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On Demand - Latest Trends in Cardiology Group Part ...
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everyone for taking the opportunity today to join our webinar on the latest trends in cardiovascular group transactions. I'm Kevin Mayer from MedAxiom, one of the VPs of care transformation here at MedAxiom. And I'm excited to have subject matter experts from Westco, which is an investment banking and advisory firm, and a very large law firm Epstein Becker and Green. And I'm going to hand it over to Justin and Abe first to do introductions followed shortly with Gary. Thank you, Kevin. My name is Justin Hand, Managing Director with Westco Partners. As Kevin mentioned, we're an investment banking advisory organization, which effectively means and related here we represent practices both private and hospital based, as they explore their, their opportunities and options for them for the future of cardiology related to private equity, strategic acquirers and how the market evolves over the years to come. And hi, everyone, Abe and Boj, also with Westco Partners as a director working within the cardiology space and alongside Justin and our team here. So good to speak with everyone here today. And hi, I'm Gary Hirschman. I'm a healthcare transactions partner at Epstein Becker and Green, which is a national healthcare firm has 180 healthcare attorneys and 20 offices around the country, including about 90 attorneys and healthcare transactions. And we've been doing a lot of work with cardiologists for over 20 years, you know, including, you know, arrangements with hospitals and ventures and more recently, and other major strategic transactions with private equity and other strategic buyers. Thank you, team. So we're going to break down this presentation into four parts do overview of the market PE in the market, some PSA partnership agreements, outline of the PE process, and then have some time for some q&a session here. Just some logistics to go over a Justin, Gary, myself have nothing to disclose. And if you would see on your screens there to this presentation will be available for download here now and after it will be recorded, you can be able to share the slides after any questions during if you would put them into the q&a for the presenter, and we will address all your questions at the end of this webinar. So from overview of the cardiology market, a lot of things happening in our space right now, a lot of different challenges, we're continually pressing reimbursement regulatory changes on on the horizon. And a lot with now with private equity entering our market too. So we have a demand issue supply, and different service offerings, which have increased the presence of private equity into our market currently. So from a demand perspective, just some info from AHA and CDC to for the next 13 years, we will see a continual rise of projected disease that will have a burden on our healthcare economy. Again, from a supply perspective, very interesting note of the 32,000 practicing cardiologists in the field, 26.5% are over the age of 61. And if you look at the number of fellows entering the market, we are not going to replenish the supply of cardiologists needed to care for the prior slide with a show the disease projection over the next 15 years. With what we like to call the disruptors in the healthcare field, just to name a few of the big giants, Apple, Apple, Optin, Amazon, Google and CVS Health, you know, CVS started with just with administering vaccines moved on to clinics and now having larger partnerships. Apple and Google using a lot of their technology to enter the healthcare realm. And and as we all know, the Optin over the last two years, the big deals of acquiring the emergency acquisitions across the US, where we can see that it's really changing the landscape for healthcare. What we'd like to say it's a race to control populations, you know, Amazon now, beginning with from a pharmacy standpoint, but now scooping up primary care, Humana and Optin with the big change healthcare deal has really changed the landscape. So it's really, as we like to say, race control the population health. Again, with the economic from an economical standpoint, hospital margins are extremely razor thin, and we have yet to see from post pandemic levels that we are reaching anywhere where we were prior to the pandemic. And with projections, there's going to be huge short shortage of from a workers standpoint, that is going to put a huge strain on our healthcare system. This is something that we'd like to show to it's a one of the largest employers in the US to we've been talking about this train coming and that we've seen the light far off and this light is becoming brighter and brighter every year. This is just a direction from a national, one of the largest employers in the US to where they show how much their coverage differentials are going to be from 0% up to 100% really driving where they were preferred care to take place. Now I'm going to give a moment to switch over to West Cove to talk us into what's going on in the private equity trends in cardiology. Thank you, Kevin. This is an interesting topic. You can move along Kevin, if you don't mind. This is an interesting topic. And one that we've been talking about with West Cove, along with MedAxium for about two years now. This panel discussion today is a little bit different because we had theorized around groups that were hospital based coming out of the hospital and joining private equity firms. And we anticipated that to happen. Since our last webinar in the beginning of the year that has started to happen. We've seen a few private equity firms, of which Gary has been a part of these transactions spinning out of the hospitals and joining private equity firms. But it's an interesting time, the variables that are influencing the decisions of practices to consider alignment with private equity or everything that just Kevin, that Kevin just shared. A growing number of individuals that are approaching retirement are getting closer and starting to think about how do they monetize the equity value of their organization, a challenge with a lower number of individuals graduating from residency and fellowship program coming into this marketplace that that provides that that results in replacement of those retiring physicians becoming a challenge, increase in labor costs beyond the physicians themselves. And just constantly we hear about the challenges from med techs, and Brown recruiting and retaining and their expectations of compensation. And so all those things are having an influence on why there are currently nine private equity firms that have made a commitment towards investing into this marketplace, able to go into that in the next slide in terms of how that's evolved really in the last two and a half years. But we've we we feel and we hear often cardiologists concern around there hadn't been there that isn't a precedent of successful transactions within cardiology that have occurred or gone through second change of control events. And so we oftentimes draw a parallel to some of the other subspecialties that have been consolidated or benefited from private equity over the last 20 and 30 years. So it all started with hospital based organizations, physician groups like anesthesia, radiology, immersed medicine, consolidating, I think a lot of lessons have been learned through the transactions that have happened in those sectors that were very a missile, not an intentional alignment around compensation and equity appreciation. A lot has been learned as the market has moved, or the investment has moved towards investing into