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    March 31, 2022

    That’s Your Plan?

    In 1970, a dead 8-ton sperm whale washed up on the beach in Florence, Oregon.

    Now what?

    Let it rot?  That will take a few years. Not be good for tourism or down-wind real estate values.

    Bury it?  Decomposing gases from something that large means it wouldn’t stay buried, which means that is essentially Option One, but with a big bulldozer bill.

    Chop it up?  No one had a really big chainsaw.

    The final answer was to blow it up and let the scavengers eat the pieces.

    Boys will never pass on a chance to light some dynamite. But how much do you need to disintegrate 16,000 pounds?  A military veteran with explosives experience suggested 20 sticks.

    But testosterone was involved.

    ‘Nah, 20 cases would be better.’  Half a ton of dynamite.

    Next question: how far back should we move the onlookers?  Quarter mile should be more than enough.

    You know this is about to get good, don’t you?

    The massive blast was enjoyed by all…that is, all except the guy whose car – a ‘safe’ quarter mile away – was flattened by a flying giant piece of blubber.

    Fortunately, no one was hurt.  Unfortunately, but for the car crusher piece of flesh most of the animal didn’t budge.  Half a ton of dynamite moved a lot of sand, but not a lot of whale.

    Eventually the bulldozers were called, and the burying option turned out to be the right plan after all.

    Mostly, I just wanted an excuse to tell that hilarious story, but there is a point.

    When physicians sell their practice to a financial sponsor and roll part of the proceeds forward as equity in the go-forward company, they become vested in the strategy to make that equity more valuable over time.

    Breaking news…not every plan the guys in blue blazers with cash dream up is a good one.  Sometimes, there is a lot of loud noise, but when the dust settles, things are about what they were before, only with a hole in the ground.

    My opinion, for what it is worth, is one of the things that gets equity sponsors in trouble – those who don’t know healthcare very well – is believing that a strategy that worked in one specialty will work in every other specialty.  They go to a conference, hear a success story, and say, ‘Let’s do that.’

    But that was in dermatology and you have bought a bunch of OB/GYN practices.

    The creation of future value in the roll-up of physician practices depends on a lot of things – culture fit, execution, sharing leadership between clinicians and business types, a million things.

    But strategy – what are we trying to do – is at the top of the list and can be discussed before you do the deal.  Make sure it makes sense.

    Just lighting a bunch of explosives – or in our case, buying a lot of practices – is not going to make your rolled equity worth more three to five years from now.

    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.
    March 24, 2022

    Talking to Yourself

    Years ago, my wife was kind enough to pretend I had a dab of culture and took me to a dramatic performance based on one of my favorite C.S. Lewis books.  It was a one-man show that included ten characters.  It was great, powerful.

    But walking to the car I wondered how long it took the guy to stop the various voices in his head from arguing over what to order for dinner.  Remember, her hope was for just a smidgen of culture…that question got me an eye roll.

    Physicians contemplating selling their practice to a financial partner will find themselves talking to themselves, nay, arguing with themselves, on one particular – but very important – aspect of the deal: the price of their rolled equity.  Here, you are both sellers and buyers, effectively sitting on both sides of the table from yourself.

    Let’s discuss this tension.

    When you put your practice on the market, you want the highest valuation possible (yes, there are other considerations, but we only have 500 words, so nuance is tabled for a minute…work with me here) and, if we are being honest, you’ve probably pushed to maximize the metrics to the hilt.  Expenses are stripped down like a street racer on Friday night and physician production is cooking with gas.  Your investment banker is working harder than a carnival barker extoling your virtues and telling the bidders they need to add another half a turn or so to the multiple if they want to stay in the race.

    Great job.  Good for you.

    But let’s say your proceeds are going to be split 70/30 – you get 70% in cash, but you roll 30% as equity into the new company.

    And right there, maybe without thinking about it, you became a buyer, not just a seller.  Imagine you got all cash but turned around with the 30% and wrote a check to buy stock in a company.  Which is what you just did (stop it with the taxes comment…you nuance people need to relax).

    So, was that a good price for your investment? You know the business better than anyone.

    I sure hope so because that is now your starting point for the ‘second bite at the apple.’  Like any other stock you own, your return on that 30% is very influenced by the price you paid to buy them at the beginning.

    Yes, 70% is greater than 30% (I am both cultured and a math wizard today), so maximizing the 70% with the highest possible valuation when you sell makes sense.

    But let me ask you a question…if the value of the new entity goes sideways for 3-5 years (it could) and your second bite at the apple is, in technical investment terms, ‘meh,’ would you still do this deal? Sell your practice for 70% of that valuation?

