Speaker 1 0:00
It's no longer enough to just do your clinical work and go home every day. If you want to be an owner in one of these businesses and you want to actually drive future value, you've got to be out thinking like a business person as well.

Austin Littrell 0:28
Welcome to Off the Chart, a business of medicine podcast featuring lively and informative conversations with healthcare experts, opinion leaders, and practicing physicians about the challenges facing doctors and medical practices. My name is Austin Latrell. I'm the associate editor of Medical Economics, and I'd like to thank you for joining us today. In today's episode, Medical Economics senior editor Richard Payerton sat down with Andy Colbert, senior managing director of Ziegler, a privately held investment bank that's focused exclusively on healthcare for more than a century. Colbert leads the firm's physician advisory practice and has advised on more than $6 billion in transactions over the past 15 years. Their conversation today gets at a question that almost every independent practice is weighing right now. As staffing costs climb, reimbursement shrinks, and the administrative burden grows, is staying independent still realistic? Colbert lays out the scale that it now takes to go it alone, why physicians so often misjudge what their practice is actually worth, and how to think about selling to private equity, aligning with a hospital, or building a management services organization, Andy Colbert. Thank you for joining us, and with that, let's get into the episode.

Richard Payerchin 1:31
I'm Richard Payerchin, reporting for Medical Economics. With me today is Andy Colbert. Thank you for joining us today.

Speaker 1 1:39
Thanks, Richard. Appreciate you having me.

Richard Payerchin 1:42
Can you introduce yourself and talk a little bit about your background and experience?

Speaker 1 1:47
Absolutely, absolutely. So I've been in the business now for about 20 years in healthcare investment banking. I actually grew up in a family of physicians. So my dad is a retired primary care physician, ran his own practice. My brother is also an internal medicine physician, and so always been around healthcare and and candidly kind of seeing some of the challenges of physicians trying to grow their practices and really struggling on the business side. And it it really made me want to get into healthcare from a business perspective and really help physicians grow and build, and and ultimately realize shareholder value for what they've built. And so, went to school to to get a degree in business, and started my career at some of the larger Wall Street firms, and then had an opportunity to come over to Ziegler in 2006 and really build out the advisory practice here, leveraging the firm's 100-year history of working across healthcare, predominantly in hospitals and senior living facilities, and I have the unique opportunity to really lead the physician services arena here, which is really advising predominantly independent medical groups and helping them think through all different strategic alternatives, everything from joint ventures, mergers, acquisitions, professional services agreements, partnerships, private equity deals, capital raising, and ultimately potential sale transactions.

Richard Payerchin 3:18
You had joined the firm in 2006 and looking back over almost two decades here, what has been the single biggest shift that you have seen in how physician groups approach mergers and acquisitions?

Speaker 1 3:32
Yeah, you know we we've gone through some some waves. You know I think I think this is a sector where there's kind of probably peaks and valleys. I would say, you know, the the 1990s, right, were a period of a lot of consolidation and a lot of aggregation of physician groups, and then kind of the early 2000s when I was getting into Ziegler, you know, a lot of those physicians were were back independent again and were were kind of out on their own trying to build private practice, and then I think you've seen over the last 10 years another wave of active consolidation, a lot of private equity or health insurance companies, even a lot of health systems getting involved and really you know building aggregation and scale across the physician landscape, and then I, you know, I think we're kind of now at another potential leveling off point where you know it feels like the groups that have really wanted to pursue something or were very excited about partnering have largely explored that or considered it, and then there's a cohort of groups now that have really decided that they've they have what they need to to really forego the path on their own and forge their own path and and stay independent, and so you know I think the way I I typically think about the world is there there's. Kind of a minimum size threshold that I think you need to really remain independent and successful in today's environment, and it's probably somewhere around 40 or 50 providers. To be totally candid, I think is kind of the minimum that I think you really need to have a full suite of back office, full administrative capabilities, be able to afford a CFO, a CEO, have the leverage to negotiate with managed care, right? Be able to have the robustness of your data systems and your technology and all that. And so, I think the groups that have kind of gotten to that scale and and and have that expertise largely have have really built the moats around themselves and and really become pretty stable. I think the groups that are smaller than that are the ones that probably do have to really evaluate where they want to be in three five years and whether they should partner or merge or joint venture or consolidate, and you know I think that's where we spend a lot of time. Right, is is the groups that are kind of either kind of mid cycle size or even these larger groups that have have consolidated and now they're trying to ask themselves what's next and where where do they want to go from here? And you know, it's it's unfortunate, but a lot of these groups operate very much in the mindset of maximizing cash flow every year and thinking about the business more as a means to a salary, right? As opposed to building equity value like you would a traditional, you know, investment in in a corporation, right? You know, most of these physician groups make a lot of a lot of their physicians partners, and you know, the the the the the buy-in is usually a relatively low amount, but what what I think they often struggle with is how do they really create real ownership mindset around what it means to be an owner and what the difference is between an employee and an owner, and I'd say that to me is probably the biggest differential that I see in the market today is that it's no longer enough to just do your clinical work and go home every day. If you want to be an owner in one of these businesses and you want to actually drive future value, you've got to be out thinking like a business person as well, and I and I think that's one of the biggest challenges. And when I meet with a lot of groups, that that's where they struggle.