multi site health care businesses like interventional pain management, dermatology, OBGYN, GYN, GI towards how do we align incentives on the physician compensation with the opportunity to repair that compensation on a go forward basis, coupled with how do we create value for equity owners through making sure that the physicians both today when they do the transaction, but also a path towards equity for associate physicians in the future is the reality of this structure of these transactions. And because of those learnings over the years, we've seen a lot of success and quick success in some of these later stage industries such as GI, urology, OB, see very quick acceleration in terms of growth in the business, efficiencies in the business and in physician satisfaction, improving compared to where things were 20 and 30 years ago. I'll let Abe comment around kind of the evolution of the market in cardiology. Yeah, just quickly before moving to the next slide here, I think one of the things that we see in this sector relative to others is just you can see the quick expansion, the first investment date in cardiology being 2021 to nine platforms today, and look at the all of the specialties above it, you can see just take GI, the first investment in 2016, up to eight today. So as we move forward to the next slide, just kind of market overview of sort of the current dynamics around around the country, there are nine platforms currently in you know, that have announced transactions with practices, several others are in the works. And then all of these practices are also in the in the in the in the middle of expanding further into different geographies and markets around the country. A lot of the activity has been centralized in sort of the southwest and southeastern United States, but transactions have certainly taken place nationally. I think one of the things that's that's been very interesting about this market is that you've also, you see a lot of these states, there's there's not many groups that are within the same state. But we found that relative to some other specialties, there's been kind of increased competition for some of these states like Florida and Texas and also Arizona to a lesser extent where the opportunity for additional ancillary services and the opportunity to build out ASCs and OBLs is wide open because of this, the lesser CON restrictions, that's relaxing and other markets around the country. But those markets have really were some of the first to see substantial investment. And then you can see evidence by the number of platforms that are in each state, that those continue to be highly active markets and very competitive. In addition, I think, you know, we're going to continue to see other practices expand around the country. So we, Abe and myself and other members of our of our team have been fortunate we've we've represented in close for cardiology transactions. In the last about 15 months, we have another one that will close before the end of the year. We see a lot of commonality in terms of why physician groups are considering private equity, and we kind of bucket into three major areas. I'm going to start with the middle one first market dynamics. Since 2021, or prior to 2021. The options for private practices were really remained independent. Individuals sells their equity if there's a buyout mechanism to future or associates in the organization. And there wasn't a there wasn't an obvious internal way to create a lot of equity value for what was created in these businesses. The other alternative was you align with the hospital system and with 80% of the groups in the market that have already aligned with the hospital system. I think the ones that remain independent have made that decision to stay independent, and didn't have an interesting kind of going in that direction. So the market dynamics have changed in the last two years where my guess is every person on this call, either themselves or another member of the organization have received calls from investment banks like ourselves many times over law firms, as well as private equity firms in the strategic acquirers directly trying to seek their interests in align with them as an organization. So the general sentiment around this industry is very different today than it was before, which I think peaks the curiosity of a lot of individuals around considering what what their options are as an organization today as they look towards the past, the challenges that are on the horizon within this sector. The other market dynamic that happens is that when a peer group in your market or a group that you you respect, in terms of what they've created, perhaps in a different geography, aligns with a private equity firm that oftentimes also sparks the interest of a group. So if you have been a part of a working group in the past, or you see some of your peers with a med axiom announcing they're doing a deal of private equity, and you always envision them to be remain them to be an independent and would remain as an independent group, but they've decided to transact, it just changes the overall kind of interest level out there in the marketplace. So the general market dynamics have changed in the last two years, coupled with what has happened from valuations. So valuations in cardiology are the highest that we've seen in the physician practice management space, ever, in particular businesses that we would define as lower to mid market. And so again, the market dynamics say a lot of interest from private equity, at the infancy of consolidation, and high valuations are allowing groups are kind of finding forcing groups, whether they want to or not to consider what's around them. The second piece of the reason why our clients do it are considering a transaction is just the recognition that in order to continue to compete independently, against these private equity firms, it's going to become more costly, it's going to become more costly to recruit. Given what Kevin mentioned before, in terms of the lack of supply of physicians coming into the market, it's going to become more costly to provide the ancillary services that your patients are expecting to have within a private practice. PET-CT, expansion of ASCs, as Ava mentioned before, in the states that allow it today, or those that will allow it in the future. And that access to capital is a real saw that these private equity firms offer. And so don't question opening up a fifth or sixth or second location, and think about how long it will take for those physicians to ramp up. But to help private equity firm, you can do it immediately and know that you'll grow into that. Same with expansion of cardiac urgent care, as an example, or building a new ASC. These are costly investments that oftentimes when you have 5, 10, 15, 25 shareholders in the group, you have differing interest in terms of where you want to invest in the business. And a private equity firm or what the capital that they can provide or do provide, kind of alleviates the concern amongst those groups to make bigger and bolder decisions. And the last piece, and it ties a bit into the market dynamics is risk diversification. You as a group of cardiologists are in a enviable position compared to some other subspecialties that have received interest from private equity. You have a lot of power to the health systems that a lot of other organizations don't. But you also have a lot of risk inherent in having ownership in these practices, where there are going to be growing competing interest in terms of the services you're providing to your patients, risks on the payer side of things with kind of erosion on margin, increase in cost to retain talent in