Physician-owned management model: An alternative to private equity
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Many physicians have looked at different organizational structures for joint ownership. I would never propose that there is a one-size-fits-all for the different gastroenterology groups out there.
There are situations where bringing in majority ownerships by private equity brings in a lot of value. For example, some organizations, whether they are management service organizations (MSOs) or another construct, have taken on more or less of the financial burden of overhead, including leases and capital leases on equipment. That is getting into finance in a way that a lot of physicians are not well-educated in or experienced in handling. I think that corporate partners on some of these things do bring value.
Another option independent groups have faced include local sale to hospitals, or even just a larger payer group in their area. This presumably brings security and patient steerage as major advantages. However, the most important concern among physicians right now, including gastroenterologists, is loss of autonomy, specifically to administrations. I think that the pandemic only exacerbated this perception and reality. It put a lot of cracks in the armor of agreements out there, and people really saw how the partners they were associated with functioned when strained. As a result, interest in other models is escalating.
Physicians Look to New Models
I have been a gastroenterologist for 20 years in Portland, Oregon, in a small group that merged with another group that had merged continually and built a multispecialty clinic. Eventually, I ended up in roles as a clinical director and on our executive committee. I was exposed to the business side and began to understand the inner workings.
Subsequently, I have spent considerable time exploring and engaging physicians in my community to find a better path in a changing landscape. What developed is a new multispecialty practice centered on two surgery centers and eight procedural specialties. This growth was organic among several different specialties and experienced physicians who are all aligned around maintaining an independent practice and providing better value of care. But we didn’t stop at creating just a clinical and surgical practice — we realized that the business of medicine needs a new model too.
It is a very exciting, interesting time for physicians to ask: Are there models out there that are not hospital ownership? Models that are not a more traditional, corporate joint venture in which you give up to private equity a controlling interest in ownership of the practice and are subjected to corporate practice of medicine rules and regulations? The structure and intent of those interests may not align with what is in the best interest of every independent practice out there — especially one intent on providing value-based care and limiting the expenses of administration.
Physician Owned vs. Private Equity
I was very interested to learn about the arbitrage that happens after many private equity deals, called a “second bite.” Arbitrarily, 5 to 7 years later an equity group is likely doing a secondary deal looking for a return on their investment of 20% to 40%. This corporate goal drives the business mission during these 5 to 7 years in a way that I think has made many physicians uncomfortable. In hindsight, many told me it led to their anxiety about giving up autonomy and having some concern about the administration of the business of medicine being in the driver’s seat. I think physicians would like for that not to happen; I think they have a different balance in their minds.
Certainly, there are those in the business world who have more experience, more contacts and more leverage, but it is not universal or something physicians cannot attain. We then thought, if we are going to have a need for such business services, why not create a physician-owned, standalone organization that is separate from our clinical practice? You are basically creating a new business entity that is owned by the physicians and if you have corporate partners, they are kept at a significant minority.
We are using the term MSO somewhat loosely, but this is a term I think many people are starting to understand. We are creating an MSO that the physicians not only own and build but hire, contract and help to run. The physician-owned MSO handles revenue cycle management, billing, payroll, HR, accounting, credentialing, contracting, retirement plans, IT and more. People understand the professionalism and economies of scale when pursuing traditional avenues of doing business with others, but they seem to be less aware that such an entity could be created and owned by them.
Creating a physician-owned corporate entity has value. It is an additional asset, one that you can use in various arrangements to build succession planning, not exit planning, which I think is one of the main goals of doing something this way vs. giving up large percentages of ownership to outsiders.
When it comes to recruiting and retaining high-quality doctors, the physicians are the ones who do it best. Being able to offer meaningful ownership to attract and retain physicians is difficult if you have already given up a large percentage of your ownership to others whose hope is an arbitrage event in 5 to 7 years. The other strength of the model is that it offers opportunities for succession planning that are based around either stock warrants or restricted stock units that are not liquidity events but are taxed as income like a typical sale of a controlling interest to private equity.
There are a lot of other potential retirement and tax benefits. Of course, consult with your attorneys and your accountants, but there are opportunities that I do not think many people have explored.
Building such a physician-owned MSO is technically not complicated. But bringing together many disparate medical practices requires due diligence and time. The process can be quite flexible though, adding services to the MSO as they fit priorities. For example, not all groups need to use all the MSO services and not all at once. You may not all need to be under a single tax ID, but there certainly are significant long-term benefits to contracting leverage and referrals between members.
Conversely, you can execute a successful MSO out of a few leading groups as we are, then demonstrate this success to others to build and attract appropriate new groups. The key overall is to retain as much ownership as you can with the intent of maintaining the quality of the physicians and the future of the practice. I think a lot of people are interested in that kind of a model, and doctors should be aware of the power they have in this regard. We are more powerful in the business of health care than we think, and the pendulum is swinging our way.
A physician-owned MSO hires and contracts with experts and consultants. But instead of giving up autonomy to the administrations and corporations with whom you may not align, you are hiring and owning them. Something deep down feels good and correct about that. As a physician of 30 years, I think it is a great new opportunity.
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- Michael Owens, MD, FASGE, is a physician and the director of digestive health at Pearl Incision.
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