Speaker 1 7:48
Right, is they may have a 20 physician owned group, and 19 of them are just cranking through RVUs, and one of them is actually out trying to negotiate with the plans and strike new arrangements with other businesses, and think about ancillary revenues and new sites of service. And the others are just trying to be clinical, right? And I think that's that's the biggest challenge. And then trying to convince them all, hey, let's forego 1020, 30% of our salaries this year to reinvest in the business because it's the right thing to do. Those are hard decisions to have.

Richard Payerchin 8:27
That's a really interesting point. It catches my ear, not least because with medical economics, of course, one of our main functions over the the years, our magazine's now more than 100 years old, but one of the main functions has really been to try to hopefully guide and coach, and maybe at least give a little bit of food for thought to physicians about that business operational standpoint. It's a great segue, and I don't want to necessarily belabor the point, but I am curious because I wanted to ask: when a physician group then first approaches you about a potential sale or a partnership, what do most of them misunderstand about what their practices actually worth? It sounds like maybe it's that ownership mindset.

Speaker 1 9:09
Yeah, I mean, at the end of the day, you you kind of got to take a step back and say, what's a business worth, right? And fundamentally, a business is worth the cash flow that it generates, right? And so, I you know, I think the biggest challenge with valuing not just a medical practice, really, but any professional services organization is the income-generating assets are largely kind of going in and out the door every day, right? And you know, most medical groups are not able to generate income passively, where the physician can just stay home and the you know clip a coupon, and the business just kind of generates right. And so I think that that is often the biggest misunderstanding. Right, is someone builds a business for 34 Years, and they think that there's value there. Absent them showing up every day, right? So they they kind of have this mindset of, "Well, I built this practice. I have, you know, x 1000 patients and employees and staff. The business must be worth something, and it's like, well, yes, it is, but it's worth something if you continue to to produce and you continue to deliver and see those patients, because if not, someone else has to step in and do it. And I think the biggest challenge with the sale of a medical group or any other professional services organization, is you know the the business is only going to generate that income if someone else is going to be able to step in, and are they willing to step in at the economic level that you're you're leaving for them, right? And so if you've got a physician that today, let's say, is making a million dollars out of the business. Well, then it's that's not really a million dollars of profit, right? Because ultimately, someone still needs to perform those procedures or see those patients, right? And so, what's really true profit is what's the delta between what they're making and what the fair market value of another provider would be to to to perform those same clinical services, right? And so I'd say, generally speaking, the industry standard is somewhere around 30% is is kind of considered what what's called the the scrape quote unquote of you know so if if if a physician is making call it a million the the scrape would be 300,000 so an investor would be willing to kind of buy 300,000 of their income, pay a multiple on that, and then they retain 700 in the business. Now, the challenge in those dynamics are the physician has to be cognizant of the deal that they're agreeing to, which is they're going to get some lump sum up front in exchange for basically selling a third of their income, and they have to be willing to continue to produce at that lower level. And I think where a lot of these deals, so where where the deals typically perform well and the physicians are happier, situations where post transaction the investor or the acquirer is able to make the practice more efficient, lower overhead, maybe increase revenue, and and and make make the physician earn more so that their 70% is maybe now equal to 8090, or best case back to 100% right? Because those those those are win win scenarios, right? Where someone paid you a lump sum, you now have it in the bank. It's taxed at you know 20% capital gains as opposed to the 37% you would have paid if you stayed in the business, and your salary is kind of back to where it was before you did the deal, right? That's that's that's the perfect you know kind of holy grail of what we're all what what everyone's trying to get to. The flip side, though, is a scenario where you do the transaction, you get the funds up front, but then you stay at that 70% level, and you start to really kind of scratch your head and question yourself and say, "Geez, why did I agree to the 70% level? I'm now below market. If I go across the street or I go down the road, I could get a job at 30% higher than what I'm making now, right? And and that and and and and that's where I think it's it's it's it's easy to forget.

