A big issue for many early career physician career opportunities in most specialties is the influx of private equity ownership in private practice. Historically, private practices were owned by physicians. Over the last couple of decades, private equity has seen an opportunity to essentially buy out private practices and create employed situations instead of business ownership.
In our firm, we treat private equity-owned private practices very differently than independent physician-owned private practices, and typically prefer the latter instead of the former. Independent physician-owned private practices for specialties with a procedural component often offer higher total future compensation packages when the practice also has access to ancillary revenue streams and ambulatory surgery center ownership. Autonomy and control of how and what you do in private practice might be even more valuable in the long run than anything else.
Most payers are leaving physician service compensation stagnant or even decreasing, particularly Medicare. As such, for private practice owners to remain competitive, they often benefit from:
- Increase their volume;
- Increase the profitability of ancillary services;
- Own the real estate they’re in, so they’re paying down a mortgage instead of paying rent; and,
- Own a portion of the facility fee component of payer payments.
For example, Medicare reimbursement for physician services has gone down from $36 to $33 over the last 5 years, but the amount paid for use of the facility has gone up. For independent physician-owned private practices that don’t have these additional components, we see them as a potential target for private equity acquisition.
Considering this reality, we believe that private equity ownership in private practices is here to stay. As such, when you’re considering various options, it’s important to understand how to properly evaluate private equity-owned options.
If this is your question, this blog is for you!
Private Equity Understands Your Psychology
Private equity understands that early career physicians are very excited about base salary and signing bonus, but don’t quite understand the volume expectations and compensation per volume rates that are typical within their specialty, practice setting, and geographic region. MGMA compensation data can clarify these norms, and I encourage everyone to understand, generally speaking, what the data suggests for their practice setting, geographic region, and volume.
Initial term sheets or offer letters that you receive from private equity-owned practices will often highlight these very attractive aspects of your compensation. It is very common for us to see starting base salary offerings at or above the 50th percentile in the MGMA data sets.
Here’s an example of something we have seen regularly in practice:
- MGMA 50th percentile total compensation = $350,000
- MGMA 50th percentile volume = 7,000 work RVUs ($50 per work RVU)
- Private equity-owned private practice starting salary: $350,000
- Private equity-owned private practice volume expectations to meet that base salary before starting to receive a productivity bonus = 8,000 work RVUs ($43.75 per work RVU, less than medians!)
As you can see above, the data and the initial starting offer from private equity suggests that they are right on par with median data points, but they often increase your volume expectations. Private equity will often kick in an additional signing bonus and moving stipend, let’s say $50,000 for signing bonus and $10,000 for moving stipends, but this varies wildly and there is not a ‘standard’ signing bonus.
However, as we’ll see below, they know how to make money, and they are often keen on taking advantage of your lack of knowledge in the space.
Private Equity Understands That Volume Pays!
In the above example, it would be common for hospital employee positions to offer a $50 per work RVU bonus for any work RVUs created in a year over 7,000. However, it’s more common in private equity-owned private practice opportunities to require more volume and offer a decreasing marginal rate of return for more volume. It would be common in this type of example for the private equity-owned practice to offer a bonus of $30 per work RVU.
Everyone should consider their career goals, life plans, and ideal practice volume before starting your first position, and make sure you understand the employer’s long-term expectations for volume. This can be difficult because you are not trained on this in residency and fellowship, but we are keen to close that gap.
Private Equity Often Requires More Volume Than Others
You might be thinking, “Okay, cool. I’ll just limit my practice to 6,000 work RVUs, collect that base salary at a higher effective rate, and avoid a low marginal rate of return!” Not so fast. This can be very challenging to accomplish in a private practice that is not owned by physicians.
Anecdotally, we see private equity-owned practices applying more pressure than other practice settings on physicians to meet volume expectations. While 7,000 work RVUs might be the average in the specialty, it would not be uncommon for a private equity-owned practice in this hypothet to essentially force-feed you volume to meet 10,000 work RVUs.
While you might think, “Oh great, an additional 2,000 work RVUs in bonus means $60,000 in bonus compensation,” the similar hospital-employed position might pay a straight-line bonus of $50 per work RVU for $150,000 for that same volume in their bonus structure.
Unfortunately, most employers are not great at explaining their bonus structure and the advantages of differing bonus rates during the interview process, so this might be something that is overlooked during your analysis. As you can see, now you’re making less in the private equity-owned practice.
