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    May 12, 2022

    Mark’s Cool Chart

    One of my professional mentors told me that if I was going to be any good at sales, I needed to be able to sell big deals on a single, simple picture.  His were on cocktail napkins, a la the famous Southwest Airlines kind of picture.  He was very good.

    That set me on my near clinical obsession with charts and graphs.  There is a story in the data and the data want to tell that story.  One good picture can change how we think about something.

    Mark Perry at the American Enterprise Institute has one such game chart, one that he updates regularly as the data change.  Multiple commentators have called it the ‘Chart of the Century.’

    Now even the accountants, who find it a slight abomination when their little rows and columns are converted to a trend line, are even a bit intrigued.

    Perry’s graph  is getting even more traction these days because it shows price changes of selected US good and services since 2000.  With all the inflation news, the site is currently getting more hits than Shohei Ohtani.

    The chart simply plots over time data for 15 items used by the Bureau of Labor Statistics (BLS) in the calculation of the Consumer Price Index (CPI), that now ubiquitous inflation number that is still a puzzling new idea to anyone under 40.

    The overall price change – aggregate of all items the BLS tracks – has gone up 65.5% since 2000.  Since recent months have spiked a lot of things, I went back to a version of the chart I found from the summer of 2018 and that number was 57.4%.  Let’s use that to be fair.

    But I want to examine at just one line on the chart.  It is easy to find.  Right that at the very top.  It shows the price changes for Hospital Services.  Before you look, you wanna guess that number, given 57-65% is the overall rate of price increases?

    How about 211-216%.

    Perry notes that, as a general rule, the items that are above the average are subject to more government intervention and those below average have more market competition.  That Hospital Services wins the title, and is now pulling away from second place College Tuition and Fees, seems to validate that observation.

    Another question to ponder…how can overall healthcare spending as a percentage of GDP stay relatively flat while the largest sector of the industry (hospitals are about 31% of total) is going up 4x faster than general inflation?

    3rd grade math and a little logic says everything else in the healthcare spend bucket has come down.

    Here is our big point on the reform status report: The changes – value-based care, MSSP, ACOs, expansion of Medicaid enrollment – were all very ‘pro’ hospital/health system because all this integrated care was how we were going to bend the cost curve.

    So, how do you explain being at the top of Mark’s Chart of the Century?

    Tim Coan

    CEO and founder

    Tim Coan, ALN’s CEO, writes an insightful and witty blog weekly about a variety of topics relevant to independent physician practices.
    May 5, 2022

    Doing Math with Lou

    One of the very best Abbott and Costello bits of all time was when Lou Costello worked out three different ways to prove to his landlord that 7 x 13 = 28.  If you are having a tough week, head over to You Tube to find it.  Will be the best five minutes of your day.

    I mention that clip because we have some tricky arithmetic coming today.  Your mind needs to be limbered up.

    Last week we noted that healthcare spending, in the decade just prior to COVID, flattened out in the range of 17% of GDP.  If not a full-throated celebration of the promised bent cost curve, stopping the steady rise from 13% just a few years prior was at least a moral victory for the government’s reform agenda.

    But there are some numbers behind the numbers that can help you decide just how much credit is deserved.  Today, let’s start with Medicaid’s role in the story because a very significant portion of ‘reform’ has been about the expansion of that program.

    Let’s go back to 2005.  Why 2005?  Prior to that year, the per capita cost for a Medicaid enrollee was quite a bit higher than the overall healthcare per capita cost.  That was logical because those covered by Medicaid have comorbidities associated with their poverty.  But the government was asserting downward pricing pressure and the gap was closing.  2005 was the year the lines crossed – we spent $6,500 per Medicaid enrollee, the same as the population at large.

    That same year, there were 46.3 million people covered by Medicaid, which represented 16% of the population.

    Fast forward to 2019 but stop before we got to see Dr. Anthony Fauci every day so we don’t have the COVID distortion.

    Medicaid enrollment had ballooned to 73.9 million people, 23% of the population.  Thus, the argument by many that Obamacare was little more than political air cover for a massive expansion of this program (that is a topic for another day).

    Per capita spending for Medicaid had continued to decline relative to the overall number.  In 2019, it was just 74% of the overall number – a full $3,000 less for Medicaid than everyone else.  Did we solve the health ills that plague the poor and disabled?

    Uh, no.

    This is pure government pricing leverage.  We pay less per Medicaid beneficiary because we pay less for Medicaid services.

    If, as Lou suggests, I hold the two here and carry the seven here (you just have to watch it), the math suggests to me that we ‘saved’ about $220 billion in 2019.

    Just from pricing dictate.

    Like the hand waving that makes 7 x 13 = 28, if we just ‘say’ prices are low, then wa-la, costs come down.