Speaker 1 13:59
Well, that's the deal you signed up for, and that's why you got paid what you did because you sold a third of your income. But I think it is just kind of human nature, right? And you kind of forget that you sold a piece of it. And I think sometimes there's a little bit of a, you know, maybe the buyer and the investor maybe overpromises sometimes to try to get the deal done, and maybe sometimes there's a little bit of not being realistic about what the true future might hold here, and the and the physician maybe gets overly excited about the cash in the bank and doesn't really think about well, what do the next five years look like, and so you know I think if you've got five or seven or 10 years left, these deals are much, much easier to run the math on. If you're 30 years, you know, if you're if you're five years into practice and you got 30 years left, well, then you really got to look at the math a little more and think about it. And you know, I will. Say the math can still be in your favor if you think that the business is going to stable or decline. Right, there still could be a value to taking some chips off the table, partnering with a bigger entity. But that's where you know that's where we'd have to come in and really do the analysis and really decide for ourselves and let the group understand what what you know what the pros and cons are of just a status quo versus a potential transaction.

Speaker 2 15:39
Hey there, Keith Reynolds here, and welcome to the P2 Management Minute. In just 60 seconds, we deliver proven, real-world tactics you can plug into your practice today. Whether that means speeding up check-in, lifting staff morale, or nudging patient satisfaction north, no theory, no fluff, just the kind of guidance that fits between appointments and moves the needle before lunch. But the best ideas don't all come from our newsroom. They come from you. Got a clever workflow hack, an employee engagement win, or a lesson learned the hard way? I want to feature it. Shoot me an email at kreynolds@mjhlifesciences.com with your topic, a quick outline, or even a smartphone clip. We'll handle the rest and get your insights in front of your peers nationwide. Let's make every minute count together. Thanks for watching, and I'll see you in the next P2 Management Minute.

Richard Payerchin 16:30
When you mention those dynamics, it's really interesting to me from an investment perspective, and I do some of the same questions and factors hold true when a physician group may be considering aligning with a local hospital or a health system as opposed to a private investor.

Speaker 1 16:49
Yeah, it's a good question. I mean, I think there. Yes, some of the same questions do arise. I would say the difference when they're considering aligning with a local health system is there may be other attributes that are coming from that relationship beyond just the capital, right? And so, for example, we advised a large group in northern New Jersey, and you know this was a very sizable multi-specialty group. They they had a lot of different options. We brought them probably 10 or 12 different options. Everything from more of a private equity to a health system partnership, and ultimately they did elect to structure more of a joint venture with their local health system, because a the health system was able to bring better reimbursement rates, right, and so now that kind of overnight produced a bump, right, a day one kind of rate bump where even though they sold that 30% that they were now getting 70% of a much bigger number, right? And so they had kind of a big bump there. They also had the benefit of incremental referrals and ancillaries and additional volume that the health system could bring. And then I think you know I think the last piece is is and I don't know how you necessarily put a value on this is the defensive play right I mean you know the the risk that if they didn't align with this health system does the health system align with another group that now is a competitor to them right and so I think that's always in the back of these physicians' minds, where health systems have always been kind of in and out of ambulatory services and physician ownership, and you know there are a lot of specialties that have been historically outside of the hospital purview, and now are I think as health systems are seeing a lot of margin pressure on the inpatient side, are really trying to double down on some of the outpatient services, and so yeah, I mean, that that's where I would say the the value upside is a different upside, right? So partnering with the health system, it's it's more of a tangible partnership where they bring certain referral streams and revenue sources, but you're also not getting the benefit of a future transaction down the road, right? It's kind of a more permanent partnership, if you will, whereas the benefit of these private equity partnerships are there's usually kind of multiple multiple steps, multiple transactions along the road. So the idea being, take a little out now, put a bunch of capital behind the business, help you grow, help you scale. And then let's transact again in five years to a bigger investor or to another investor, right? And so you kind of get multiple what we call bites of the apple, and I think that works well for groups that are very entrepreneurial and have a real vision and want to be what we call the platform, which is really they have the vision for really being the aggregator, if you will, as opposed to a group that maybe doesn't want to take on all that administrative work and perhaps wants to be, you know, more, you know, what what we would call more of a tuck in, right? Where where where they kind of join someone else's administrative infrastructure.

