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    Mike Delmonico
    Mike Delmonico, CMPE, MBA, BSN, RN
    Author’s Note

    The legal structures used to establish private practice medical groups (i.e. private practices) and the subsequent terms used to describe the physician-owners and the foundational agreements among the physician-owners can vary by state and structure type.

    Commonly, depending on the legal structure of a private practice as either a partnership [e.g., general partnership (GP), limited partnership (LP), limited liability partnership (LLP)], limited liability corporation (LLC), or a professional corporation (PC), the physician-owners may be referred to as partners or members. Similarly, the foundational agreement among the physician-owners of a private practice may be referred to as a partnership agreement or an operating agreement.

    For this article we will refer to the physician-owners as “partners” and the foundational agreement among the physician-owners as “the partnership agreement” to reasonably cover the most common legal structures and the respective naming conventions.

    Introduction

    Physicians have many choices when it comes to the organizational structure within which they pursue their clinical practice career goals. Some of the most important considerations for a physician should be their preferences regarding:

    1. Professional and career goals
    2. Independence and autonomy
    3. Involvement in organizational decision-making
    4. Personal financial goals
    5. Personal tolerances for risk and change. 


    For physicians who choose to practice clinically in a private practice and who aspire to be a partner, they are seeking value from wages and benefits earned resulting clinical services rendered, as well as profit distributions and equity earned resulting from investments and taking risks as an owner.

    The partnership agreement

    According to the American Medical Association’s (AMA’s) definition, a private practice is wholly owned by physicians rather than a hospital, health system or other entity.

    It is a common scenario that the partners of a private practice are also considered employees of the practice and as a result are party to an employment agreement with the practice.  It is the employment agreement that establishes the value that may be earned by the physician — who is also a partner — in exchange for clinical services rendered.  By comparison, it is the partnership agreement that establishes the value that may be earned by the physician — who is also a partner — in exchange for making investments in the practice and taking on the risks of ownership. 

    The intent and content of partnership agreements and operating agreements (together referred to as the partnership agreements in this article) are similar, although there are some differences based on the legal structure of the private practice and the laws of each state.

    The partnership agreement is one of the foundational documents for the private practice.  The partnership agreement is a contract between the partners that describes arrangements and rules related to:

    1. The responsibilities and authorities among partners;
    2. The process for decision-making;
    3. The entrance and exiting of partners;
    4. The division of profits and losses;
    5. The need for capital contributions;
    6. The tax treatment of the private practice;
    7. The indemnification of partners;
    8. Dispute resolution; and
    9. The actions following the disability or death of a partner.


    Bylaws can also be considered a foundational document for a private practice, but bylaws are more for establishing the private practice’s reason for being (i.e. purpose or mission) along with some broad organizational arrangements than they are for describing specific partnership and membership rules.

    However, the terms and conditions described within the partnership agreement — including rules on all manner of organizational leadership, management, and decision-making issues — guide how profits and equity of the practice will be created, optimized and realized.


    Profit and equity

    Physicians who are only employed by a medical practice or other healthcare entity derive their value for clinical services rendered through wages and benefits primarily.

    Physicians who are partners in a private practice, and who are frequently also employed by the private practice, derive value for clinical services rendered through wages and benefits and for making investments and taking risks as an owner through profit distributions and the sale of equity.

    Profitability is the result of generating an excess of revenue over expenses. That is, when there is money that remains with the practice after paying for wages, benefits, and day-to-day operational costs — that is technically a profit. 

    The partnership agreement generally describes how and how often profit distributions to the partners are to be made. The partnership agreement may establish goals on minimum cash reserves and maximum indebtedness that the practice must achieve in advance of declaring profits that are then available for distribution to the partners.

    Equity is the value of the practice as determined by assessments, analysis and calculations, following a process that is usually described in the partnership agreement.

    The partnership agreement also establishes the authorities and the processes that guide major decisions by the partners such as:

    1. Selling shares to new partners;
    2. Buying shares from existing partners;
    3. Merging the practice with another entity;
    4. Acquiring other medical practices or entities (e.g., real estate); and/or
    5. Selling the practice as a whole.

    Equity and practice valuation

    Healthcare systems are acquiring medical practices to integrate vertically and be positioned for success with value-based care in their respective markets. Private equity firms are acquiring practices in select specialties to gain market dominance and operational economies of scale while negotiating influence with payers. Various financial performance results documented on the balance sheet and income statement combined with market intelligence and projections of future performance are frequently used to determine the value of a private practice at any point in time. 

    Balance sheet considerations might include:

    • Assets such as equipment and buildings
    • Assets such as long-term (e.g., CDs) and short-term (e.g., savings accounts) investments
    • Liabilities such as deferred compensation and accrued vacation
    • Liabilities such as long-term (e.g., loans) and short-term (e.g., credit cards) debt

    Income statement considerations might include:

    • Overall profitability
    • Trends for income derived from patient care and value-based care
    • Trends for expenses derived from wages and benefits
    • Trends for expenses related to occupancy, supplies, and technology

    Market forces considered might include:

    • Regulations
    • Competition
    • Fee-for-service (FFS) payment rate trends
    • Value-based care opportunities
    • Workforce availability
    • Ongoing mergers and acquisitions
    • Socio-economic conditions

    Key trends in medical practice ownership

    Several new entrants to the physician ownership space are driven by investors that include private equity firms, venture capitalists, health plans and large employers, giving “new options for where and how” physicians work.1