the organization. And so from a risk mitigation, risk diversification and risk mitigation perspective, a lot of our clients consider private equity because this allows them to take some capital off the table, put cash in their pocket in the individual level. And the way in which all of these deals are structured with private equity, and whether you're a private practice today or your hospital based group kind of going into a private equity firm, is there's an expectation that you as a shareholder base will maintain anywhere from 30 to 40% ownership in this business going forward, which is aligning interest in the future towards creating additional value opportunities and equity and capital opportunities for the shareholders in this group, both on the short term basis related to income repair that we'll talk about in a long term basis related towards growing the equity value to get to a second bite of the apple, a third bite of the apple, and so on. Kind of moving on to the next slide, we kind of parse out life post transaction from an economic standpoint, in two different buckets. One is which is called income repair that we'll talk about on the next slide, which is what are the opportunities that a private equity firm can offer to practices that allow their income to get back to or put them on a path towards getting back to what it was prior to the transaction. And what I'm going to talk about is how does a private equity firm actually help private organizations experience a change of control or return on equity. So as I mentioned before, these deals are structured with 30 to 40% of the ownership or value of your business is rolled forward for the next transaction. And the way the reason for that is they being private equity firms want to align the interest with the physicians in the group, the current positions and shareholders in the group management within these groups, and also the associates that are on track, or will become on track in the future. And we want everyone to have as much opportunity for upside on this value accretion and increase in the value and the equity so that everyone's thinking about how do we create? How do we think about our practice in terms of improvement? So the first is, can we go after local competitors of ours and do what are called acqui hires? So can we can we encourage and convince the one doc to doc practices in certain markets to join us as a private organization and shift some of the administrative burden away from those smaller practices to the to the to to your practice, the initial transaction, which allows those physicians to or providers within those groups to be more focused on clinical excellence and patient care. The second piece around is add on acquisitions, are there other client other companies around yours or practices around your region that you've admired as being friendly, friendly competitors of yours prior to the transaction. So I can think of a client that in a deal we closed in the southeast where they had a real mutual respect for their competitors in the marketplace. And once our client decided to do a deal, it most definitely sparked the interest of the other private practices because it was going to be more difficult to compete in terms of recruiting and what they could offer their patients in that marketplace. And so you naturally see consolidation in the market. And what that does is it creates the opportunity for growing value in this in these organizations, which results in equity return. The second piece is private equity firms want organizations to think bolder and larger. So instead of just thinking about your practice in Houston or Atlanta or Tampa, think about what else is around you within a two to three hour radius and how to calculate expand through the reputation that you've established in those geographies. How can you expand into those other markets and you do it through acquisitions. So creating value along the way. And ultimately, at the end of the day, the way these deals are structured is private equity firms think about their investment hold period for about five years. And what we've seen in the past is the first slide that we showed those other subspecialties is smaller private equity firms typically sell to larger private equity firms and larger private equity firms. So they're moving up the value chain. And as you move up the value chain in terms of private equity firms, you're also creating liquidity events for your shareholders all along the way. So the expectation is you see a three to four times return on that rollover. So you grow your 30 percent three to four times return with the help of private equity, private equity firms doing things that I just mentioned a moment ago. And that's more of the long term opportunity that five year out able now talk about how do you create these income repair opportunities to get economic, get the economics on an annual basis related to compensation back to what it was more similarly prior to the transaction. Yeah. So moving on to the next slide, I think, you know, the way these transactions are typically structured is there is, you know, an upfront reduction of income. You'll hear it termed a scrape in some instances, usually that number is around 30%, right? So if someone was making 1 million the year before a transaction, they'd make 700,000 a year after 30%, representing the EBITDA or scrape of that transaction. So one of the biggest components of growth post-transaction alongside the equity is how do we grow the income level so that we get from 700,000 back to a million or whatever, you know, whatever maybe it varies by deal and practice. And so income repair is one of the largest ways or is the largest way. And the way you grow that is through the launch of different ancillary service lines. Some of the more common ones are PET, PET-CT, converting PET to PET-CT, ambulatory surgery centers and OBLs, you know, private equity firms and these platforms have built at this stage, a wealth of resources and knowledge around how to launch these services in states that have CONs, how to get those CONs in states where the CON laws are relaxing a little bit, how to execute them quickly. In many cases, actually lobby for the CON laws to get changed so that you can start to build out these service lines and then have the capital to do so. So they have a wealth of experience in sort of bringing that to the table to be able to expand very quickly, leveraging those, which is a way that they're able to create that income. And it also is good for the platforms and for the equity value, because for smaller practices that may not have the volume to support a PET or PET-CT machine or opening their own ASC, you know, if there's a larger practice in an adjacent market that's in the region that has those services, you know, partnering with one of the larger practice that can provide those also is beneficial to that smaller practice because they want are getting access to that. Whereas previously that may have had to have been going to a hospital or an unaffiliated center. And so there can be value that's very created, that can be created there. I think also strategic growth opportunities. So Justin just talked about kind of acquisitions, but there's also, you know, they have the resources to be able to help expand very quickly in terms of new and developing hospital relationships, being able to establish new PSAs, which Gary will talk about in a little bit, but also, you know, make very substantial investments on the value-based care side, which, you know, for most practices, the level of data and the infrastructure that's needed to be able to meaningfully track outcomes and then report that back to payers