Richard Payerchin 20:47
You know what? And it's that's an interesting segue to something that that also caught my ear, and something I wanted to ask about because there's been, you know, in the last few years, particularly a lot of debate about private equity investment in healthcare. Frankly, some studies have shown potential bad effects on patient outcomes, but I know that there's also some physicians who advocate for private private equity investment as a way to maintain independence. What do you predict for 2026 and beyond about private equity investment, both the amounts, the levels, the medical specialties, and then maybe regulations.

Speaker 1 21:28
Yeah, it's a great it's a great point, and you know I think you have to be a little skeptical with any of the data that you see out there because often it is somewhat biased or one sided, and you know very much of it is funded with a viewpoint in mind. from From my perspective, and this I think goes back to kind of where we started the conversation, which is groups under 50 providers are in a really challenging situation right now, where they've got record rising staff costs and overhead, right? They've got declining reimbursement, and they've got just an increasing burden of the complexity of running the practice from just an administrative headache, managing the complexity of you know insurance claims and getting them processed and paid is harder than ever, right? And there's more red tape, more loopholes, more barriers, and so you know I I I think it's it's it's a little naive for us to sit here and say, "Okay, private equity is bad, because then I, I really would push and say, "Well, what, what is the alternative? Because if, if these smaller independent groups don't have an option, there's really only two available paths, right? It's either they all go to hospital employment, or they become part of a big health plan, right? And and and those are really, I think, the two alternatives. Over the years, we've seen other entrants try to move in, like the pharmacies, Walgreens, right, or CVS, or even Amazon, and I think what we've learned is those are very those are harder than they look. I think Walgreens and CVS are both pulling out of healthcare delivery and physician services, and I think you know realize that they're they're they're harder businesses than they anticipated. You know, Amazon obviously bought one medical, but hasn't really said, "Hey, we're going to go you know double or triple down on this. And so, you know, I see private equity as an independent third option, right? As as a as a means for physicians to still retain some ownership in their practice, have a capital partner to back them, and ultimately still maintain an independent view and mindset versus a pure hospital ownership or physician or health plan ownership, right? And so, in my mind, I think it's a very healthy third option. And I worry that if you if you eliminate it, then I actually think as a consumer, we're we're actually worse off because now we're in a situation where a lot of these groups are going to fold, and you know they're all going to be forced to pick one path or the other, and then all you're doing is kind of creating way more leverage in the hands of the hospitals and the the insurance companies.

Richard Payerchin 24:56
Like I said, you got the wheels turning for me here because not least because historically. Medical economics really has tried to cater to smaller and medium-sized independent practices, and you've probably even seen-I don't mean to presume-but you know, just judging from the experience you said, you know, with was it? I believe your father and brother, you might have even encountered some of these issues. One question that comes up in just about every interview now, though, and I always call it the technology question. Frankly, the AI question. Going forward, you know, AI has made a splash in healthcare and across numerous other business sectors. Whether it be for that day-to-day management, physicians trying to really maximize value, and then consider a future going forward to remain capitalized, how do you see artificial intelligence coming into play in those financial elements that physicians have to consider?