    “These players understand the central role physicians play in directing large portions of healthcare dollars and believe that tighter management, technology, data analytics tools and practice innovation can result in better care, better outcomes, better care experience and profitability,” per an AHA market insight report.2

    The AHA’s view of hospital acquisitions of physician practices focused largely on doctors seeking financial security and more clinical focus rather than “the administrative burdens and cost concerns of managing their own practice,” also adding that commercial insurers’ investment of billions into practice acquisitions has been met with “little scrutiny.”3

    Beyond the favorable ability of larger entities to negotiate better pricing with private insurers, another key driver of these ownership changes has been the “growing disparity between the Medicare fees for physician care versus hospital outpatient care,” which has “left many physician practices financially vulnerable,” per an American Antitrust Institute report.4

    To put these shifts into perspective, a recent PAI-Avalere report found that:

    • Nearly four out of five (77.6%) physicians are now employees of hospitals, health systems or other corporate entities.5
    • Nearly six in 10 (58.5%) of physician practices are owned by hospital, health systems or other corporate entities.6

    Similar studies from the American Medical Association (AMA) found that the shift of physicians working in private practice fell 13 percentage points between 2012 and 2022, from 60.1% to 46.7%. By 2022, nearly half (49.7%) of physicians were employees, with 44% owners and 6.4% as independent contractors.7

    Briefs on private practice ownership considerations

    The following four case study briefs highlight some of the current variables and scenarios that are considered by private practice partners when setting goals and deciding on strategies and tactics for their practices. The range of ownership considerations and the degree of urgency are very similar across private practices regardless of the specialty.

    Case study brief 1. Scanning the marketplace

    A full-service ophthalmology practice with three partners and other employed physicians is managing the transition of old partners leaving and new partners joining; the entry of new partners is a key to the practice’s future. Their staffing costs are increasing while reimbursements (especially from Medicare) are declining. As a private practice it must stay connected with referring physicians from different healthcare systems, so it is weighing the importance of changing to a new EHR to better integrate with the dominant healthcare systems. With the multiple, ongoing administrative burdens and considerations, the practice is evaluating the acquisition opportunities that private equity firms are presenting. 

    Case study brief 2. Independence versus union

    A single physician MOHS practice has a history of receiving referrals from local dermatologists resulting from its reputation for high quality care and high patient satisfaction rates. The ongoing market consolidation in dermatology — with private practices and private equity firms acquiring smaller dermatology practices — is threatening the MOHS practice's referral base.  As existing referring physicians are being acquired by larger dermatology entities, referral patterns are changing for the MOHS practice. As a result, the practice is evaluating the options of:

    1. Growing and diversifying in order to compete; or
    2. Considering acquisition proposals from private equity firms and larger practice entities.
    Case study brief 3. Bucking the trend

    A primary care practice of 10 providers was formed recently. Seven of the providers had received termination notices from their financially struggling, for-profit healthcare system owner. Three of the providers were faced with their corporate owners (a pharmacy chain) selling their location to a new corporation. The 10 providers together decided that the best course of action was to establish a new practice among them. Patient loyalty, participation in a local IPA, and value-based care arrangements have helped to jump start the new practice financially. 

    Case study brief 4. Marketplace realities

    A multispecialty practice with two naturopathic physicians, a dentist and complementary therapists has faced significant business development, staff recruitment and financial challenges. State regulations and insurance company policies have impeded the practice’s ability to succeed even though there is significant patient demand for their services. Opportunities to sell the practice to a local healthcare system and even converting the practice to a charitable 501(c)(3) entity are being considered.

    Conclusion

    The medical practice ownership marketplace is superheated. Physician entrepreneurs, healthcare systems and private equity firms are competing for ownership and control of medical practices to achieve their respective goals. The drive to own medical practices might be an end goal or might be a tactic toward achieving a larger, more complex end goal.

    When it comes to owning medical practices, physician entrepreneurs are driven by personal business and career aspirations, healthcare systems are driven by the need for vertical integration and to be positioned for success with population health, and private equity firms are driven by the interest in horizontal integration across select specialties, economies of scale and a return on investment.

    Notes:

    1. AHA Center for Health Innovation. “Evolving Physician-Practice Ownership Models.” Market Insights report. 2020. Available from: https://bit.ly/3yKc96C .
    2. Ibid.
    3. AHA. “Report: Examining the Real Factors Driving Physician Practice Acquisition.” June 7, 2023. Available from: https://bit.ly/46QMwxs .
    4. Scheffler RM, Alexander L, Fulton BD, Arnold DR, Abdelhadi OA. “Monetizing Medicine: Private Equity and Competition in Physician Practice Markets.” American Antitrust Institute, The Nicholas C. Petris Center of Health Care Markets and Consumer Welfare, University of California, Berkeley, and the Washington Center for Equitable Growth. July 10, 2023. Available from: https://bit.ly/41iZEc7 .
    5. PAI-Avalere. “Report on Physician Employment Trends and Acquisitions of Medical Practices: 2019-2023.” Updated April 2024. Available from: https://bit.ly/3X6SreC .
    6. Ibid.
    7. AMA. “Physician Practice Benchmark Survey.” Updated May 16, 2024. Available from: https://bit.ly/3OvsAZ7 .
    Mike Delmonico

    Written By

    Mike Delmonico, CMPE, MBA, BSN, RN

    www.mikedelmonicoconsulting.com 


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