Importantly, our experience in the firm is that hospital-employed positions might offer a bit more flexibility on average for the type of practice and the type of volume you want to perform compared to the private equity-owned private practice counterparts. “Might” is the key word here, and this is not the case in every situation. We should investigate this for each position you are considering, but generally speaking, this is the trend that we see.
As such, if you learn during the first couple or few years of your practice that you don’t want to practice at high volume, the private equity-owned employer and you will experience some friction and misalignment of expectations. You might not really have the option of practicing in the way that you desire in the private equity-owned opportunity, and you might also be paid a low rate for all of that extra work that you don’t actually want to do!
Private Equity Understands Exit Strategy
On average, physician contracts are structured in a way to make it legally and financially problematic to leave. Between noncompete clauses that may require you to leave town, nonsolicit clauses that might severely restrict your ability to practice in that geographic region anyway, malpractice tail exposures, compensation clawback and waiver issues, and requirements for exclusive employment that lock you out of lucrative moonlighting opportunities, these contracts can be exceedingly restrictive. If you’ve been following along, you’ll see that the majority of my content is about these clauses.
On average, private equity understands that you might underestimate the impact of these punitive exit strategy clauses and often beef them up a little bit. Private equity is more likely to require exclusive employment, locking you out from potentially lucrative side gigs or PRN or locums opportunities as they arise. They want all of your work to only be for them, and they want your high volume to benefit them because they pay you a very low rate under that productivity-based bonus structure. In employment, being locked out of side opportunities can be very costly!
Also, they are more likely to have more punitive noncompetes, as they understand that the family impact of being required to leave town for a job can be exceedingly restrictive and can trap physicians in unattractive deals.
As such, while you might think you’re getting a great deal and thus don’t have to worry about exit strategy, as I outlined above, you might be trapped in a practice that doesn’t meet your career goals and life plans, and experience more restrictive exit strategy clauses that make it difficult to pivot and consider other positions.
Private Equity Understands Negative Accrual and Clawback Clauses
These negative accrual clauses mean that, depending on the situation, you might be required to give up or give back money that has already been paid to you. It may also mean that your attractive base salary is reduced in the future if you don’t meet your volume expectations.
For example, that $50,000 signing bonus plus $10,000 relocation stipend could be tied to a 5-year commitment. Often, the first draft of their employment agreements say that you must pay back all $60,000, sometimes plus interest at a high rate, if the contract ends for any reason during the first 2 to 5 years. This often means that even if the employer terminates your employment without cause, you could be stuck paying back even more than you received in signing bonus and relocation stipend.
Also, you probably used those funds for very useful reasons, like buying a house, paying down debt, or just otherwise increasing the quality of life and easing your transition with some financial buffer from training into attending life. As such, especially if you leave a job within the first couple of years, you might not have $60,000 plus accrued interest, and it could be difficult to pay that money back.
We also see private equity being more aggressive in negative accrual aspects related to base salary. Going back to our initial example, you are receiving $350,000 in return for a 8,000 work RVU annual expectation. It’s somewhat common in private equity-owned private practices for you to be required to pay back a portion of your “unearned” base salary if you underperform their volume expectations during the first few years.
For example, I’ve seen negative accrual clauses on base salary that say if the employment ends for any reason during the first 3 years, the physician owes back to the practice any underage between the base salary paid and the work RVU expectation. For example, let’s say you left after 2 years and did 12,000 work RVUs. Their base salary expected 16,000 work RVUs, so now you are 4,000 work RVUs under their expectations. Some of these contracts will require you to pay back that 4,000 work RVU underage multiplied by the effective rate for their base salary. That’s right, you might owe back a six-figure amount. This is in addition to the signing bonus and relocation stipend plus interest that you already owe.
We find this a bit less common in hospital-employed opportunities and more common in private equity owned private practice, but they could be present in any practice setting (yes, even academics). I believe this is because they don’t think you even understand or know to look for something like this in a contract. They know they can use it to leverage pressure to force you to do more volume during the first few years of your practice. They also understand the culture of physicians is that if you’re asked to do more, you do it, as this is somewhat bred into your DNA during training.
For Private Equity Deals, Don’t Get Catfished.
Before you proceed in a private equity-owned private practice, please make sure you understand these details and get thoughtful assistance. While the starting offer might blow your socks off, the details around that offer and what you’re required to do for that compensation can be quite problematic and impactful for you. Watch out for very punitive exit strategy limitations and high-volume expectations that might not pay you as well as you might think. If you’ve ever been catfished, you know how this feels and let’s avoid that with your first position after training!
This is obviously a general discussion, and your particular contracts could differ from this analysis.
