Private Equity Acquisitions: What Does it Really Mean?

Transcription

1 MGMA 2017 ANNUAL CONFERENCE OCT ANAHEIM, CA Private Equity Acquisitions: What Does it Really Mean? Wallis Stromberg, Esq. Shareholder, Hall, Render, Killian, Heath, and Lyman PC Denver, Colo. Joseph Kahn, Esq. Shareholder, Hall, Render, Killian, Heath, and Lyman PC Raleigh, N.C. Wallis Stromberg and Joseph Kahn do not have any financial conflicts to report at this time. 1

2 Learning Objectives Interpret key distinctions between a PE/PC-backed acquisition and a hospitalled acquisition Assess important deal-points when evaluating and negotiating transactions with PE/PC-backed purchasers Evaluate opportunities PE/PC-backed transactions can present for prospective practices considering a sale Agenda Overview The meaning of Private Equity (PE) or Private Capital (PC) Reasons for practice acquisition by Hospital or Health System Reasons for practice acquisition by PE or PC Criteria and deal points for the PE or PC Criteria and deal points for the Physician Practice Opportunities for the Physician Practice stemming from PE or PC transaction Practical Takeaways 4 2

3 Overview In 2016, Physician ownership of medical practices dropped to 47.1% AMA, Carol Kane, Ph.D May 2016 Physician group acquisitions were up 46.8% in 2015 Q1 as compared to 2014 Q1 Advisory Board, April 21, 2015 In 2015, Private investments in healthcare rose from $12.7 billion to $14.6 billion McKinsey In 2016 healthcare private equity surged to $36.4 billion in disclosed deal value as investors looked to the industry as a safe haven Bain 5 Overview, Cont. In the past two years, there have been over 200 deals involving physician practices, with about 30 of those transactions in dermatology Business Insider Hospital employment of physicians leveled off after 2014 AMA, Carol Kane, Ph.D May 2016 PE acquisitions: In 2014: 28 deals; Q1 2015: 41 deals (out of 113 total) Modern Healthcare, Beth Kushner, April 18,

4 Private Equity and Private Capital 7 What do we mean by PE and PC? PE and PC refers to investors who are not owner providers or otherwise involved in the direct provision of clinical care Does not include publicly traded companies Size and structure May be small investors looking to aggregate a group of small practices or sell them to a larger PC; or May be a larger holding or management company acquiring multiple practices, backed by larger investment funds Types of PE/PC partners Financial partners Strategic Partners Both 8 4

5 Financial Partners They provide a specified amount of capital to help a practice expand and to improve its IT and management capabilities Capital is structured as Convertible Debt or Equity Position, with a preferred return on the investment Although they do not provide direct management, financial partners may have control over significant decisions and expenditures Their involvement is of limited duration, with a planned exit strategy Involvement may be for a short term aggregation and growth phase, resulting in a sale once the objectives have been reached 9 Strategic Partners They often invest for a longer term and/or as part of a broader strategy They are likely to have continued involvement in the practice They maintain a controlling equity position or minority position with significant controls Capital investment is generally not limited, but is part of a larger business plan The target practice is part of a larger strategy in the health care sector, and not just an invest & exit strategy 10 5

6 Practice Acquisition by Hospital or Health System 11 Reasons for Hospital or Health System Acquisition of Physician Practices To retain and sustain specialty services in the market To align incentives in view of value based reimbursement To assure adequate provider base for narrow network contracting To enable participation in ACO contracting To maintain market share in hospital community 12 6

7 Other Considerations The regulatory issues that affect and limit the structure of the transaction The difficulty in aligning the interests of the hospital and those of the physicians The relationship between the physicians and the hospital after an acquisition 13 Regulatory Issues Affecting or Limiting the Structure of the Transaction Stark Law Anti kickback False Claims Act State Laws on Corporate Practice of Medicine Provider Based Clinic Reimbursement 14 7

8 Difficulty in Aligning the Interests of the Hospital and those of the Physicians Difficulty in adhering to a new vision Stems from a lack of communication Lack of collaboration Lack of integration efforts No cultural blending 15 Relationship between Physicians and the Hospital After an Acquisition Power shifting Culture conflicts Demand for transparency Related to government regulations 16 8

9 Strategic Reasons for Practice Acquisition by PE/PC firm 17 Reasons why a PC/PC firm would want to acquire physician practices Improvement to a practice s net income through improved technology and economies of scale Network development to achieve economies of scale Builds value for the owners with a view toward a subsequent sale transaction High quality/efficient practices can generate significant profit in risk contracts or shared savings arrangements Nationwide aggregation of regional practices can enhance contracting 18 9

10 Fewer Regulatory Limitations Generally, there is less of a concern about "down stream" referrals as compared to hospital acquisitions Reduced compliance risk allows for more flexibility in any valuation approach and the structure of acquisition transactions It can sometimes result in higher purchase price as compared to hospital acquisition 19 Other Considerations PE/PC firms can bring operational expertise to the practice, allowing physicians to focus on clinical care delivery and maximize productivity/profitability In some instances, the owner physicians of the acquired practice obtain equity in the larger company, giving them a stake in the future performance of the company as a whole 20 10

