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Veteran attorney Dennis Hursh discusses his article “Private practice employment agreements: What happens if private equity swoops in?” In this episode, Dennis explains how private equity acquisitions of medical practices complicate the traditional path for employed physicians who expect eventual ownership. He highlights risks such as working years at below-median pay without ever reaching partnership and inheriting underpaying contracts after a sale. Dennis also offers strategies for physicians to negotiate protections, including provisions for equity-equivalent bonuses or safeguards in case of a private equity takeover. He emphasizes that while some private equity firms bring resources and technology, others impose profit-driven pressures that can erode job satisfaction. Listeners gain actionable insights into safeguarding their career paths and financial futures in the evolving private practice landscape.

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Transcript

Kevin Pho: Hi and welcome to the show. Subscribe at KevinMD.com/podcast. Today we welcome back Dennis Hursh, health care attorney. Today’s KevinMD article is “Private practice employment agreements: What happens if private equity swoops in?” Dennis, welcome back to the show.

Dennis Hursh: Thanks. It’s great to be here.

Kevin Pho: All right. That issue of private equity buying a lot of independent practices is definitely in the forefront, and I’m certainly interested in hearing your perspective from the contractual standpoint. So what led you first to focus on the impact of private equity on physician employment agreements?

Dennis Hursh: Well, it’s funny; I get very mixed results talking to people. I have physicians that work for private equity and they love it. They say there’s money now. When we were in private practice, we never had the money to afford the latest gizmo, and now I just say, “Hey, I think this would come in.” And the company says, “Oh yeah, we can make a lot of money with that. Certainly we’ll buy that.” So the capital’s there.

I have some physicians that say it’s not that different from when I was in private practice. The ones you hear more of, though, are the ones that say, “Yeah, I’m like a factory worker. I’ve got an assembly line. The patients are rushed in.” I’ve had people say, “I’m under pressure to order more labs.” Just everything you can imagine horrible about practicing medicine. It’s like a hospital, but ten times worse sometimes.

So, I guess it’s important to remember it’s not necessarily going to be a horrible experience if private equity comes in.

Kevin Pho: Because, as you said, one hears about the universal experiences of the private equity model. They will buy a practice; they will cut costs so they can sell it at a higher price. That’s how private equity makes money. And one hears from the physician standpoint, in some cases, where they’re being squeezed to order more tests and see more patients, and in the end, patients suffer. But you do see cases where physicians are happy with the private equity model, is that correct?

Dennis Hursh: Yes, I do. As I said, there’s capital there, so if we need something, it used to be, “Well, the carpet’s a little shabby in the reception area.” Now there’s plenty of money for that. I might not have been able to justify buying this gizmo. And the private equity says, “Oh yeah, we can make a lot of money if we buy that, and we have the capital. So we’re going to get you that and then we’ll market that you have that.”

So in some cases, the physicians are very happy and they’re better off. I’d say… I won’t say it’s rare. The majority are not happy with private equity, but there are some.

Kevin Pho: So tell us, from a physician contract standpoint, what’s the most common first interaction that a physician group has with private equity?

Dennis Hursh: Well, a lot of times you just get a call out of the blue that says, “Hey, would you be interested in selling?” And I’ve had situations where it’s destroyed a practice. Some of it depends on the shareholder agreement. Physicians come in and think, “I got this great deal. If I become a partner, it’s $10 and I become an equal partner. But guess what? When you leave, you get $10.”

So you get these physicians in their mid-fifties, sixties, and sometimes older. Private equity comes in and says, “Hey, we’d be willing to give you a couple hundred thousand dollars for your ownership in the practice.” And they’re thinking, “If I retire in two years, you guys will give me $10. Private equity will give me hundreds of thousands of dollars.” It may not be a hard decision for them to say, “I want to do that.”

And I’ve represented practices that were just split down the middle. The younger physicians said, “No way, no how. We love being independent. That’s why I came to a private practice and we’re going to stay.” And the older physicians sold out, so it literally just destroyed the practice. They split into two practices, with the younger physicians in one and the older physicians in private equity.

Kevin Pho: Is there a specific type of practice that private equity typically looks at to buy?