and enter into arrangements where you're being compensated based on taking on that risk. It's a very challenging thing to do, but a lot of these platforms and their private equity firms behind them have experienced doing that and doing that in differing specialties as well. Moving on to the next slide. One of the biggest components that everyone talks about in these transactions as well is, well, how are we going to recruit post-transaction? Kevin touched on it a lot earlier in his presentation, but we are in the situation where there's a mismatch and limited supply of new cardiologists entering the market. And so competition for the new cardiologists that are entering the market is only getting more and more fierce and more and more intense. And so the way that a lot of these groups are approaching this and have approached in other specialties as well is making dedicated investments to being in residency and fellowship programs and within the medical schools and really educating groups and people around the benefits of joining a platform. There is a bit of what we've commonly seen as a theme like a generational shift towards maybe not wanting to start a brand new independent private practice and joining one and having those resources dedicated to them from day one. These platforms can offer that much like the hospital setting can in some ways, but also while still maintaining an opportunity to be part of an independent or private organization, they structure equity incentives to be able to give these individuals upside in the organizations that they're joining and oftentimes allow them to buy in and can create programs to help them buy into that equity as well. And then I think in addition, as you think about recruiting, Justin touched on this a little bit and Gary's going to talk about it in more detail, but what we're starting to see is this notion of acqui-hires within the cardiology space where if you go back to some of our earlier webinars, we talked about the biggest opportunity within the specialty is that 90% of the groups are employed by health systems and 10% being in the independent kind of community-based private setting. And now some portion of that 10% has gone and partnered with private equity as well. And so what we're starting to see is, and we get calls from these groups fairly often, groups that want to find ways to transition back into outpatient medicine in the independent setting. And these private equity firms can often create solutions to help stand these groups up and help them with that transition, get them the local autonomy that they're looking for, and then also equity in the overarching platforms. Thanks Abe. Now we're going to transition over to Gary now, talk about some of the professional service agreements and other partnerships with hospital systems. Thank you, Kevin, and great presentation, Justin and Abe. So if we move on, Kevin, so what I'm talking about is if you're in a professional services agreement with a hospital or you're employed by a hospital, it doesn't mean you can't participate in private equity transactions in every case. In some cases it might be, and other cases, there's a lot of opportunity that you should explore. And I have represented two groups that have done this that were either employed or under PSAs with hospitals and separated out and working with a few other cardiology groups now, one that's going to close by the end of the year and two that'll probably move into next year. So this is, a lot is going on in this regard. So back in the 2008 to 2012 timeframe, I probably represented about 30, 35 or so cardiology groups in multiple states doing PSAs with hospitals, where all of their professional services, it's almost like leasing the physicians in a way to the hospital or its physician captive affiliate or enterprise where the hospital bills for the services and they pay you per work RVU. And there's lots of doctors that became employed by hospitals under a similar model, selling their practice instead of leasing it over, kind of selling their practice and become employed. So the good news is, is that for many of you out there you may have an option here. And so the first thing you need to do to assess whether this is even something to consider is to look at the terms of your existing PSA or employment agreement with the hospital. A lot of these agreements have a certain type of advanced notice. I mean, employment agreements of course do, but PSAs also many of them allow a notice of either side to terminate the arrangement on a certain amount of notice whether it be 90 days, a lot of times it's like closer to six or 12 months, but in a lot of the agreements I've looked at and that I've worked on, they do have the ability to terminate, to give a notice. Now that doesn't mean you give a notice, it just knows you're doing pre-planning now. There may be agreements out there where you have to wait to the end of the term. Like if you're locked into a five-year term and you don't have a right to get out on a certain, even if it's 18 months notice that you don't have a right to get out, in which case you need to give a notice of non-renewal to avoid an auto renewal. So it's either, can you get out at any time or do you need to understand when you can get, avoid an automatic renewal? Those are things you really need to look at. You also need to look at the non-compete. Now, in many of the hospital cardiology PSAs that I worked on 12 to 15 years ago, they only restrict the physicians from doing a deal, going to as an employee or otherwise a competing hospital. A lot of them, again, not all of them as I've seen some that don't allow going back into private practice, and some do allow you, that require you to stay outside of whatever 10, 20 mile radius or more of the location. But again, I've seen a lot. And I think more than half of the ones I've looked at do allow you to go back to private practice as long as you're not doing it with a competing hospital of the hospital that you're affiliated with. So these are the really key threshold issues that you need to look at or have an attorney look at just to see what is possible, right? So after doing this, if you decide, we're gonna go through after we talk about this, we're gonna go through the general private equity and other major transaction process, but suffice it to say that if you can get around these potential hurdles, then you can look at doing a potential deal with private equity. So if you do do a deal with private equity, we're gonna get to this a little bit later, but on the next slide, one of the issues that doctors have issues with is, well, it's really gonna off the hospital or whatnot if we decide to go ahead. So the first thing you have to know is do not tell the hospital you're looking into this. Bad idea, very bad idea if you're exploring your options. But if you do explore your options and you decide to do something after a deal is signed, only then would you wanna give the notice to the hospital and have a conversation with them. But in that regard, and I've been through this a couple of times with cardiology groups in the last year, it's important to reassure the hospital that you're staying in the community, you're continuing to be an active member of the hospital and that there's really no downsides to the hospital. Even though the hospital's initial knee-jerk reaction will probably be negative because they no longer directly control you and bill for your services. But I think what you need to convince the hospital is you're not going anywhere. Someone else is paying a lot of money to allow you to spin off. It's not the hospital, it's somebody else to help you monetize the practice value. And you