that could mean decreased prices for practice acquisitions in the future.

envision

The recent buyout offer by Amsurg for TeamHealth underscores that this is a dynamic marketplace. Consolidation will reduce the number of potential acquirers.

 

We must also consider macroeconomic pressures. Eventually, rising interest rates will make acquisitions more costly and reduce prices. The lending market is still tight because of the financial crisis of 2008.

 

The uncertainty raised in the previous paragraphs explains the dilemma but also points to the solution for those worried about a bubble. Our best guess is that most providers/owners are better off now with the investment and efficiency of a large entity. If the underlying business of anesthesia deteriorates, the smaller groups will be hurt more than the bigger ones. Even if the business falls apart, you will likely have fared better in a large company than on your own during a downturn (“popped bubble”).

 

In the end, I cannot say with certainty that we are in a practice valuation bubble. Bubbles tend to be impossible to predict. Are we saying you should sell now? Not necessarily. Just that you should think about it systematically and not run away because of fear. Start with a practice and risk assessment. Then you can choose among several options, which may or may not involve a sale of your practice.

5 Steps to Increase Revenue at your Pain Management Practice

The physician practice acquisition and optimization market continues in full force.  Pain management practices are also in great demand and it’s important to understand the unique dynamics of this market.  This is the first of a series of articles to discuss pain management.  In this first article, Dr. Mandyam, an expert in pain management practice, discusses tips to optimize a pain management practice.

1. Know where to take your cases (posting in an office vs. ASC).

If you are partnered or have equity in an HOPD (Hospital Outpatient Department) or an ASC (Ambulatory Surgical Center), it is important to know where to schedule your cases.  There can be a significant service differential in the fee schedule in an office based setting versus an ASC or HOPD.  For example, in 2015, a two-level thoracic percutaneous kyphoplasty pays approximately $12,000 if done in an office-based setting. If this same procedure is done in a surgery center, your professional fee drops to about $735.00. Furthermore, reimbursement for multiple levels is bundled into a single payment for HOPDs and ASCs.

2. Negotiate your contracts with commercial payors

You do not simply have to accept the rates a commercial payor initially offers. Everything is negotiable. You may improve your odds of receiving better rates by enlisting in the services of a professional contract negotiator.  Many of these professionals are former employees of commercial payers and have experience being on both sides of the table.

3. Focus on your return patient visits.

Although new patients are vital to practice growth, it is usually less expensive to retain an existing patient rather than seeing a new patient. If you calculate the cost of marketing, more overhead dollars are spent bringing in new patients rather than retaining existing ones. A healthy pain management practice should have a patient retention rate of above 75%. These patients may require monthly follow up visits especially if opioid medication management is offered. Use patient satisfaction surveys if needed to find out which areas of your practice are affecting patient retention and fix these issues ASAP. Please keep in mind return patient visits generate income for your ancillary services.

4. Don’t forget your existing referral sources.

When marketing in the community to secure new potential referral sources, do not forget to keep tabs on your existing referral base. Sometimes your referring physicians may want to provide you feedback from time to time, and the only way you will know is if you meet with them regularly. This also keeps your name fresh in their heads when they send out their pain management referral.

5. Establish a relationship with the local hospital system.

By taking a few of your procedures to the local hospital, you are effectively building your brand. The nurses and staff members who work with you will see for themselves the high level of care you provide your patients. The physician break room is also a great place to market your services to other referring physicians in between your cases. Many large hospital systems own primary care groups and can effectively “steer” their referrals to you based on how much revenue you generate for them in terms of facility charges for your cases and any incoming referrals for hospital ancillary services like imaging or labs. When starting a new practice, some hospital systems may offer you a physician support loan as well as free marketing services.
Sri Mandyam, M.D.