Dennis Hursh: Yes, although it’s expanding. For a long time it was dermatology. You saw orthopedic surgery; some of the high-dollar specialties were targets, but now I’m seeing it in primary care and other specialties too. They’re starting to just roll up lots of specialties. It’s not as one-sided as it used to be. Anesthesiology, too, has been big for private equity.

Kevin Pho: So private equity typically contacts a practice to see whether there is any interest in selling or not. Now, from the practice standpoint, what normally happens next and what are some of the pitfalls that you’ve seen along that path?

Dennis Hursh: Well, what normally happens next is I’ve had practices that just said, “Nope.” They say, “I don’t want to hear the money. I don’t care. I’ve been in private practice 20 years. I’m not going to get a job now.” So a lot of them just say, “Nope, forget it.” Some will say, “Well, let’s talk about it.” And they start the due diligence process, which can also drive a lot of physicians off.

Private equity is getting better in one area. In the old days, it used to be just like IBM taking over a company. They’d come in and say, “OK, we want to see all your income statements for the last five years. We want to see your accounts receivable. We want to see all your liabilities. We want to see your pension plan.” A lot of physicians will just say, “I don’t have 27 staff sitting around just waiting to do this due diligence. I can’t do it. Forget it.” And in the old days, the deal fell through at that point for a lot of practices.

Now private equity is getting a little more sophisticated and they’ll send somebody in to go through the books and look at what they need. But due diligence is the first step. I’ve represented practices where reimbursement dropped. The partners didn’t want to lose money, so they took a line of credit out to pay themselves. And those are the kind of things that private equity will say, “That’s fine, but we’re not taking that line of credit over. If we sell, you guys are responsible for the line of credit.”

Kevin Pho: Now from the physician standpoint, if they’re considering a private equity buyout, tell us about some of the issues and points that they need to ask themselves to consider this.

Dennis Hursh: Well, I think one of the biggest things is if you are joining a private practice, you have to have a contingency for that. You have to say, “Hey, if we are going to sell, I want to be treated as a partner.” Because a lot of times a private practice will bring you in and they’ll say, “Look, we’re not going to pay great. But you get the golden ring of partnership. You pay your dues and in three years we’ll make you a partner.” The partners are doing pretty well. “Our employed physicians are making less than they could at a hospital. But the good news is, in three years you’ll really be doing well.”

And what happens to the physician coming in sometimes is then the practice sells to private equity. So you’ve accepted below-median income for two or three years expecting to get the brass ring, and it’s pulled out from under you.

So that’s a contingency that I always try to put in with varying degrees of success. I’ve had people say, “Yeah, sure, no problem.” People will say, “There’s no way I’m ever going to sell to private equity.” So it’s the same as if I insisted on it and we were doing a deal that you pay me $10,000 if you ever shoot my dog. You probably wouldn’t make that a big negotiation point. You weren’t planning on doing it. It’s never going to happen in your mind. It seems important to me. We can put it in the contract. So those kinds of deals usually go smoothly.

However, many practices will resist that clause because they want to maintain their flexibility. The owner might think, “I own this practice. Right now, I’m not thinking about private equity. But if somebody came in and offered me hundreds of thousands of dollars… I’ve built this practice for 20 or 25 years. I’m not going to guarantee that you can just ride my coattails and get that bonanza too.” So, it can be a tough negotiation, but I think it’s important to bring it up and try to get some resolution for the new physician.

Kevin Pho: So for a new physician joining a practice, introducing some type of private equity clause right up front is something that you would advise?

Dennis Hursh: Yes, I do. Because as I said, sometimes it’s no big deal. If the practice says, “There is no way I would ever consider selling to private equity,” they’re probably not going to fight that clause very hard. But as I said, I talked about the example of $10,000 if you shoot my dog, but if we put it into the agreement that you pay me a lot of money if you choose to buy a new car, you’re going to say, “Well, I am happy with the way things are, but I am not really willing to limit my options in the future.” And I do get that response quite a bit.

Kevin Pho: So if a private practice is considering selling to private equity, what other parts of the physician contract are most commonly affected?

Dennis Hursh: Well, for the new physicians coming in who are not partners… The people that are owners, a lot of times their contract doesn’t massively change. Sometimes it’s a little less. Not always. It’s a little less “eat what you treat” and it’s more, “Here’s your salary. And you have a bonus.” Although practices that are doing “eat what you treat” a lot of times will continue that with private equity. So there’s not that many differences.