have to assure this continued alignment with the hospital, things will be seamless. You'll stay on their EMR, you'll continue to be part of their IPA or SIN, you'll continue to take call coverage and serve in directorship roles. And there's also a potential to be, and we're starting to hear a lot about this, for hospitals to be co-investors, to be almost like a three-way joint venture with the private equity platform, the physicians and the hospital, where the hospital could participate in some way. It's in a minority way, but some type of joint venture for certain services, whether an ASC or otherwise. So that's the way this needs to be pitched. So now some key operational issues that you need to plan for if you're gonna unwind and go either, listen, you can unwind and just go back to being independent, but as I think Abe indicated, it's hard to do that. Like the working capital to start up your own practice again not get revenue initially, have a big ramp up and manage care contracts, all that kind of stuff. So I think what you need to do also, whether you're gonna go private or go with a private equity firm after you separate or in conjunction with separating, you need to look at post termination provisions in your PSA. If you did, if you're leasing all your assets, it's easy because when the PSA terminates, the lease of those doctors and assets terminates. But some, like if you're employed, you may have sold your assets or even if you're under a PSA, you may have sold your assets and are just leasing the doctors over or just being employed by a hospital. So you need to look at that, at the logistics of taking over your old office locations. And if you need to buy back assets, usually it's very limited. It's just, you know, the fair market value of very old equipment and tables and furnishings. EMR is another big issue. It would be great. And the hospital would want you to continue to be on their EMR. But if you don't, that could be something that's very expensive to do as a independent practice. And that's why the groups that I've worked with separating out have gone with private equity because they already have the EMR set up or will invest that capital in the EMR. And also is managed care contracts, establishing payer agreements, which is the third bullet here. A lot of groups I'm working with that are looking at the potential to unwind are looking at mainly private equity platforms and cardiology in their market because they already have the managed care agreements. If it's a new, you know, platform coming in, you know, they better have a good plan to have managed care contracts ready to go once your notice period is over, you know, whether it's six months or a year and you're going live separate from the hospital, which means you need your own managed care contracts. The last bullet here is probably the most important bullet. And I touched on this a little earlier, choreographing. This is very important. I think it's a big mistake and I've been very successful in deals where, you know, you get the advice and you plan it all out, but you don't, until you sign your deal with the private equity, you, you know, you don't wanna be telling the hospital your plans. You wanna, you know, and in most cases, you have to look at whether you need the, you know, any type of consent of the hospital. And if you're gonna try to, if the private equity platform is thinking about continuing the PS, acquiring the group, but continuing the PSA, then it's very likely, but not always, that you would need the hospital's consent. But this really assumes that you're spinning out of the hospital PSA, but it is possible to continue it. But you need to sign and be definitive with the platform before you then provide your six month or whatever the notice is, 90 days of notice of termination of the PSA or the employment agreement. And then after that, at the end of the notice period, you go live. So I'm now gonna give a brief outline of just the transaction overview process in general. Whether you're doing this, there's those pre-steps that you have to really think about if you're in a PSA or employment, but for other groups too that are independent. And so there's four phases of the, you know, of a transaction exploration process. So we can move on to the first one, Kevin. So, and one of the things I wanna say, there's four phases, but there's five go, no-go decisions throughout the process. So just by exploring, you're not committing to anything. You're just trying to get informed, okay? To see what's out there. And so phase one is really talking to a financial advisor, investment banker, you know, people like Kevin and Abe or maybe a consultant like Kevin to talk about like, hey, it's probably an investment banker here. What's the value of my practice? Just based on your experience. What's the value? Here's some basic financial information about my practice. What do you think the value is if we went out to the market? And, you know, if they come back and say, well, you know, the value is X, and you're like, oh, geez, that's not that interesting. You just stop the process right there. Why do anything further? If very experienced investment bankers that know this market are telling you this is probably a range you're gonna come out in and you're thinking, wow, that's not even close to being what we, we don't even wanna do this, okay? So that's the first go, no go. But if you say, wow, that sounds interesting. These real, you know, expert, you know, financial advisors are telling me the value. Then I think I'd be interested. I'd be interested in seeing what does the market say now? Like, are there people, what are these platforms gonna, you know, what type of proposals are they gonna make? And so then you go into phase two where the investment bankers get even more information, like all the information about your practice, your demographics, your payer mix, your ancillary services, the age of your physicians, everything. And puts together a detail of what's called confidential information memorandum or SIM or confidential presentation. And then they go out to who they think the usual suspects are, you know, who's interested in this space, the existing platforms. They sign, they just give a very general thing called a teaser that doesn't say the name of the practice. It just says it's in the Northeast. It doesn't say, you know, too much more, the general size. And if they're interested, they sign a non-disclosure agreement and then they get this big, thick information booklet. And after everybody gets the information booklet that wants it, there's a date where they come back with initial indications of interest or first round bids. So right there, you see what those bids are. Wow, this isn't anywhere near what they said it was gonna be, or, you know, oh, the only one that looks interesting is, you know, a company, a platform that I've heard bad things about or whatever. But you have the ability right there to say, let's just stop the process. I'm not interested. If these are the initial proposals, it's different than what I thought it would be. And you just stop the process. Then if we go to the next slide, if you do, if you still are interested because those bids came in and usually, you know, Nolan, Justin and Abe, they usually come in, you know, above that range because they're very conservative when they give you their ballpark valuation up in phase one. Then you basically get these indications of interest and you have discussions with them, you know, management meetings where you narrow it down to maybe three or four, sometimes five. And then they come and meet with you, you know, with the bankers and the key doctors and the whole