Check out our original blog on the common pitfalls of private equity opportunities: ‘Don’t Get Catfished by Private Equity’ by Michael Johnson Legal LLC. We also recently did a blog post on How to Protect Your Ownership Track: Physician Contracts and Private Equity Buyouts.
Private equity groups are constantly coming up with new traps for physicians to put in their contracts. We hold a weekly roundtable at the firm where we discuss what we are seeing. A common topic is the newest trick that one of us encountered in an employment contract from a private equity group. Often, this comes from extra-punitive exit strategy clauses or compensation models that may look good initially but lose their luster once analyzed. We wanted to cover some of the recent tricks and pitfalls that we have run into when evaluating private equity opportunities.
More Complexity In The Compensation Model = More Opportunities For Private Equity To Reduce Your Compensation
As a general rule of thumb (and this goes for all employment models, not just private equity), as the complexity of the compensation model increases, physician compensation decreases.
We’ve recently seen a number of private equity models that are designed to look like a wRVU based compensation model, which is most common to see in hospital-employed positions. Under a wRVU-based compensation model, all of the clinical work that a physician does has a CPT code assigned to it. Each CPT code has a wRVU rate assigned to it, which is done by CMS each year in its Fee Schedule. Essential, wRVU-based productivity compensation models work by multiplying the number of wRVUs a physician generates in a year by a wRVU conversion rate. So, if a physician generated 5,000 wRVUs in a year and has a conversion rate of $50 per wRVU, the physician’s total compensation for the year would be $250,000.
As an aside, it is always important to understand what CMS Fee Schedule your employer uses. Some employers have not updates to the more recent Fee Schedules, and this can substantially change the number of wRVUs you are credited.
We’ve run into several private equity models that have a similar structure. However, they replace wRVUs with a different term. Let’s call them Private Equity RVUs, or peRVUs. The peRVU model looks very similar to a typical wRVU-based compensation model. The physician does their work, enters their CPT codes, and is credited a number of peRVUs for each CPT code. The total number of peRVUs they generate is then multiplied by a conversion rate. The trick is that when we have looked closely at CPT codes, the peRVUs are often worth substantially less than the equivalent wRVUs for those CPT codes.
For example, let’s say a Psychiatrist at a private equity-owned practice billed two CPT codes, a 99214 and a 90833, during a single visit. Under the peRVU model, the Psychiatrist receives 1.62 peRVUs for the 99214 and 1.34 peRVUs for the 90833, for a total of 2.6 peRVUs. However, when we examine the CMS Fee Schedule for those CPT codes, we see that 99214 is worth 1.92 wRVUs and 90833 is worth 1.64 wRVUs, totaling 3.56 wRVUs. If you billed this combination 8 times in the course of a week, then you would have generated 20.8 peRVUs under the private equity model. Under the wRVU-based compensation model, you would have generated 28.48 wRVUs, or 7.68 wRVUs more than the private equity model!! You can see how this would add up over time.
Equity Shares in Private Equity?
Private equity groups often try to emulate pre-ownership private practice opportunities by offering an opportunity to purchase “equity” in the private equity company a few years down the line. It is supposed to look similar to how a physician can purchase equity in an independent, physician-owned practice.
The “equity” that is offered to physicians is often called Profits Interest Units, or PEUs. Essentially, a PEU gives you an interest in the profits from a potential future sale of the private equity company. While this may sound like an ownership opportunity, it is not. When you buy PEUs, you typically do not receive any control over the operation of the company. You are still in a perpetually employed position. In a true ownership opportunity, you have a seat at the table and the ability to vote on the decisions of the partnership.
Additionally, you do not share in the profits of the private equity group each year, like a true partner in a physician-owned partnership would. Rather, you only receive income from the PEUs if there is a sale of the private equity. On top of this, there must be an actual profit from the sale for the physician to receive anything from this. If the purchase price just covers the debts of the company, then there is no profit to distribute. Also, often can’t hold onto the PEUs after your employment ends. It is exceedingly common to lose those PEUs if your employment ends for any reason, even if you are terminated due to no fault of your own!
To be clear, some people have certainly made some great money from PEUs. If you have PEUs in a private equity group, and if there is a sale of the private equity group while you hold the PEUs, and if there is a significant profit from the sale, then you could receive a nice payday! But that is a lot of “ifs”. Don’t hedge your bets on PEUs; treat them as “let’s buy a boat” money rather than retirement money.