And sometimes the physicians like it. You didn’t go to med school so that when Susie, the receptionist, gets sick, you’ve got to figure out, “Do we go to a staffing agency or who’s going to answer the phones?” Sometimes people are relieved when they go to private equity. And they hire all the employees. They deal with the pregnancies; they deal with the poor-performing employees. As I said, there are some advantages to doing private equity. So sometimes, as I said, physicians are not displeased working for private equity.

Kevin Pho: But for the new physicians in a practice being bought by private equity, do their compensation structures typically change a lot?

Dennis Hursh: No. A lot of times they don’t. Sometimes it goes up and a lot of times there’ll be a decent signing bonus when you sell to private equity. Most of the time, the way that the purchase price is determined is some multiple of revenue. So if you think about it, if there are four physicians and you’re number four, but you’re employed, you’re probably producing close to 25 percent of the revenue. So both the practice and the new private equity are going to be very interested in keeping you.

They’re not going to come in and say, “You got a low-ball deal now because you’re going to be a partner. Well, you’re not going to be a partner and we’re going to keep paying you low-ball.” Most people always say, “Well, why should I stay? The hospital will pay me more. I can snap my fingers and get a better deal.” So sometimes you can negotiate a very lucrative buy-in.

I talked about in the article a situation where somebody was promised that in one year they’d be in private equity and they would get hundreds of thousands of dollars given to them so that they could buy into the bigger fish. Only the bigger fish got swallowed before that year was up and that physician was offered something like $50,000, whereas the partners were each getting hundreds of thousands of dollars. And so there wasn’t a particularly happy negotiation, but we were able to increase the signing bonus, get him a retention bonus, and get him a little more money. He still didn’t do nearly as well as if that practice had been sold the day after he had become a partner.

Kevin Pho: How about parts of the contract outside of compensation, like benefits for instance? Do they typically change?

Dennis Hursh: To the extent they do, it’s not uncommon that they’re better because private practices tend to run a tight ship. So a lot of times the private equity will come in and say, “We’ve got this massive deal with the health insurance company and you have smaller copays and maybe even lower monthly premiums.” So a lot of times the benefits are almost as good, in some cases better, and in some cases the retirement plan is better.

And the other thing is a lot of private equity will allow you to buy into the private equity concern. And it’s not uncommon that they will actually give you money to do it. So in two years or three years, “We’re going to give you enough money to buy an equal share of the physician’s part of private equity.” So the whole idea of private equity is we buy cheap. We hopefully sell for three times in three years. If you are an equity owner in the private equity, you benefit from that too.

Kevin Pho: So it sounds like from a compensation standpoint, in many cases, private equity would benefit, especially the older partners, and as you said, in some cases benefits and retirement plans could be even better as well. So what are some of the reasons why physicians are so dissatisfied with the private equity movement that you see? Why are so many physicians unhappy with this?

Dennis Hursh: Well, it depends on the company. If you think about it, there are companies like Patagonia that are out there to make money, but they also have a strong public bent and they support good causes and they care about their people. Well, the same is true for private equity. There’s not a Patagonia equivalent, but in private equity there are some that say, “Look, these physicians are the people that are making us the money. We are going to make a lot of money from this deal, but it’s important that our physicians do well too.”

Some, I think, really do believe in quality care. I’m not sure that that trumps profit, but I think for some it truly is more than just a buzzword. I think they really do want to provide good care. So, as I said, they are going to be more likely to put the money into a capital investment that maybe a private practice would say, “We could really serve our patients better if we had one of these, but they’re just too expensive and it might break even. It might make a tiny bit of money, but we don’t want to borrow a ton of money to get it.” So in those cases, private equity will come in and say, “Hey, we know we can at least get our money back. We think with marketing, we think if you’re the only ones in town with this gizmo that we’ll do very well with it. So we’re happy to put the money up for that gizmo.”

Kevin Pho: Now there are some studies that show that private equity-backed practices have worse patient outcomes and worse quality metrics compared to practices that aren’t owned by private equity. Is there anything that could be negotiated in a contract that protects and maintains patient care?