11 Important Criteria and Deal Points for the PE/PC Entity 21 A Practice's Financial Profile Breakdown of quality of earnings Referral patterns Insurance mix Is the physician staying with the practice The amount of debt The amount of cash on hand Opportunity to refine operations to enhance EBITDA of practice Process of improvements IT and technology updates 22 11

12 A Practice's Operational Profile The practice's compliance history Staffing matrix and ratios of the practice Market competition Opportunities for growth Opportunities to expand service offerings Technology platforms Culture of providers compatibility and willingness to modify behavior Experience with evidence based medicine 23 Other Considerations In a primary care practice setting, is there a large number of patients who may qualify to be participants in risk or shared savings programs? It is important to assess the realistic potential for indemnification from any liabilities arising from the practice's pre closing activities Caps, holdbacks, fees Liabilities may vary according to the type of sale stock sale asset sale 24 12

13 Other Considerations Market Demographics Patient population Geographic Location Payor profile Strategic fit within overall network Results in less time spent on integration and profits are seen in a shorter amount of time Payor Contracts and Payor Market Regulatory Issues CON / Licensure requirements CPoM restrictions 25 Important Criteria and Deal Points for the Physician Practice 26 13

14 Valuation and Purchase Price Valuation refers to how much your practice is worth. Depends on: Hard assets equipment, facilities, supplies, etc. Cash this includes the physician compensation Accounts receivables money due to the practice Intangible Assets IP; trained work force Goodwill anything paid above the value of hard assets, cash, and A/R EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) Usually performed by an experienced CPA or health care valuator Purchase price often adjusted based on the findings from the valuation and due diligence 27 Structure of Purchase Price and other Considerations All cash Mix of cash and stock/equity PE will pay a cash stock mix Physicians have opportunity of continued minority ownership or ownership in parent company Earnouts PE to transfer additional cash or equity to Physicians if a specified event in the contract occurs Phantom Equity Compensation plan that confers the right to receive cash at a future point in time, typically a share of the proceeds received upon the sale of a company Escrows 28 14

15 Equity Opportunities In parent company In local/regional JV affiliate 29 Other Considerations The influence in the management of the practice post closing, especially the clinical management and decision making PC/PE's history and experience in health care and in operations within the specialty area of the practice 30 15

16 PC/PE Commitments Provide adequate capital for growth and enhanced performance capabilities Prioritize acquired practice in balance with other practices in network Operational enhancements Technology enhancements EMR platform 31 PC/PE's Strategic Plan Where is the company going? Some questions to ask are: Are they seeking long term opportunities? Are they looking to sell the care coordination and expertise of the practice to an insurer? It is important to consider the PC/PE s plans for cultural integration 32 16

17 The Ability of the Practice to Profit The PE/PC s ability to profit from future value in the organization Shortened time for integration Expansion of services Optimization of processes and procedures Expertise on patient care coordination 33 Fair Employment Terms Acquisitions have a great impact on the employees of the organizations involved A high rate of failure or lack of productivity of a practice post acquisition is attributed to HR factors Fair terms are needed when it relates to: termination of employment competition work expectations 34 17

18 Potential Opportunities that a PE/PC Transaction Presents for a Physician Practice Potential for a significantly higher purchase price than available from a hospital/health system, along with a continued equity interest Often easier to find alignment of interests with the PE/PC firm, with both parties having a stake in enhancing revenue and profitability of the practice (whether for a future sale or for a long term investment) Better access to necessary capital and technical/management expertise in physician practice operations Improved contracting opportunity through a larger organization More continued involvement in the day to day management of the practice, as most PE/PC firms do not micromanage every physician practice in which they invest 35 Practical Takeaways for Consideration of PE/PC Opportunities 36 18

19 Do Your Homework in Advance About your practice: Consider obtaining an appraisal/valuation in advance Perform a self audit for coding and compliance Organize and update corporate documents/operations Know your market and competition About the PE/PC Firm Due diligence Know their experience in the area Know their key executives/personnel Know their capitalization/access to cash 37 Identify Your Goals Are you looking for: Investment opportunity Cash out opportunity Growth of the practice Upgrade facilities and technology Capital access opportunity Defensive play given market dynamics 38 19

20 Be Prepared Engage experienced counsel and accountants to assist you throughout the entire process Prepare for extended negotiations 39 Continuing Education ACMPE credit for medical practice executives. 1 AAPC Core B, CPPM credit 1 ACHE credit for medical practice executives 1 CME AMA PRA Category 1 Credits.. 1 CNE credit for licensed nurses 1 CPE credit for certified public accountants (CPAs) 1.2 CEU credit for generic continuing education 1 Let the speakers know what you thought! Evaluations are available on the MGMA mobile app 20

21 Wallis Stromberg, Esq Hall, Render, Killian, Heath, and Lyman PC 1512 Larimer St., Ste 300 Denver, CO Joseph Kahn, Esq Hall, Render, Killian, Heath, and Lyman PC 3015 Carrington Mill Blvd., Ste 450 Morrisville, NC