For a great dive into the potential pitfalls of PEUs in radiology, check out this blog post by Ben White: Radiology Partners and a “Comprehensive Set of Financing Transactions” | Ben White. And if you are interested in physician-owned private practice radiologist opportunities, he has an awesome job board for these opportunities: Radiology Jobs | Ben White.
When was the Original Private Practice Bought?
When private equity buys a private practice, the former owners of the practice are typically entitled to receive a substantial amount of money in exchange for selling the practice. It is often much more than what a practice could get from a traditional sale, such as to a hospital or another independent practice. However, there are some big strings attached to the purchase price.
The private equity group often holds back a large chunk of the purchase price. To receive the amount that is held back, the former owners need to work for the private equity group for a set time period after the sale, often for 5-6 years. This makes sense when you think about it; private equity doesn’t want to pay a huge sum of cash to purchase a practice only to have everyone leave and the practice fold.
However, this usually just delays the inevitable. We often see massive turnover at the 5 or 6-year post-sale mark. Remember, private equity did not gratuitously pay the former employers that huge purchase price. The private equity company plans to make that money back and more during this 5 or 6-year period. This often leads to some huge burnout among the former owners of the practice. Once they finally hit the 5 or 6 year mark, all of them are ready to take the final part of the purchase price and leave.
If you are considering a private equity group and it was purchased just a few years ago, definitely do some due diligence here. You don’t want to join a practice of 8 physicians and then have six retire within your first year and leave their work for you.
The Nationwide Nonsolicit Clause.
Nonsolicit clauses make it legally problematic for a physician to continue with relationships that the physician developed during their employment. They most commonly restrict physicians from contacting former patients and asking them to transfer to the physician’s new employer, from contacting coworkers to leave and join them at the new employer, and from contacting previous referral sources to send patients to this new location. They also sometimes prohibit the physician from seeking to do business with anyone that the practice works with, such as hospital systems.
Some form of a nonsolicit clause is very common to see in physician contracts. They typically have the same timeframe as the noncompete clause, usually 1 or 2 years after the termination of your employment.
Many times, these clauses will be limited to the relationships that the physician personally developed. So, the patients that the physician treated, the employees that the physician worked with, and the referral sources that the physician developed. However, some are drafted to protect the relationships of the employer, rather than just the ones that the physician developed. So, they would prohibit the physician from contacting any patient, employee, or referral source of the employer.
For a regional healthcare system, this already has the potential to be quite problematic. It gets even worse when we think about it applying to a huge private equity company with a nationwide presence. Under those circumstances, these clauses have the potential to restrict patients, employees, and referral sources that are located all over the nation. Think of the biggest private equity group you know of in healthcare, and think about how many locations that group could have. Think carefully before signing something like this, and consider pushing to see if it could be limited to patients, employees, and referral sources that you personally interacted with.
Who has the Right to Intellectual Property?
Intellectual property clauses set out who will have the rights to any ideas or inventions that a physician may create and who has the right to commercialize and to receive any compensation from commercializing an idea or invention.
Academic and private equity opportunities often have some of the broadest intellectual property clauses that we see in physician employment contracts. For academics, this makes sense on some level. If a physician is employed by a major research institution that has a ton of cool stuff going on, they do not want the physician to learn about it during their employment and then take those ideas for themselves. So, they typically have very broad intellectual property clauses that give them the right to any intellectual property that the physician develops in the course of their work.
It is far less common to see private equity groups involved in research (though there are some notable exceptions!). However, private equity groups will often have as broad of an intellectual property clause as academic employers in their contract, if not worse. If we take a moment and think about it from the private equity group’s perspective, this does again make sense. We have to think about the employer’s motivations. For private equity, their motivation is ultimately to make money for the owners of the private equity company. They never know if you’re going to come up with the next multi-million dollar idea. So, they want a broad intellectual property clause in their contract that will allow them to take that idea and make money from it.
If you are interested in any research or development, it is exceedingly important to make sure that you understand what intellectual property clauses could be set out in your employment contract. Michael Johnson Legal is here to walk you through the details and make sure your interests are protected.
