Selling Your Practice: Perspectives from the Investment Banker and the Private Equity Firm Presented By: Ralph W. Davis, Cressey & Company, LP R. Riley Sweat, Raymond James & Associates Cynthia Y. Reisz, Bass, Berry & Sims PLC American Health Lawyers Association Physicians and Physician Organizations Institute February 8, 2012 1 OVERVIEW Driving Forces Behind Practice Acquisitions History Revisited Evaluating Alternatives / Preparing for a Transaction Transactions with Strategic Partners Transactions with Financial Partners Case Study 2 1
WHY NOW? Factors influencing interest in physician practices Change (or fear of change) in healthcare delivery models Impact of accountable care organizations Bundled payments Payors with more bargaining leverage Changes in physician preferences for employment Increased reporting burden to government, including quality measures, expenses for installing EHR/EMR Interest in work-life balance Decline in reimbursement 3 WHY NOW? (CONT) Cost of New Technologies Increased need for sophistication in the business office Cost tracking Accurate billing/coding Patient outcomes measurement Quality measure reporting requirements Amount of capital available and interested in healthcare investments is substantial Amount dedicated to investment in physician practices is growing Limited ability for physicians to joint venture 4 2
TRANSACTION ENVIRONMENT In 2011, there were 106 physician medical group transactions representing aggregate transaction value of $465 million. Transaction volume and value increased 58% and 9%, respectively, compared to 2010. 5 RECENT TRANSACTIONS 6 3
OTHER RECENT TRANSACTIONS 7 DÉJÀ VU ALL OVER AGAIN? Revising models used in physician employment and aggregate strategies From late 1980s to late 1990s, physician practice acquisitions and aggregations proliferated and then for the most part, crumbled Physician incentives not aligned with the capital partners Contracting power not a reality Physicians did not perceive added value 8 4
DÉJÀ VU ALL OVER AGAIN? (CONT) IPAs PHOs MSOs 9 DÉJÀ VU ALL OVER AGAIN? (CONT) Staff model HMOs Physician networks PhyCor and those that followed Direct employment by hospitals 10 5
EVALUATING ALTERNATIVES / PREPARING FOR A TRANSACTION Market assessment Internal preparation Engage legal and financial advisors Tax considerations 11 EVALUATING ALTERNATIVES / PREPARING FOR A TRANSACTION Valuation of practice assets How to treat ancillary services Preparing for due diligence Compensation expectations 12 6
UNIQUE DYNAMICS OF SALE TO A STRATEGIC PARTNER Strategic Partner defined Includes hospitals and health systems Is there a typical structure? Pros and Cons Pros: Greater clinical integration Aligning common interests of practices and purchasers Cons: Dealing with physician ownership of competing interests Differences in motives between the parties Antitrust issues 13 STRATEGIC CONSOLIDATORS 14 7
STRATEGIC CONSOLIDATORS 15 STRATEGIC CONSOLIDATORS 16 8
REGULATORY AND LEGAL CONSIDERATIONS IN SALE TO A STRATEGIC PARTNER Stark Law Anti-kickback Statute Corporate practice of medicine Antitrust Certificate of Need Private inurement (if nonprofit purchaser) Other State laws 17 UNIQUE DYNAMICS OF SALE TO A FINANCIAL PARTNER Financial Partner defined Pros and Cons Pros: Fewer regulatory/legal issues in acquisition Cons: Existing management may not have expertise to lead regional or national entity 18 9
UNIQUE DYNAMICS OF SALE TO A FINANCIAL PARTNER (CONT) Control or non-control investment Exit strategies 19 REGULATORY AND LEGAL CONSIDERATIONS IN SALE TO A FINANCIAL PARTNER Regulatory and legal considerations Anti-kickback Statute Corporate practice of medicine Antitrust Certificate of Need Other State Laws 20 10
STRATEGY COMPARISON Strategic Sale Cedes control of practice Become employees of a larger company Reset compensation to negotiated level; motivated for growth from bonus plan Liquidity event at close for all shareholders Physicians have no skin in the game from ownership standpoint Sign mid-to long-term employment agreement including a noncompete Private Equity Recap Maintains some control of the practice Provides liquidity for certain shareholders; others may retain ownership (second bite at the apple) Reset compensation to negotiated level; motivated for growth from retained ownership Potential to grow larger through add-on acquisitions Sign mid-to long-term employment agreement including a noncompete 21 CASE STUDY Specialty physician practice 50 physicians Multi-site provider Ownership structure: equal ownership Governance: Board of Directors elected (all physicians) Management: Non-physician CEO and CFO Revenues in 2011 - $100 million Average annual physician compensation of $700,000 Practice provides ancillary services Dominant market share Reimbursement flat to declining over past 3 years 22 11
QUESTIONS? 23 CONTACT Ralph W. Davis R. Riley Sweat Cressey & Company, LP Raymond James & Associates (615) 369-8408 (615) 321-8075 rdavis@cresseyco.com riley.sweat@raymondjames.com Cynthia Y. Reisz Bass, Berry & Sims PLC (615) 742-6283 creisz@bassberry.com 24 12