Speaker 1 25:49
Yeah, I mean it's absolutely going to be an attribute that I think could be game changing in the medical space, right? I mean, it's it's a it's creating a more informed consumer right where where I think patients are able to do more research and information up front. I think b it really hopefully lowers the risk around any sort of mistakes or or issues or errors right because you're kind of creating another layer of of overreads. I don't. I don't think it ultimately changes the trajectory of a of a physician's, you know, economic or or their their ultimate value add. I think what it does is it enables them to probably focus more strategically with their time, right, and maybe kind of automate some of the more manual administrative remedial tasks, and perhaps practice more at the top of their licenses. We like to say, right? So, like, you know, if if you're a radiologist, for example, right? I I think it enables you to be more efficient with your time and and and focus more on the cases that are really complicated and breeze through the cases maybe that are very basic and and and black and white, right? And I think it ultimately. My hope is it'll help us alleviate some of these real shortages, right, and and staffing challenges and staffing shortages that we're seeing across the board. Because let's face it, I mean, there are just less applicants going to med school, there's less individuals coming out of fellowships and residency. I think because of the challenges in the field and the the headaches and the red tape, I think a lot of physicians are not always encouraging their their children to go into the field. You know, in many cases, they're they're kind of encouraging them to go elsewhere, right? And so my hope is it it turns the pendulum back and and creates more demand, enables physicians to be more productive, more entrepreneurial. But I think the flip side is it it it does set a bar higher for groups to figure out how to incorporate AI, how to invest in it, where where they should be investing and spending, and I think that's hard to do as a sole independent group, right? I think that's where, as a larger you know integrated practice, there's just a lot of benefits, and so my hope is that's another tool that these larger enterprises can bring to the smaller groups and really make them more efficient and more productive.

Richard Payerchin 28:54
I'll turn back to the practice management side, though, because this is something that I think you touched on earlier in our conversation, talking about some of those efficiencies, for example, when a physician's group might start working with an investment company in a medical practice, doctors aren't the only people who are there. They have MAs, they may have some advanced APPs, other staff, and what factors should physicians consider around, particularly staff, healthcare is heavy in staff and personnel. What other factors should physicians consider around staff and maybe overhead when they start considering, like a merger, an acquisition, joining in partnership with another entity?

Speaker 1 29:38
Yeah, yeah, it's a great question. I mean, largely, you know, these these mergers or affiliations or acquisitions are not really reducing the staff headcount and reducing the number of employees in the practice. If anything, they're often providing these individuals. Visuals with more opportunities and more upside, right? So you might have a a practice manager at a at a 30 staff you know practice who has been there for 20 years and starts to kind of get a little bored with what he or she does, right? And and doesn't necessarily you know, and and they're kind of tapped out from an income perspective, right, relative to the size of the group. And so now, if you can put them together with a another group and another group, and now it's 100 individual practice, and that manager can kind of rise up the ranks. Well, there's there's there's more growth there. There's more opportunity. There's more leadership potential, both from a responsibility and a salary and economic perspective. And I think that should be exciting for the staff and the business side. But you know, I I do think you want to tread lightly on if you if you're a physician considering these types of projects or initiatives, you want to be careful how to engage with your staff, when to talk to them about it, when to open up about this, because it it can create a lot of anxiety, right? When folks think that there's change or uncertainty, they they may assume their jobs are going to be cut or redundant, and I think it's really important to to really think through how you communicate it and at what time in the process you make that communication so that you do it when you have the answers and you can paint a very positive, exciting, optimistic view as opposed to creating uncertainty.

Richard Payerchin 31:48
What have I not asked about that you would like our audience to know?