    To some extent, you are negotiating with yourself.  Which is why, as a buyer you better care about the plan for the future.  That is 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.
    March 17, 2022


    Last week, I teed up a mini-series about the land rush of private equity buying up physician practices.  Right after that posted I went back and re-read what I wrote on this subject a couple years ago. A better approach would have been to do that first, but that level of planning gets in the way of our ‘winging for excellence’ motto here at ‘What Matters HQ.’

    I did get around to the archives from 2018 – whoa, four years ago; time flies when you are having a pandemic – and, Lordy, did I get long-winded.  What I thought would be three or four posts turned into 22!  My James Michener phase, I guess.

    My goal then was to provide physicians thinking about selling their practice a primer on the big concepts they needed to understand before going down this road.  Though I’d tweak a few things now, it has held up pretty well for its purpose.

    If you are interested, we pulled all 22 posts into one document (I should call it an ‘e-book’ or something and declare myself a published genius, but alas, it is just a pedestrian PDF download) that you can get here.  Our sommelier recommends pairing it with a nice Pinot Noir and an easy chair.

    Rest easy…I will not subject you to another marathon series this time. Instead, I want to think about just one dimension of selling your practice to private equity.

    Let’s call it ‘dogfooding.’

    Dogfooding is a term used in the software industry about companies needing to use their own products.  ‘Eat your own dogfood’ was not cool enough for this crowd, so it morphed into a present participle that is an offense to English teachers everywhere, but you get the idea.  You prove that you believe what you are pitching by using it yourself.

    One of the key elements of most deals with the PE buyers is that physicians ‘roll’ some material portion of their proceeds forward and take equity in the continuing company.  Say your share of the sale is $100…you get $70 in cash (well, you and the IRS split $70) and $30 worth of stock that you get to cash in down the road when you and your new PE BFFs sell the business the next time.

    When you roll equity, you are dogfooding big time.  The money guys in blue blazers like that. They like that you believe in what you are pitching them, and like that you are staying to help make it happen.

    But there are three aspects to your dogfooding that you need to keep in mind: your valuation; the new path forward; and how many others are trying to do the same thing at the same time.  Let’s dig into all three of those.

    OK, we are not off to a good start.  There was an intro post last week, and now a second sort of intro post.  This is how I ended up at 22 four years ago.

    Discipline, Tim.  Stay focused here.

    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.
    March 11, 2022

    Men in Blue Blazers

    My job gives me a unique perspective on the healthcare industry.  With a diverse set of clients all over the country and range of business partners who think about things in very different ways, my point of view is akin to a kid peeking through knot holes and cracks in the fence trying to make sense of what is going on inside. See the same thing enough times and a theory starts to form.

    So, here is the epiphany that emerged from conversations over the last few weeks of meetings that I want to explore with you…there are a lot of physician practices that now have a role on their team that never existed before – Vice President of Mergers and Acquisitions.  Or some other similar very important sounding title.

    Of course, this little factoid is an artifact of the bigger picture.  There is a ton of capital flowing into the physician practice world; that capital buys an initial practice as its ‘platform’ and then wants to add other practices to the deal; someone needs to go make that happen, so we created the ‘M&A dude’ (and they are mostly dudes with a penchant for the same wardrobe) to get out there and spend that money.

    First, let’s get my biases on the table that are in favor of what this portends:

    • For over a decade now in this space we’ve been telling independent physician practices that they need to get bigger to ride the changes in healthcare and keep docs in their rightful position of industry leadership. This is part of making that happen.  Is this consolidation destroying some romantic view of the doctor-patient relationship? Maybe.
    • We, ALN, have directly benefited as we have some of these kind of practices as clients. So yes, when they grow through acquisitions, we grow with them.  Does that make me an arms dealer in your mind?
    • Physician owners who have worked for years to build a practice worth the attention and money of an outside buyer have the right to monetize their practice just like every other small business owner. Does that make them greedy capitalists? Of course.

    By the way, those were rhetorical questions.  But you can email me your responses if you like.

    So, full disclosure – I am right in the middle of this whole process, working with practices on both sides of the deal, both buyers and sellers.

    But in one of those knot hole conversations this week I was with a group of long-time industry executives.  Yep, a table of old guys, which meant we compared the current goings-on with what had happened in the past.

    And that got me thinking about some of the downsides all these ‘VPs of M&A’ running around with fat checkbooks.  Not the downsides the purists will raise (they do that just fine), but some you should consider if you are talking to one of these dudes about selling your practice.

    We’ll explore those in coming weeks.

    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.
    March 3, 2022

    The Fight Over RCM Plumbing

    We’d all be forgiven if we are a little behind on our healthcare industry news.  Our hearts are heavy, and our minds are distracted.