team. And they ask questions, you ask questions, and then you do that with all the, you know, whoever it's been narrowed down to, like three to five finalists. And, you know, and then you ask them, the bankers ask them to submit updated final proposals now that they got this additional information. And then you get those final proposals. And again, you have this, you know, the ability to say, listen, let's move forward with this one, or let's, I want you to negotiate these two against each other or whatever it may be. And then if you really like the deal, you negotiate a letter of intent with one of the parties. And once you negotiate a letter of intent, you can't talk to anybody else. There's exclusivity. And before you sign that letter of intent, again, you can again decide and have a vote. Do we go forward with this? And then assuming you go forward to letter of intent, you move on to transaction execution, which really is extensive due diligence that they do on your practice. And your lawyers are negotiating all these comprehensive agreements with the bankers. And the bankers are helping with everything, the negotiations of the agreements, the due diligence. And then you sign. And that's the way. Until you sign that definitive agreement though, when all the details in these hundreds pages of agreements are out there, until you sign those agreements, you also could say, I'm not going forward. So that's your last go, no-go decision. But once you sign, you then move to a closing, get any regulatory approvals and whatnot. So that's kind of the overall process. But on the next slide, I just want to highlight something before we open it up and I turn it back to Kevin for questions and answers. I think it's important for all cardiology groups out there, whether they're under PSA's employment or independent, in light of everything going on that Kevin, Abe, and Justin were talking about, I tell folks, this is not right for everybody. This is not a sales thing. This is not right for everybody. But before you make a decision, whether this might be right for you or not, get all the information. When you see this activity around you, something's going on and it's getting a lot of groups interested in partnering with the private equity platforms and then potentially separating from hospitals, PSA's and stuff. And so what I always say, it's not right for every group, but first go through the exploration process. There's really very little, if any, cost in that phase one. And get all the information and then make a decision. And again, it might not be right for you. So I'll turn it back over to Kevin. Appreciate that, Gary. So one mentioned, you said about not involving hospitals during the process too. And I just want to speak to that a little bit. I've been contacted before too, and I really want to say sometimes that's really market dependent and culturally dependent too, with some of the relationships that they have with their hospitals. And sometimes jumping ahead of that is the wiser move, as opposed to some other markets where, to your point, not disclosing any of the information is more of a valuable approach. So one question here to start is, if you're an independent group with a PSA and you want to continue the PSA in relationship with the hospital, when should you engage the hospital in the discussion? I've heard that sooner is sometimes better. So you want to stay with the PSA is the question, Kevin? Yes. It looks like it's an independent group with the PSA, and they want to continue their PSA relationship with the hospital. And they want to know, I guess, from a timing perspective, when should they engage the hospital in discussion? So most PSAs, you should go back and look at your PSA. There's a lot of them say that within the last 12 months of the term, you start the renegotiation process. And I think it's important, if you want the terms to be different, like if you want to change terms, by all means, you must give a notice of non-renewal. If you've gotten to the point, if you have to give a notice of non-renewal 12 months before the end of the five-year term, then unless you can get those new terms signed and agreed to by that 12-month mark, at least give the notice of non-renewal to preserve your ability to get out if they don't increase or otherwise modify the terms that are important to be modified. If you could work that out beforehand, better. But don't get caught in the trap of just talking and talking and talking with hospitals on and on without something binding and in writing if you don't give that notice of non-renewal, again, depending on the language of each contract, you might be stuck in on the same terms or if there's an escalator clause, you're just subject to that. So if you really want to continue with it, but change the terms, something to look at at least a year or more in advance and educate yourself about what's in your agreement. And and educate yourself about what's in your agreement and then decide to speak to the hospital and see where they stand. They may negotiate with you and get to a good place or they may say, we were thinking about bringing the work RVU rate down, or keeping it just up the 2%. So if it's not something, I mean, you should speak to them as soon as possible about that 100%. I agree with that, Kevin. Okay, thanks, Garrett. So jumping to my favorite topic, DeNiro, Justin and Abe, could you please explain to the audience a little bit what determines the multiple in these private equity transactions? I'll start and then Abe can chime in. This is a very democratic answer, given the audience that's here. But number one is what's the quality of the group from a compliance perspective, quality of care, how they viewed in their in their geography. Excellent patient care is what private equity firms and partners are looking for. And the reason for that is they want to make sure they're aligning with the very best in the industry. And once they've aligned with the very best in the industry, they want to kind of add additional partners that are going to kind of fit the philosophy of that core group. And like a bad egg can really have a detrimental impact on the group from a philosophical perspective. Obviously, from a compliance perspective, it opens up risk to the balance of the shareholders. So number one is how are we outcome driven? If we've got value based care, how are we looking contrast to others? And then just reputationally in the marketplace, how are we perceived? The second set is just the profile of the physicians is an important one as well. So you commented earlier on 25, I think it was 25% of cardiologists are 61 and over. We don't like talking about this, but the age demographic of a shareholder base is important. And it's important because of the other factor that you mentioned, which is recruiting is becoming more and more challenging because of lack of graduating individuals coming from medical school into this field. And so when a private firm is thinking about an investment or an add on acquisition, as I mentioned before, they're thinking about this from a five-year window. So if we've got 21, excuse me, 25% of our population is 61, but what's our population five years from now? What percentage of that is going to be 61 plus and what's going to be at that point 66 plus? So one, what's the demographic of the group? And then also, and it ties into the first comment, what's our reputation and how are we doing on recruiting? Because recruiting is a really important factor. So do we have associates on track? How are we treating them? What's the path towards partnership? And what's been our retention around our providers, both at the physician level and APP level and