Speaker 1 31:52
Yeah, I mean, one of the things we didn't talk about that I've seen a lot of discussion around lately, and and I think a lot of conversations around is is the concept of forming an MSO, which is not necessarily a topic that physicians learn about in medical school, right? But what it what it effectively is is kind of creating two sister companies where you have the clinical practice that continues to be physician owned that governs all the the the clinical decisions and where all your payer contracts are and your your clinicians reside, and then you effectively create a sister administrative entity, and that is the entity where all of the staff would reside, your leases, your real estate, your equipment, and and and the benefit, and that MSO would basically charge a management fee to your clinical practice in exchange for providing management services, and what that enables you to do is bring non physicians into the ownership of the earning stream, as well as create an opportunity for some of your key physician leaders to be incentivized in growth in a way that might not be possible in the clinical entity, and we we we've seen a lot of innovative physician groups starting to embark on that strategy, even if they're not looking to do a private equity or sale transaction, it's a great step to kind of start thinking and acting more like a true business, right? Because I think one of the biggest complaints I often hear is the leadership team doesn't necessarily have any real incentive to really grow the business if everyone's just going to split all the profits equally per se, right? That CEO or CFO or business head, and so what the MSO does is it allows you to put in place a management incentive pool, or an option pool, or growth pool, and really try to drive some of the profit share aligned with the growth and the individuals that are driving that growth. And so, I love talking to groups about that because I think that is a great opportunity. I think the other thing that is is great, you know, to talk about is, you know, how do you, if you if you feel like you have, and then and then once you set that MSO up, you now could provide services to other medical groups as well, right? And so it creates kind of an additional income stream opportunity, revenue opportunity, and so you know that is something that I often, for innovative entrepreneurial groups, I suggest they consider thinking about that structure because it just gives them more flexibility depending on what direction they might want to head.

Richard Payerchin 34:55
Our main audience is primary care physicians. What would you like to say to them? Or what would you like them to know?

Speaker 1 35:03
Yeah, so I, you know, I, I'd like them to know that at the end of the day, when you really take a step back, what really matters is building scale, and fundamentally, for any physician group to continue growing and being successful and being independent, they absolutely have to continue building scale. And so, I would just continue to push them to think about how do you continue building scale, and do you have that three to five year plan in place? Have you sat down and put together a thoughtful strategic plan, a full SWOT analysis, and a full analysis that that that lays out where you think you'll be over the next three to five years. Because if you haven't, I really would suggest that becomes an imperative to to do that as soon as possible and be honest with yourself about where your strengths and weaknesses are, and think about ultimately what what the objectives are. Because I think the biggest mistake that a lot of physicians groups make is someone knocks on the door and shows up with an offer or some sort of interesting proposal, and the groups just evaluating in a vacuum, right? What they haven't done often is really put a full strategic assessment together of what are our objectives, what do we actually want and need to be better and bigger and stronger and more successful, and so I think it's, you know, it's it's it's like trying to apply for colleges if you haven't sat down and said to yourself, "What am I looking for? What are my strengths? What what am I what do I excel at? Do I want a big school or a small school? Do I like academics or athletics? Right? Otherwise, it's just kind of a shot in the dark, right? And so I think you you got to create that scorecard. You got to create that set of objectives, and then from there, then you're in a position to actually sit and have real conversations and engage with these outside parties and be efficient with your time. Because at the end of the day, time is the most valuable resource we all have. And you know what? What I see a lot of groups struggle with is just constantly conversations with groups or partners that just aren't really the right fit or the right path, and yet they're spending time on stuff that isn't really additive. And so, I think the absolute number one thing I want to leave groups with is go through the exercise to conduct that strategic assessment and understand what your what your gaps are and where your needs are, and then from there you'll be in a much better position to think through what you need and and how to get bigger and stronger.

Richard Payerchin 37:56
I'm Richard Payerchin reporting for Medical Economics. My guest today has been Andy Colbert, a senior managing director at Ziegler, the investment bank. It's been a great conversation. Thank you for joining us today.

Speaker 1 38:10
Thanks, Richard.

Austin Littrell 38:17
Once again, that was a conversation between Medical Economics senior editor Richard Payerton and Andy Colbert, senior managing director at Ziegler. My name is Austin Latrell, and on behalf of the whole medical economics and physicians practice teams, I'd like to thank you for listening to the show and ask that you subscribe so you don't miss the next episode. As always, be sure to check back on Monday and Thursday mornings for the latest conversations with experts sharing strategies, stories, and solutions for your practice. You can find us by searching off the chart wherever you get your podcasts, and if you'd like the best stories that Medical Economics and Physicians Practice publish, delivered straight to your email six days of the week, subscribe to our newsletters at medicaleconomics.com and physicianspractice.com. Off the chart, a business of medicine podcast, is executive produced by Chris Malini and Keith Reynolds, and produced by Austin Latrell. Medical Economics and Physicians Practice are both members of the MJH Life Sciences family. Thank you.

Transcribed by https://otter.ai