Dennis Hursh: Yes, a lot of times I will try to get something in that says, “Number one, I’ll keep the same schedule I have so you don’t set my schedule.” I might be working 60 hours a week now, but we agree that I’m going to keep the same schedule. We’re going to agree to the same call coverage. I’ve had agreements where we got down to the nitty-gritty of, “New patients will be a one-hour consultation.”

And if you start specifying that, what’s important to the practice? “Well, we think we’re different.” What was involved in a recent sale was, “We think we’re really different because we have an hour,” or it might have been 90 minutes, “new patient consultations.” And so that went into the contract. In your employment agreement it says, “New patient consults will be no less than this many minutes.”

So you can specify things that right now, when it’s all physicians making the calls, maybe you don’t think about. “Obviously we’re going to treat patients as well as we can. And obviously for a new patient we need this much time.” Sometimes it’s not so obvious to private equity. They say, “Well, if you can get three patients in that time, we make more money. So we think 20 or 30 minutes is fine for a new patient.” And so you just have to get that in the employment agreement or the purchase agreement. It’s usually the employment agreement.

Kevin Pho: So you mentioned that private equity is expanding the scope of practices that they’re looking to buy. Tell us what kind of trends you see in the foreseeable future when it comes to private equity involvement in health care.

Dennis Hursh: I think it’s just going to continue. There’s a lot of money in health care, so I think you’re going to see them getting deeper into some specialties like dermatology. Now, in my experience, I don’t see too many private practice dermatologists anymore. They’ve almost all been bought out. I think it’s going to expand into other sectors, and I think eventually they’re going to start taking over some of the hospitals too. The hospital chains and their physician practice groups sometimes are not as robust as you would think.

I think that’s going to be more of an integrated model where we’re going to do an integrated delivery system and we’re going to capture those primary care physicians because we want to make sure they’re putting patients in our beds. So I just think it’s going to keep expanding. I don’t see it cutting off in the near future.

Kevin Pho: So in that context, and with that in mind, what are some things physicians can do to maintain our independence? Assuming what you say is true that private equity is only going to expand, eventually buy hospitals. And I know in my local area there’s been a disastrous partnership between a private equity and a hospital system. Is there anything physicians can do to protect themselves in that environment?

Dennis Hursh: You can try. I think the biggest thing you do is what you do naturally: You do the best care for your patients. So the concern would be the dermatology practice won’t sell, so private equity is going to come in with a new dermatology practice. I think that is a threat that they can make, and to the extent they’re controlling primary care physicians, they may have some success with that.

But the bottom line is if yours is the go-to practice and everybody knows that you treat patients well and you’ve got good outcomes, I think you’ll do better. It’s going to depend a lot too on the referral situation. If they own the referral sources, just like a hospital is going to say, “Our primary care physicians will refer to our specialists,” and so that’s going to be an issue. You’ve got to be aware of it, but I think doing what you’re doing and what you do naturally is provide the best care you can for your patients. I think that’s ultimately going to be your best protection.

Kevin Pho: And when it comes to legal representation and counsel, is there any specific type of attorney a private practice should rely on to go through this negotiation path?

Dennis Hursh: A lot of times you’ll have two. You’ll have a health care attorney who really understands the reimbursement issues and such, and a mergers and acquisitions attorney who comes in and does more of the business aspects, like reviewing the bylaws. But I think if you had to choose, I’d go with a health care attorney over an M&A attorney.

Kevin Pho: We’re talking to Dennis Hursh. He’s a health care attorney. Today’s KevinMD article is “Private practice employment agreements: What happens if private equity swoops in?” Dennis, as always, let’s end with some take-home messages that you want to leave with the KevinMD audience.

Dennis Hursh: Yes, I think don’t dread private equity too much. Some of them are really not bad to work for. But the thing you do need to think about is if you’re joining a private practice, even if you’re joining a private equity practice, because they can be bought, you really have to protect yourself and make sure that you don’t accept below-median income with the idea that eventually you’re going to be a partner and make it back. There has to be some protection. If private equity swoops in and buys the practice, you have to be protected somehow.

Kevin Pho: Dennis, as always, thank you so much for sharing your perspective and insight, and thanks again for coming back on the show.

Dennis Hursh: Sure. It’s my pleasure.