By Dana Jacoby and Dr. Douglas Jackson
In the previous article, we explained why a practice would raise the question, “Are We a Platform?” That article explored several important elements in deciding whether a practice might want to be in the platform position of a private equity investment. Building on the understanding of why a physician practice would prefer to be a platform, what are the considerations that answer the question, “Are we a platform?” While there isn’t a clear-cut definition of a platform, there are a number of factors that are important to keep in mind.
First, the size of the practice matters, but it size is not determinative. The overall revenue of the practice, the number of physicians, the patient mix are all proxies for underlying signals of practice health. A practice with a larger bottom-line revenue (more precisely called EBITA) is more likely to provide a private equity investor with more certain returns in the future. A larger number of physicians or a greater number of patients also indicates that the practice has a bright future and will continue for years to come. Taken together, a larger practice is more likely to be considered a platform.
Financial considerations also may include ancillary revenue streams. Ancillary revenue is the amount of money that is achieved through sources outside of the main payor mix from patients and their insurance or Medicare/Medicaid reimbursements associated with the primary practice of medicine within the specialty. For example, an orthopedic practice may also own a physical therapy enterprise for their patients rather than referring them to a third party P.T. provider. Similarly, dermatologists may have developed a strong retail “store” in their lobby, or have created proprietary brands of cosmetics and skin care products.
Certainly there is a lot of excitement about Ambulatory Surgical Centers (ASC’s) across a number of specialties. For a physician group to have equity ownership in an ASC means that a potential private equity partner will look beyond the traditional practice for the revenue opportunities that come with owning the entire surgery process. As a final example, In Office Dispense pharmacies within the practice have been a tremendous source of ancillary revenue for practices. The patients are able to fill their prescriptions on their way home before they leave the doctors’ offices, and the profit margin is retained by the practice. Each of these factors are appealing to a private equity investor, and the more revenue that is generated, the higher the likelihood that a physician practice will be recognized as a platform.
Professional management is a key consideration in the answer to, “Are we a platform.” Larger practices are more likely to have professional managers oversee the business side of the practice, but that isn’t an absolute correlation. Some smaller practices may have great professional management, and some larger practices can be a managerial mess. In general, an investor is looking for a practice that is led by a well trained, seasoned practice manager. The title is not as important as their ability to guide the administrative aspects of the day-to-day business decisions. These will include accounting, human resources, information technology, medical records, billing, coding and accounts receivable, and so on. A larger professionally managed group may have multiple administrators over each of these areas. And most will likely carry educational pedigrees in line with the amount of revenue, the number of doctors and medical staff, and the number of patients in the practice.
Closely aligned to professional management is the importance of systems and processes within the practice. A practice that can demonstrate that they have documented systems and processes will more likely be considered a platform than those practices that don’t. These systems and processes may include the method for patient care, beginning with the patient’s experience when they enter the waiting room. The system will guide how the practice manages the overall journey including data collection, communications, procedure preparation, the day-of processes and the post procedure follow up. In an environment that is increasingly dependent on value-based outcomes, these processes are exponentially more important. Certainly, a documented system for the billing and collection of payments will be more efficient and effectual, whether that system is under a fee-for-service model, a concierge format or a traditional payor mix including Medicare and Medicaid. Physician practices that have not documented their systems and cannot demonstrate that there is a strict adherence to those systems will be less likely to be considered as a platform. The reason is that a practice is not “scalable” if it does not have documented processes and procedures. It may be obvious, but if there is no curriculum, it’s questionable whether the practice would continue to onboard new associates and ultimately, without documented systems and practices, there is very little to teach the new “bolt on’s.” That significantly hinders growth.
An additional consideration in the question of “Are we a platform” is the area of the culture of the practice. Many people decline to discuss “culture” because it can be difficult to define and harder to quantify. Management has attempted to proxy for culture by distributing employee satisfaction surveys, instituting 360 peer reviews or quantifying turnover. Those may offer a bit of insight into what’s happening between people, but they are imprecise tools at best. Like many other important things in life, culture may be tough to describe, but “we know it when we see it.”
That said, culture is absolutely essential to the long term success of a practice, and even more important when considering growing the practice through acquisition of other “bolt on’s.” Some questions to ask when reflecting on the question of culture are such things as, “How are decisions made within the practice?” and “How does the team communicate and interact with one another?” The morale of both the physicians and the staff will largely depend on whether people feel a sense of belonging and believe that their concerns and opinions are heard and understood. It’s important to know whether the team is aligned on such factors as the mission of the practice, what is recognized as success or failure, how are people compensated, rewarded, recognized and bonused. One sage executive coach put it this way, “So what does it take to get fired around here?” That will quickly define the boundaries of what is acceptable.
It is very likely that the culture of the platform will carry over and strongly impact the subsequent culture of the bolt on practices. The communication protocols, rewards and recognitions and the general morale will set the tone for growth. And it will make a tremendous difference in whether a later practice wants to join the platform. After all, nobody wants to work in a place where people aremiserable and dislike their job.
One last note on culture that is probably significant enough for an article on it’s own, but the question of culture is paramount in the selection and “getting married” process of engaging an investment bank or private equity partner. Sadly, some physicians learn about the high payout that a colleague might have received in a private equity transaction. This is the topic of many cocktail conversations at medical conferences across the country. “Did you hear Dr. Smith got a $5 million payout on their transaction?” That can taint the process for some doctors, feeling they should negotiate for a similar deal. However, no amount of money in the world is worth ruining the practice and making everyone miserable because there was a mis-match of cultures with the partner. Don’t make a decision solely for the money.
A wise person once remarked, “If you’ve seen one transaction, you’ve seen one transaction.” There are no hard-and-fast rules. For example, in a recent situation, the private equity group invested in a practice as their platform. It was a good practice and fit the criteria mentioned above. Later, the private equity investor approached another practice that was better managed, better known and had more significant revenue. In that case, the size and influence of the bolt on practice overshadowed the original organization. While there is no official platform designation, for all intents and purposes, the bolt on became the platform. In other instances, the first transaction resulted in a weak platform. In a good news/bad news scenario, the practice received the benefit of being the platform, but no other practice wanted to join them. They were orphaned and face an uncertain future.
In summary, for a group of physicians considering a private equity transaction and wanting to be considered as a platform investment for a private equity partner, keep in mind the following questions:
- What is our size as compared with other practices in our specialty? Bigger is likely better.
- Do we have ancillary revenue that would be attractive to an investment partner? Again, more is better.
- Is our practice well managed by well trained professionals? An investor wants to work with people who know what they are doing.
- Have we documented our systems and processes? It’s tough to teach things that haven’t been written down.
- How would someone describe our culture? People want to work with happy, mission driven people.
If the answer to the above questions isn’t something to be proud of, it’s not too late. Take the time, have the discussions and make the changes. Whether or not your practice decides to engage with a private equity investor, the things that make better partners are the things that make better practices.
Ultimately, your practice will be stronger, your team happier and your patients better cared-for as a result. And that is a very good outcome.