otherwise as well. It's not important. It's not just the physicians that obviously are making these groups successful. And then I'd say the last point I'd add is kind of what are the growth opportunities in the marketplace? So I'd say some of our best successes that we've closed the last year or so is they're in a market where there is a path towards an ASC. And so there's a big opportunity for bringing more cases out of the hospital into a commonly owned surgery center. And that obviously creates economic upside on income repair, as we talked about before, but also value creation. What is the opportunity and conversion from PET to PET-CT in certain markets? And so what is the outlook in the existing market? And then also where is the noise around possibly kind of expanding the ability for ASCs, cardiac urgent care, clinical research, those growth opportunities that most, excuse me, not all practices and most practices don't have everything, but you can layer it on those things in time to create an opportunity for value creation for the organization. Yeah. And I would just add, I think one of the biggest determinants as well is just the overall level of infrastructure and breadth of ancillary service offerings. So we talked about earlier in the presentation, some of the items like PET, PET-CT, surgery centers and others that are viewed as ancillary service lines. There are independent practices today without funding that have those in place. And those tend to end up being more productive practices, which leads to a higher level of EBITDA, which you tend to see higher multiples on that end. And then also from a, just an administrative and infrastructural standpoint, the groups that have a C-suite of management, maybe CEO, COO, CFO, dedicated accounting teams, et cetera, et cetera. Those groups also tend to see higher valuations from a multiple standpoint. So the range is wide. We've seen them anywhere in the high single digits to, in the single digits to the teens. It really varies and it depends on the geography, the infrastructure and all the things we've talked about. And so, and so taking into account maybe EBITDA over the last prior three years, but also taking into account the future growth potential would really dictate your multiples? Well, it's really the prior 12 months preceding a transaction is the most like relevant indicator, but then also what, how is that expected to change and call it the, you know, 24 to 36 months post transaction based on the growth trends, the growth opportunities exist today. Like one of the most common is a lot of these practices will have just switched their pet to a pet CT, which they see an uplift in, in the reimbursement and the, in the, in the profitability of that service line, or they just launched a pet or pet CT machine. And that mission, that service line is ramping up. And so like seeing how that's going to trend over the next 12, 24 months, 36 months also has, it has an indicator as well. And then you want to see historical growth in the numbers and call it the 24 to 36 months leading up to the transaction. Excellent. So next question from the group chat here, is there a size limit of the group that PE generally considers our smaller group, which consists of seven MDs and two APPs is currently employed by health system, but due to the increasing expense, they've all, but said that they'd like us to go private, but still cover the facilities. Yeah. So I I've, I I'm just going to answer that from a, you know, a separation from the hospital perspective. You know, I think that the answer is, is it depends on a number of factors, but if, you know, if, if there's an existing cardiology platform in the state, they may very well be interested and they have managed care contracts and they could take over the office lease or whatever there it's very possible. That, that, that would be a good fit. Or if there's a private equity platform, that's not in the state that really wants to get into the state and sees this as almost like organic growth in a way and has enough lead time to get managed care contracts and, you know, ready to go. And that, and if the hospital wants you out then this could be carefully orchestrated with the hospital as to timing and all that kind of stuff. But I'll let Abe and Justin answer on a, on a more financial perspective. I wouldn't answer it the way we would. If there's an existing platform in the region, there's absolutely an option for that spin out. And it sounds like you would already have the support of the hospital, which as Gary mentioned before is going to be, is oftentimes like the most area you need with, we need to kind of tread with the most caution. So you've already, it'll allow you to be collaborative with them as a partner right from the very beginning, which would make the whole process much smoother. Yeah. And also because the hospital's involved, you'll have, they'll, they'll provide you your data because remember what they're going to do if you're part of a hospital and most groups under PSAs get this information about their work, RVU productivity, and the private equity firm will look at that and say, okay, if that was in a private office, you know, what rates could we get and what would the expenses be? And then to run a pro forma of what that practice would look like as if it were independent. And then to come up with the value for it. But yeah, I recommend any, any group like this, whether you're independent or, or thinking about, you know, leaving or separating from a hospital, like your group, you know, five or more physicians, I would say definitely speak to an investment banker. They may send you to, you know, a consultant, you know, that does smaller deals if it's not the right size. But I think when you're over that hump, but I, I don't know, Justin, whether you have any input on size for an investment banker to be involved. Yeah. I think to your earlier comment, there is, I don't, there's very few groups that are too small to at least be curious around what a partnership with a private equity firm could look like. And so whether it's an investment bank or Kevin and his team or a combination of both, or we've been in instances where we've worked with Gary on a couple of examples and just on the phone and collaborating with a hospital based group around like what their options are. It doesn't, it's helpful to have that understanding of what your options are. And I don't think there's anything that's too small. There's always a home for even those smaller groups. Excellent. Next question from our group chat here. Our group has been approached by a specific PE firm, but it seems your outline indicates that after the valuation offers are put out to various PE entities to, for buyout offers, how does this work? You want to take it? Yeah, I was going to say, so it sounds like that group was approached by a private equity firm, and a lot of times there's any private equity firms listening, they may not want to hear this, but a lot of times these groups like to circumvent processes for the, to create an absence of competition, which then allows them to kind of, you know, pay a little bit lower valuation generally speaking. And so a lot of times that they're one of the most common ways these groups will get other practice to join the organization is just direct outreach and leveraging the relationships of the positions that are part of their platform. The private equity firms will have business development and origination individuals as well. And so you can skip sort of all the steps in the process Gary outlined and go straight to giving a private equity firm some information and letting them kind of, you know, run their numbers