    Yes, I live on the provider side of this issue and have a dog in the hunt. Fair enough.  But you don’t have to be a physician forced to accept below market reimbursement to question if this approach is the best long-term strategy.

    Tim Coan

    CEO and founder

    Tim Coan, ALN’s CEO, writes an insightful and witty blog weekly about a variety of topics relevant to independent physician practices.
    April 28, 2022

    Simple Numbers, Complex Causes

    The former president is back on our televisions again.

    No, not that one.  He and Elon are off somewhere in a thumb wrestling match over their respective social media platforms.  Comedy writers everywhere are going to have a heyday.

    President Obama narrated a five-part documentary on the great national parks around the world currently playing on Netflix. Seeing the promos got me thinking that we haven’t checked in on how our headline healthcare economic measures are doing in a while.

    For the half of the workforce that has no pre-Obama life experience (ponder that…about half of the US workforce was born after the 44th president was initially elected), let’s reset the context.

    Healthcare spending, as a percentage of GDP, had lumbered along around 13% as the 20th century was coming to a close.  Then suddenly, the trend line began to climb faster than the price of a used car.  By the 2008 election, it had passed 16% and showed no signs of slowing. The promise to solve this issue propelled Obama to the White House, with his signature legislation to follow two years later.  Two years after that, Nancy Pelosi read it.

    In 2020, healthcare spending hit 19.7% of GDP, up almost 50% from 2000.

    Wait, wait…we need a big asterisk here.  Everything about 2020 gets an asterisk, especially healthcare spending.

    If we go back to 2019 – like my plane ride this week that did not require a mask – you see a trend line that the Prez and the wildlife in Tanzania might point to with pride.  From 2009 through 2019, the healthcare number had a 17-handle every year, moving incrementally from 17.2% to 17.6%.

    While that is not bending the curve, it absolutely flattened from the rapid rise of the decade before. We try to call the ‘balls and strikes’ as we see them and that is clearly a heck of lot better than the path we were on previously.

    But (you knew that was coming), we need to dig in a little bit to understand what is driving the story.  We still live in a bifurcated industry where some believe the reforms of 2010 are the cause behind this effect, and the path forward is more of the same, while others argue market innovations have succeeded despite bad policy from the government.

    If you have been reading along here for more than a minute, you know where I am going to come down.  Though Covid may have made me allergic to hand sanitizer, it did not change my bias in the government v market debate.

    So, with that disclosure clearly on the table, I’d like to look under the hood to explore what has been driving things the past decade to see if we can be better informed about what we should do in the coming decade.

    Also, disappointingly, there will be no cool slow-motion footage of flying monkeys.  For that, you’ll have to check Netflix.  Go ahead, their trend line could use a little help these days.

    Tim Coan

    CEO and founder

    Tim Coan, ALN’s CEO, writes an insightful and witty blog weekly about a variety of topics relevant to independent physician practices.
    April 21, 2022

    Coda to the Coda

    I really am trying to move on, I promise.

    Yes, that sounds like a line from the needy ex-boyfriend in a bad rom-com, which makes it even more pitiful.  Yes, I am going to milk one more week out of the ‘Men in Blue Blazers’ series about physicians rolling forward equity when they sell their practice to a financial sponsor.

    Technically, in the symphony world, another coda after the first coda would probably be called the ‘encore,’ and, to be clear, no one was giving the last blog post a standing ovation while shouting ‘bravo!’  But I did get a few very thoughtful comments worth cycling back to one more time.

    First, my goal was NOT to throw a universal wet blanket on the entire idea of physicians selling to private equity.  I happen to think this is the best option for physicians in many situations.  We have a growing number of clients who are equity-backed, so I get a ringside seat to watch life after the deal from the inside, seeing both the goods and bads of the marriage.  With that perspective, I frequently recommend to clients and friends that they explore this option.

    Think about the alternatives.  Though there are endless variations, there are only a few alternatives.

    You can stay independent forever, but that gets harder everyday unless you either get really small (climb into a niche as a solo provider) or pretty large.

    You can sell to the hospital.  Yeah, that always works out beautifully, doesn’t it?

    Optum seems to be buying everything short of Russian gas.  Maybe you can sell to them.

    But there are not a finite number of choices. Private equity, warts and all, often merits a hard look.

    Second, please know that for many physicians who sell and roll equity, the ‘second bite of the apple’ can be lucrative.  Every $1 rolled forward comes back a few times higher.  That happens.  I just wanted to put up a flashing yellow light to encourage you to do your diligence on that piece of the deal.  Bring a little skepticism to your evaluation of the range of financial outcomes for these magic beans you are getting.

