Should you sell your practice to a VC-Backed MSO Startup?

A look at the latest MSO roll up strategy being marketed by venture capitalists

A new player has moved into healthcare and they’re looking to acquire your independent practice, using an equity strategy that was first developed in the 1970's that is still used today by several large group practices located over all the United States. 

Now physicians are no strangers to roll ups, since it used to be the most common route to practice ownership. Find a physician who is looking to retire and sell their practice, apply for a loan, and buy it. This process occurred for several generations until hospitals started to notice the benefits of practice consolidation with managed care, igniting the M&A (mergers and acquisitions) wave in the early 2000’s. For over a decade, hospitals rolled up primary care and specialty practices one by one. That was until private equity moved in around 2010 or so, initially rolling up non-medical practices like optometry, but quickly expanded into orthopedics, radiology, and dermatology. 

I won't go too deep into the private equity (PE) model, since nearly every physician knows how horrible corporate-owned care is for patients, physicians, and communities. Nevertheless, private equity's roll-up strategy differs substantially from non PE backed hospitals, which is why it's important to discuss it. Since the goal is to increase profits by any means necessary in order to resell quickly, unlike hospitals that are simply trying to expand their regional footprint or market share, yet still profit driven (even the non-profits).

New player, but same playbook.

The largest generational transfer of wealth in history is currently underway, and according the U.S. Census Bureau, it’s estimated that 2.3 million cash-flowing small businesses (SMBs) will be up for sale and 60% of them or more have no transition plan in place. So that means the race is on to roll them up, and VC-backed startups are using the PE playbook to purchase these SMBs all across the United States. We’re seeing this happen with pool companies, construction, house cleaning services, and now independent practices. 

One difference however is that many other SMBs do not adhere to the Corporate Practice of Medicine (CPoM) Doctrine, which was initially developed to prevent corporations from holding primary ownership stakes in healthcare companies, preventing non-clinical shareholders from putting profits over patient care. Which is exactly what we have seen with private equity businesses, like Steward Healthcare's St. Elizabeth's Medical Center. See video below.

To bypass this doctrine, startups are forming management services organizations (MSOs) in order to create separate entities that let non-clinicians, such as venture capitalists and startup founders, own and run businesses that provide patient care. It’s through this MSO structure is how new VC-backed startups are able to implement their roll up strategies, and right now there are several vulnerable independent practices of all medical and clinical specialties that were impacted by the Change Healthcare hack who have not received reimbursement payments for nearly 4-6 months and are most at risk of being rolled up by PE and these new startup entrants.

Not all MSOs are bad. MSOs owned and operated by physicians and clinicians are simply built different.

Personally, I do not view MSOs as always being bad. As the real purpose or value is to share and spread the costs of operations among multiple SMB businesses, creating greater bargaining power with vendors, suppliers, and insurance payors. We generally see this in medicine with independent physician organizations (IPOs) and associations (IPAs), but now as the virtual care hybrid practice model becomes more common with licensed physicians and clinicians, adding an MSO actually makes a lot more sense.

At Ease for example, we’ve helped build MSO extensions for primary care physicians, radiologists, allergists, and even speech therapists.

DOJ, FTC, and several states are pushing back against the MSO CPoM workarounds being used by non physicians and clinicians.

The CPoM abuse has been pushed too far for too long and now state and federal governments like the Federal Trade Commission (FTC), which is hot off from implementing a federally recognized non-compete ban, are finally paying attention and putting these CPoM practices under review. ⤵️

Earlier this year Oregon passed House Bill 4130 through the House of Representatives and the DOJ (Department of Justice) Anti-trust divsion and FTC is currently requesting comments from physicians and patients impacted by corporate care MSOs like those operated by PE and VC-backed startups. Here’s a website hosted by the DOJ requesting for comments and complaints from anyone who believes that’ve been a victim of unhealthy competition in healthcare that has impacted their right to access to care.

It’s important to note however, that not everyone is onboard with banning CPoM and some of the organizations that are opposing these bans may actually surprise you while others not so much. The prospect wrote a really great overview article on HB4130, you can check it out here.

VC-backed startups are repackaging and rebranding ESOPs as the new way off ownership.

As I mentioned in the beginning of this post VC-backed MSO startups are rolling up independent practices by marketing employee stock ownership plans (ESOPs) as their differentiator. Their claim is that ESOPs allow for continued ownership even after the practice has been purchased by the startup. Thus providing a bit of early liquidity in addition to a retirement plan to help support physicians even after they stop practicing.

If you’re unfamiliar with what ESOPs are, here’s the definition taken directly from the SEC.

an employee stock ownership plan (ESOP) is a retirement plan in which the company contributes its stock (or money to buy its stock) to the plan for the benefit of the company’s employees. The plan maintains an account for each employee participating in the plan. Shares of stock vest over time before an employee is entitled to them. With an ESOP, you never buy or hold the stock directly while still employed with the company. If an employee is terminated, retires, becomes disabled or dies, the plan will distribute the shares of stock in the employee’s account.

The main problem with this ESOP model is that it’s not at all new and it’s also not technically ownership. We have over 40 years of data on how this ESOP model works and more specifically how it has been used in medicine to manage “partnerships” of large group independent practices. But if you really want to learn more about how this model actually works or how it “benefits employees,” simply do a search in reddit. Trust me when I say you will certainly not walk away with any confidence in this model. 👀

In order to make an educated decision, I believe that all sides need to be heard, so if you want to hear the PE investor’s perspective on this model, you should watch this recent episode of 60 minutes, in which he discusses how he uses ESOPs to help “employees become owners.” But not to be confused with owners getting rolled up and becoming employees, who turn into owners again. 🙄

For me, the only PE that makes sense is the one in grade school.   

This old way can actually be the way forward, but without any of the middleman.

Liquidity is the real problem here and the reason why these roll ups are happening is because only PE and startups are able to access capital while independent practices struggle living pay check to pay check.

Being rolled up by a startup that knows nothing about running independent practices makes zero sense to me. Especially if you’re betting on these founders with zero clinical knowledge or experience to be able to continue to run your practice exactly like you did thus guaranteeing your that you actually have something for retirement. I’m sorry but…

Instead, here's what should happen. Create an IPA/Os structure that functions more like an MSO to create a fund or access capital (e.g., via local credit unions using combined P&Ls) to keep practices from selling. This would allow all IPA/O members to own a percentage of all practices combined, thereby providing WAY MORE VALUE for the IPA/O membership while still being able to draw liquidity from their practices equity.

We're already seeing an expansion of responsibilities with IPA/O's, for example the Centers for Medicare and Medicaid Services (CMS) recently announced the Accountable Care Organization (ACO) Flex program which will be providing over $250,000 of startup capital to help IPA/O's restructure their entity status so they could add an administration layer to their operations in order to become an ACO.

The environment is already there, the entity structure is already there, and the collective is already there. There is no reason why any independent practice should feel as if selling their practice to a PE or VC-backed startup middleman is the only option. None!

So if you’re an IPA/O and you’re interested in trying this model out, I’d love to help. As Ease is a physician-owned startup with a mission to help millions of physicians and clinician regain AND maintain their practice independence.