The Third Way: An Alternative Business Structure For Hospital-Based Groups

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March 31, 2018

The Third Way: An Alternative Business Structure For Hospital-Based Groups

Let’s start with a thought experiment. Suppose that, with all your free time, you decide to start a second business, perhaps a consulting firm or a large-scale manufacturer of crocheted dog sweaters. Either way, you’re going to need some skilled people in your business. Would you:

(a) make everyone an equal co-owner from the start?
(b) make a sincere promise to your employees that they are on a track to equal co-ownership?
(c) have no or as few co-owners as necessary and employ the others at market rates?

In many, and growing, areas of medical practice, there is a significant split, a bright line dichotomy, between medical groups that are physician-owned and groups that are, one way or another, investor-owned.

This is particularly evident in anesthesiology, radiology, and emergency medicine, in which there is a clear divide between the so-called national groups, almost all of which are controlled by public entities or private equity investors, and those that remain local and completely physician-owned.

But don’t for a moment believe that the phenomenon is limited to hospital-based specialties. There’s a growing trend of investor ownership in many office-based specialties as well, for example, in dermatology and gastroenterology. In part this is fueled by private equity money and in part it’s fueled by physicians wishing to cash out in a way that 15 or 20 years ago was not only impossible, but also hilarious.

Obviously, in the investor-owned model, the physicians are, for all intents and purposes, no longer owners. (They might have been granted some ownership in the larger entity in place of some of the cash purchase price, but that’s the tail wagging the dog and not relevant for this discussion.) And, certainly, no physician employed by the practice in the future will attain any ownership in it.

With far more than half of all physicians moving from training into practice being employed by hospitals or their proxies or by investor-owned practices, investor-owned practices are not at any significant disadvantage in recruiting and retaining physicians.

On the other hand, on the other side of the Grand Canyon of business models, physician-owned groups tend to be structured in a way in which a significant percentage of the physicians, sometimes all, are owners or are on a “partnership track.” If a physician makes the cut, and almost all do, then he or she becomes an owner, oftentimes a full-share owner.

But here’s the question for those partner/partnership-track structured groups to consider: If physicians coming out of training don’t expect ownership, and if the market is shifting around you to structures in which no ownership exists for the physicians qua physicians, then can, and should, you alter your business model to one in which ownership is restricted and separated from the notion of “group physician” status?

On the one hand, the culture of many groups is such that partner/partnership-track is held to be a central tenet of collegial, “independent physician practice.” That’s certainly a valid position.

On the other hand, if a group, even one that today thinks it will never decide to sell, does sell, and by then its ownership is spread across all or nearly all of the group’s physicians, then the sales proceeds flowing to the owners are diluted. Sure, it’s most likely not chicken feed (or there’d be no sale), but it’s not a tremendous nest egg, either. If each partner receives even $1 million to $2 million, but continues to work at a $200,000 reduction from his or her prior compensation for a period of 7 years, the sales proceeds are not particularly life-changing. The problem is that ownership was widely distributed.

Let’s look at another alternative scenario, one that leads to the third way of this article’s title: What if the group, the one that today thinks it will never decide to sell, never does decide to sell?

With a large pool of employee-candidates lacking any expectation of ownership and seeking to obtain lifestyles as much as careers, there’s a tremendous opportunity for physician groups, both office-based and hospital-based, even those that are very large, to transition from their current all-partner/partnership-track model to one that is quite different, one that creates tremendous equity value for the current physician owners. That equity, meshed with a strategically structured compensation plan, can provide what is, technically, on-going distributions in respect of ownership that can out-strip the expected return of a sale. And, despite all protestations of the present, if the owners later do decide to sell, $70 million divided among 5 shareholders yields more than if that same sum were divided by 40.

Harken back to our thought experiment. Are you going to be sending stock certificates to the consultants in Cleveland or the crocheters in Canton?

 
 
Wisdom. Applied. 109

Wisdom. Applied. 112:
CVS, Aetna and Your Practice

The Wall Street Journal portrays it as causing panic in the streets. I’m taking about the pending acquisition of Aetna by CVS Healthcare.

All Things Personal

 
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Over the years, I’ve developed a sense of the mindsets that are common among healthcare leaders and those aspiring to become one, from solo physician entrepreneurs to large group CEOs.

I recently created a scorecard as a sort of self-diagnostic tool to allow you to get a clear sense of where you fall on the mindset spectrum.

You can access the diagnostic, The Healthcare Leader Mindset Scorecard, by clicking on the image of the scorecard below.

How do you score on those mindsets, both currently and where you’d like to go moving forward? Go ahead and find out now.

There’s no obligation to return your results, but if you’d like, email the completed form back to us, and we’ll tell you how your mindset compares with that of other healthcare leaders.

How do you score?

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Books and Publications

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We all hear, and most of us say, that the pace of change in healthcare is quickening. That means that the pace of required decision-making is increasing, too. Unless, that is, you want to take the “default” route. That’s the one is which you let someone else make the decisions that impact you; you’re just along for the ride. Of course, playing a bit part in scripting your own future isn’t the smart route to stardom. But despite your own best intentions, perhaps it’s your medical group’s governance structure that’s holding you back. In fact, it’s very likely that the problem is systemic. The Medical Group Governance Matrix introduces a simple four-quadrant diagnostic tool to help you find out. It then shows you how to use that tool to build your better, more profitable future. Get your free copy here.

Learning opportunity: Mark will be presenting the key concepts of the Matrix as a part of his presentation at the Advanced Institute for Anesthesia Practice Management, April 28 – 30, 2018 at The Cosmopolitan of Las Vegas. http://aiapmconference.com

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Whenever you're ready, here are 4 ways I can help you and your business:

1. Download a copy of The Success Prescription. My book, The Success Prescription provides you with a framework for thinking about your success.

2. Be a guest on “Wisdom. Applied. Podcast.” Although most of my podcasts involve me addressing an important point for your success, I’m always looking for guests who’d like to be interviewed about their personal and professional achievements and the lessons learned. Email me if you’re interested in participating.

3. Book me to speak to your group or organization. I’ve spoken at dozens of medical group, healthcare organization, university-sponsored, and private events on many topics such as The Impending Death of Hospitals, the strategic use of OIG Advisory Opinions, medical group governance, and succeeding at negotiations. For more information about a custom presentation for you, drop us a line.

4. If You’re Not Yet a Client, Engage Me to Represent You. If you’re interested in increasing your profit and managing your risk of loss, email me to connect directly.

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The Mark F. Weiss Law Firm 1227 De La Vina St. Santa Barbara, California 93101 United States (310) 843-2800