A practice transition strategy that safeguards autonomy
The prevalence of mergers and acquisitions in the healthcare community is showing no signs of waning.
The 2020 Kauffman Hall M&A report stressed the remarkable nature of the fact that M&A activity remained “within historic range” during the pandemic when healthcare organizations were focused on immediate pressures brought on by the crisis.
Perhaps not surprising due to the financial strain it brought to the industry, it’s expected that the pandemic will spark a surge in M&A activity in the coming months. The 2021 BDO Healthcare CFO Outlook Survey reported that, “the industry is moving forward with haste to form partnerships and solidify operating models.” The report cast these expected partnerships in a hopeful light, citing that they could foster the ability to scale and expand into new areas of service.
But what about the physician practices that want to remain autonomous? Many private practicing physicians believe that their autonomy allows them to provide better, more personalized care and form deeper relationships with their patients. A 2019 McKinsey survey reported that 79% of small independent practitioners and 67% of large independent practitioners cited autonomy as a major factor in their choice to remain self-employed at a time when physician employment is on the rise.
Unfortunately, it’s getting harder for private practices to remain autonomous even if they want to.
Transition strategies can sink or support autonomy
Not many practice owners realize that their practice transition strategy could play a role in safeguarding their autonomy. Unfortunately, the most common approaches to practice transition can all leave practice owners with no choice but to sell to a larger system or hospital.
The most common approaches to practice transition
- Borrowing money: When a practice owner retires, the remaining physicians could borrow the necessary funds to purchase the retiring physician’s share in the practice with a lump sum payment. But taking on that much debt would result in restricted cash flow and hefty loan payments. This solution is also less than ideal for the retiring physician since the lump sum payment would be taxable.
- Liquidate personal assets: The other way the remaining physicians could come up with a lump sum buyout payment is to liquidate their personal assets. This approach would be influenced by the strength of the market at the time, and the remaining physicians would have to liquidate a greater amount than the retiring physician’s share in order to account for capital gains taxes. While the remaining physicians would not have to incur any debt in this scenario, the overall cost is significantly higher while providing no additional benefit to the retiree since the lump sum payment would be taxable.
- 3-year earn out: It’s common for remaining physicians to be hesitant about taking on considerable debt or liquidating assets, so many choose to use an “earn out” approach to purchase a retiring physician’s stake in the practice. In this scenario, the retiring physician receives payments over a three to five year period until they’ve received the entire buyout. There are two main problems with this approach. For one, there’s a chance that the revenue generated by the practice would be insufficient to cover all operating expenses as well as the ownership interest. The pandemic has shown us how quickly a physician practice’s cash flow can be impacted by unforeseen circumstances. There’s also an immediate financial impact to the practice as each of the remaining physicians would take a hit to their annual income. This could have repercussions for other staff members and impact the physicians’ ability to attend to the practice’s needs.
A better solution
These common approaches put physician practices at a greater risk of acquisition. If the remaining partners are unable to come up with the buyout payment on their own, or would be unable to continue operating the practice under the financial stresses a loan or earn-out plan could impose, they may have no choice but to sell the practice. But it’s important to remember that there’s no guarantee that a hospital or larger health system would be willing to buy it, in which case, the remaining physicians would be left without any options at all.
A better solution is needed if a practice’s transition strategy is going to help safeguard its autonomy. That’s why we created our Practice Transition Strategies. MaxWorth can help practices create a transition strategy that’s cost-efficient for all parties. And since we utilize a pre-funding vehicle, our PTS also allows for greater security.
Implementing this kind of plan creates alignment of interests among practice owners and gives physicians peace of mind about their individual futures and the future of the practice itself. Being able to offer this kind of peace of mind could even help a practice attract physicians and keep the ones they have.
If you’d like to learn more about our Practice Transition Strategies, feel free to reach out to one of our team members today.
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