    But my dang blog reminder pops up on the calendar every week and hounds me like that condescending app on the phone that notes you have taken fewer steps this week than you took last week.  On more than one occasion, I have heard my wife tell Siri to just shut up and mind her own business.

    So, I shifted my focus and dug through my news feeds, and am happy to report that the Team Biden Trustbusters have come through, as they promised they would, and filed suit to stop UnitedHealth Group’s $13 billion acquisition of Change Healthcare.

    While I land in a different place than the administration on many economy-related issues, I applaud this one.  As a free market guy, I am opposed to monopolies that screw up a free and competitive market.  Many providers could make a compelling case that United – just the insurer part of the beast – is already an anticompetitive monopoly in their market.

    But the UHG-Change merger gets to a more insidious choke hold that could do more damage.  And it takes us deep into the weeds of the revenue cycle.

    Are there any words that get you more excited than ‘deep into the weeds of the revenue cycle?’

    United’s Optum division, a begotten beast in its own right, has a critical piece of technology used mostly by payers (and some providers) to process and edit claims.  Change is the only major rival in that space.

    Ok, so if they combine and are really the only game in town, they will raise prices, right?

    Probably, but that is not the biggest risk this combination would create.  To paraphrase James Carville, ‘It’s the data, stupid.’

    Detailed data about claims – most important, the pricing – that flows through this plumbing that is the gold.

    Optum says that the combination of the two companies will allow them to simplify everything, improve patient outcomes, lower costs and even make your crappy Peacock user interface better.  Maybe it even fixes Putin, but I stopped reading at that point.

    Let’s take one of the justifications from the list – this will lower costs.

    I might actually agree with that, but not because of some magical administrative processing efficiency delivered to the world by the Optum wizards.  Imagine a provider trying to negotiate contracts rates with an already massive United, who also now knows everything about the rates paid from competing health plans.  Yeah, healthcare costs will go down…coming right out of provider hides.  That is not efficiency, that is just the bully confiscating someone’s lunch money.

    We’ll continue to cheer the DOJ as this plays out in the District Court of DC.

    And we’ll also continue to cheer and pray for the good people of Ukraine as they fight the good fight.

    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.
    February 17, 2022

    Deep Thoughts on Kid’s Allowance

    Welcome to The Parenting Corner, where we discuss key topics about raising kids.  One issue, which comes with a little psychological nuance, is how parents message the ‘weekly allowance’ when it is first introduced to a child.  Is the allowance a quid pro quo (you do chores, and you get some money), a pre-payment to convey expectations (you get a $20, but that means you better be a good citizen and help around the house), a teaching tool (learn to manage your resources) or just an entitlement (you’re cute, so here you go…have fun at the mall).

    Keep this silly metaphor handy as we talk about the tax-exempt status of non-profit hospitals.

    Yes, our random thought connector machine is cooking with gas this morning.

    The fundamental idea behind the IRS granting an organization a tax-exemption is that it is a payback for some good provided to society at large. For the 3,000 non-profit community hospitals in the US (there are also about 1,200 for-profit and 1,000 state and local government hospitals), that ‘community good’ is what we know as charity care – providing services for which they did not get paid.

    Sounds good on the surface, but maybe the kids are not earning their allowance.

    For starters, the largest component of charity care (44%) is not what you might think, but is labeled ‘unreimbursed Medicaid cost.’ You might be confused since Medicaid actually pays for services, but it doesn’t pay enough to cover costs.  A hospital’s self-reported ‘loss’ on these patients counts as charity care.  Don’t even think about accounting games that might be played.

    But wait, you say.  Don’t for-profit hospitals also take Medicaid patients and get reimbursed those same ‘below cost’ rates?  Yes, many do, and this is where it gets interesting.

    A recent study published by the JAMA Network looked at 2019 data and found hospitals incurred almost $21 billion of unreimbursed Medicaid costs.  This was about 2.5% of total hospital operating costs. The study found no material difference in the percentage when non-profits were compared to for-profits.

    This more specific analysis echoes a similar, but broader, one released last year.  Using 2018 data, it found total charity care – all categories, not just the loss on Medicaid patients – provided by non-profits was $2.3 for every $100 in expenses; their for-profit counterparts spent $3.8 per $100.

    Inconvenient truth.

    Back to the allowance parallel.

    Want to guess what the exempt kids get for doing less community good than their tax-paying siblings? About $25 billion a year in tax avoidance.

    Entitlement might be the answer in this situation.

    And those other things we tend to associate with non-profits…everyone is donating their time or working for cheap; they only provide services to the really poor; their facilities are almost decrepit…seen a new hospital lately?

    Separately, a public service announcement: It is about two months until tax day.

    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.