and come back to you with an offer and then sign that letter of intent, grant them exclusivity and try to close the deal over 60 to 90 days, you know, maybe a little biased, but we would generally, you know, say that groups should really do their homework, understand what this can look like, put a presentation and package of materials together. So you're not, you know, letting someone else kind of crunch the numbers on your behalf and then determining the offer based on what they crunched. And so having that intermediary, I think is helpful. The example I always give is it's the equivalent of someone showing up on your doorstep, knocking on your door, offering to buy your house, and then you taking the offer. And so I think, you know, anytime that happens, you should call a realtor. And so that's sort of how we view ourselves as the middleman. And we've done this enough where we can position the organizations in the best light. We know what private equity firms want to see in terms of growth opportunities and highlight those in the most attractive manner. And then also that aside, just working through a lot of, you'd be amazed at the shareholder dynamics that will come up during the course of these transactions as well. It's something we're also well-versed in navigating. So I think it's helpful to have from that perspective. But generally speaking, you could take an offer and work to get the, you know, and sometimes that is the right group, the group that reaches out. The alternative is sort of what Gary described is sort of evaluating multiple in parallel and negotiating and really getting to the best offer. But more importantly, you know, if you do choose the party that approached you, you know, from the beginning, that that was truly the right party because you've then evaluated what other options were out there. Excellent. We are at time. You know, I really wanted to, if you can give a quick 10 second description of the second bite of the apple, if you will, since cardiology is so new, if you can maybe I know there's no second bites out there, but maybe a quick 10 second prediction on what the second bite of the apple looks like with that term. Yeah, we've already, we've begun to see consolidation amongst the nine. So earlier this year, we've already saw the first one of the first groups that were backed by private equity, it was called Novacardia, which a lot of people probably at least recognize the name backed by Deerfield. They've since merged with CVA USA backed by Webster Equity. And so I what we what has happened is a bump in equity for those original owners within Novacardia. So we've already seen like a non liquid second bite of the apple happened in this market in a very quick amount of time. We've also seen the likes of Aries, USHP, US Health, and Vascular Partners bring in additional capital sources with Rubicon. So that's not a second change of control. But it's a commitment towards more capital for growing that organization. Our prediction is that within two years, one of those nine will have gone through a second change of control either with a larger, either with and likely with a larger private equity from moving up market that is also probably combining one of the others on that list to create an even larger organization. And so we will see cardiologists experience a change of control second bite of the apple within that two year period. Thank you, Justin. Gary, please take a couple seconds here and tell us about the offering here happening in. Sure, sure. So so thank you, Kevin. This was a one hour webinar. And if you really want to learn more, and maybe bring some of your partners or board members of your group, or other doctors, if you find this intriguing, for a full day conference, which is free for for physicians of a full day conference on this topic, it's February 15. It's our seventh annual physician transactions conference med axiom is a major co sponsor and so is is West Cove, and there's probably about 15 other large advisory organizations and platforms that are that are sponsors. So it's just a full day deep dive learning about all of these things like half an hour sessions, you know, just on income repair and on valuation and, and and a lot of other topics, second bites. There's a whole panel about second bites hearing from doctors that have been through them and life after closing from a panel of six physicians to talk about their life after closing, but it's a full day. If you go to this website, physician, www dot physician transactions, conference calm or the QR code, you'll see the agenda. And I would just say register soon if you're interested, because there is a limit of limit to the number of people. It's just a single conference in a nice room that holds about 150 people. So if you're interested in learning more, it's a great opportunity. Thank you, Gary. So I want to thank everyone who took the time today to listen in our webinar, and especially want to thank Justin and a West Cove partners and Gary with EBG. It was an absolute pleasure sharing this platform with you today. In this slide deck, we do have our content information and a little bit more about MedAx team offerings to help your group, whether pre or post of what EBG is able to help with. And also, of course, what West Cove is able to help with. So again, thank you for your time today, and I hope you enjoyed our presentation. Thank you. Thank you, everyone.
Video Summary
The webinar was hosted by Kevin Mayer from MedAxiom and featured subject matter experts from Westco Partners and Epstein Becker & Green. The experts provided an overview of the current trends in cardiovascular group transactions, with a focus on private equity involvement. They discussed the challenges and opportunities facing cardiology practices, such as reimbursement changes, regulatory issues, and the entrance of technology giants and private equity firms into the healthcare market.<br /><br />The experts also highlighted the demand and supply dynamics in the cardiology market, including the projected rise in cardiovascular diseases and the limited supply of new cardiologists entering the market. They discussed how private equity firms are attracted to cardiology practices that offer growth potential, have strong compliance and quality of care, and have a solid infrastructure and ancillary service offerings.<br /><br />The experts explained the process of a private equity transaction, including the exploration phase, where an investment banker or consultant assesses the value of the practice, the marketing phase, where potential buyers are approached and initial offers are made, the negotiation phase, where final proposals are received and negotiations are conducted, and the execution phase, where due diligence is conducted and final agreements are signed.<br /><br />The experts also discussed the importance of engaging the hospital in discussions if the practice wants to continue its professional services agreement (PSA) with the hospital. They emphasized the need to carefully consider the terms of the PSA and the non-compete clauses before making any decisions.<br /><br />Overall, the webinar provided valuable insights into the trends and considerations involved in cardiovascular group transactions, particularly with private equity involvement. It highlighted the importance of evaluating options, exploring partnerships, and considering the growth potential and infrastructure of the practice.
Keywords
webinar
cardiovascular group transactions
private equity involvement
challenges
opportunities
reimbursement changes
technology giants
cardiology market
private equity transaction
hospital
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