    Finally, one friend who has been around the block a few times shared a tragic story worth mentioning. He saw a practice pass on the equity offer, in part because they wanted 100% cash and did not want to roll any equity, only to hit turbulence and begin to shrivel. Eventually, the practice wasn’t worth much at all.  They would have been better off taking 70% in cash, even if the value from the rolled equity never materialized.

    All to say…navigating the future is complicated and there are no easy or obvious options.  Get help from some smart people who are for you as you work through both your strategy and then the process of getting to where you want to go.

    OK, next week is a new topic.  I (mostly) promise.

    Tim Coan

    CEO and founder

    Tim Coan, ALN’s CEO, writes an insightful and witty blog weekly about a variety of topics relevant to independent physician practices.
    April 14, 2022

    Blue Blazers, Coda

    We’re a little late today because I was in my CPA’s office signing company tax forms all morning.  I am only writing this brief post at all to kill time because I can’t yet have a whiskey at this hour to dull the pain of the bite Uncle Sam took out of our backside.

    My tax guy always tries to remind me to cheer up, that paying taxes means we made a little money.  He thinks that is funny.

    But as we were wrapping up, he shared a story from one of his clients, a physician who sold his practice to private equity.  In telling me the story, he had no idea that I had just spent a month writing about this subject, but it is worth me going one additional week to share it.

    Consider this a little coda to the series – the musical kind, not the Oscar winning film.

    The practice of his client sold to private equity a few years ago.  They got a big multiple and a high valuation.  This particular physician took 70% in cash and rolled 30%.  Fortunately, the 70% was nice enough by itself because the PE firm is about the exit the deal to a different financial buyer at a price that means the rolled 30% is worth zero.

    Not a zero return and here is your invested capital back, but a zero.  Gone. He, and the other physicians who rolled equity, get nada.

    ‘But he gets to take the loss,’ my CPA said.  He went into accounting and not comedy for obvious reasons.

    I don’t want to imply the second bite of the apple is binary – zero or a home run.  There are a lot of outcomes that fall somewhere in between.  But zero, a real zero, is a legitimate possibility that you must consider and factor into your thinking.

    We’ll stay short today because we are already late, because we already said we had wrapped up this series, and because the holiday weekend is fast approaching.

    See you next week.

    Tim Coan

    CEO and founder

    Tim Coan, ALN’s CEO, writes an insightful and witty blog weekly about a variety of topics relevant to independent physician practices.
    April 7, 2022

    Legs, Squealer and the Plush Gang

    For $5, Karen Boeker will give you a sticker that confirms your $5.99 stuffed animal is legit. Boeker runs a Beanie Baby authentication service, working to protect the world from fake Beanie Babies.

    Nope, we are not running an old post from the archives.  There is still an active world out there for the plush toys that were the Internet’s first viral craze.  Boeker’s Facebook group for collectors has tens of thousands of members.

    Let’s hop in the Casey Kasem time machine (if you don’t know, then you were the child whose mom was running all over town trying to find you the Princess Di bear) and jump back to the 1990s for a second as we make our final point in this series on physicians who sell to private equity and roll some of their proceeds forward into stock in the new company.

    When Ty Warner’s cute little toys took off in the mid-90s (Legs, the Frog and Squealer, the Pig were among the first nine of Warner’s stuffed critters) it was, for many, going to be the path to early retirement and financial freedom. Prices skyrocketed in the secondary trading market.

    Moms who circled through the McDonald’s drive thru multiple times every day in hopes of snagging the Teenie Beanies inside a Happy Meal can recall just how nuts it all was.

    We know what happened as a key economic principle proved itself true yet once again: scarcity drives value up; abundance drives value down.

    Collectors camped in the long line outside the Hallmark store should have done the math and realized that if this many people were hoarding Beanie Babies, there would be a lot of them and maybe the idea that they’d be valuable someday was a pipedream.

    This is not (intentionally) a post about NFTs, but my final word of caution as you evaluate the potential future worth of your equity in the practice being built by your new financial partner.

    Sometimes, the craze attracts too much money, and we end up with too many of a thing, and in the end that diminishes the value of all of them.

    The last I heard there were over 40 private equity-backed dental platform companies, all out there trying to buy up the same finite world of dental practices and service the same finite number of mouths. But also, all trying to be worth a lot at exit when they sell to the same finite world of future buyers.

    I picked that example because I have no idea whether 40 is too many dental companies or not, but it sounds like a lot, right?  Will there be buyers paying a large price for all of them someday?

    Even today, there are Beanie Babies that are rare and, thus, worth a lot.

    Make sure your new partner and their strategy will create a unique value that somebody down the road absolutely has to have.  That is what will make your rolled equity pay off.

    Tim Coan

    CEO and founder

    Tim Coan, ALN’s CEO, writes an insightful and witty blog weekly about a variety of topics relevant to independent physician practices.