Over the years, groups of doctors in a number of different specialties have monetized their practices through sales to venture capitalists and ultimately public investors via Wall Street.
Group owners have made enormous amounts of money through these buyouts. The investors (buyers) get their profit and return on investment (ROI) by receiving a portion of the physicians' future earnings in perpetuity. A recent post on KevinMD and an article in the December issue of HealthLeaders brought this topic to the forefront over the holiday season (although it's never really far from my mind).
In my 20-plus years as the CBO of CEP America (where all physicians have the opportunity for equal ownership), I have been directly or indirectly involved in almost one hundred physician-hospital contract transitions, most of which involved hospital-based physician (HBP) practices. I know that the successful ingredients of a well-honed, quality-driven, compassionate medical practice include performance, physician leadership, culture and a sense of ownership — all of which are hard to establish and maintain in physician practices owned by private equity or investor-owned entities.
For the record, I have been the chairman of ACEP's national Democratic Group Practice section. I am favorably biased towards democratic physician groups that offer transparency and total equality to owners/physicians.
Why doesn't this type of buyout work in the field of medicine? Are physicians more likely to be motivated to provide a higher level of patient care in investor-owned groups or in broadly owned physician groups without investors? And at the end of the day, how does this monetization of physician practices affect patient care?
The success of publicly traded companies, including physician management companies, is dependent upon growth and quarterly earnings. When earnings conflict with patient care in these companies, it stands to reason that patient care may become secondary to earnings. Ultimately, this creates a lose-lose scenario for almost everyone involved, from the physicians themselves to the hospital that contracts them and ultimately to the patients. Only the investors stand to benefit.
How are these deals structured? Generally, a public company will buy out the physicians with cash or stock. If cash, the company may have to borrow money (incur debt) to purchase the physician practice. In either case, the company will pay the physician group less than the value it will receive from its investors for future profits.
For example, if the multiple on earnings that the public market is willing to pay is 10 times annual earnings, the buyer may purchase a new company for a lesser multiple — say six times — and therefore get an instant pop based on their public valuation. The seller is happy because (s)he now has taken future profits up front without having to perform and make a profit in the future. The public company (buyer) is happy because they have paid less than they will receive and because they will receive steady income into the future.
So what's wrong with this business model? It is the way the world is supposed to work — buy low and sell high, right?
Let's take a closer look. Initially, all of the owners of the original group who built the business have made money. They have received a multiple of their income and a substantial financial windfall in exchange for leaving some "profit" on the table in the future. But where does this "profit" come from? It comes from the company's operating budget and the doctors' compensation going forward.
If you are a seller who gets paid, you have made what you think is a good business deal. You get future years of income paid up front and take a cut in future pay in exchange. Those who were the big owners do great. However, if you are a minority owner, a non-owner or a future worker, you are now getting less compensation for your work because of the deal and because the money for the buyout has to be recovered.
Where does this lead? For one thing, lower operating budgets. Now instead of innovating and investing in patient care, the money is taken out for the investors and quality suffers. In the new world of value-based purchasing, the practice struggles to compete.
The need for profits also cuts into physician compensation. This deals another — albeit indirect — blow to quality and innovation. After all, doctors who are at the top of their class have a choice as to where to practice. The salaries offered in this previously monetized group practice — which may have initially been very attractive — are now much lower. High achieving physicians will choose to work for greater compensation in a medical practice that doesn't owe the public a debt.
This cascade doesn't stop there. If the physician group is hospital-based, the hospital suffers. Strong doctors will choose to practice elsewhere and the hospital, which was once noted for stellar patient care, gets to be known as the hospital whose care is delivered by doctors who are not as invested in their patients' well-being and who basically do what they have to do to fulfill their contractual obligations. These doctors work by the hour for the practice's owners. Their wages are lower, they have no ownership in their practice and hence care little about the long-term viability of the practice.
I believe the eventual and inevitable unintended consequence of the investor-owned model is less compassion and empathy for the patient and deterioration in the quality of the care being delivered. The decline in the hospital's reputation occurs over time, and a good reputation is very difficult to recover after bad performance.
The hospital's CEO is now in a conundrum. Should (s)he sign a contract with a big public company (which may charge less and even below cost because of the desire to buy market share and future revenue) to take over the hospital-based practice, knowing that the previously described cascade of events is inevitable? Or should (s)he opt for long-term gain by contracting with a group of doctors who own their own practice? After all, those latter physicians really care about the group. It's theirs. And they generally recognize a long-term commitment to their community and their practice. In all likelihood, they will continue providing excellent patient care that creates a stellar reputation for the hospital that will go on in perpetuity.
The choice should be obvious, but in this era of value-based purchasing, ensuring quality patient care makes the case for physician-owned groups even more compelling.