Growth, practice value and mergers: a strategic guide for physicians

Physicians in independent practice often feel a sense of freedom to guide patient care and a sense of pride in operating a business.

But success now does not translate to success always. Physicians need to consider the best ways to maintain their independence. If the time has come to join forces with other physicians, investors, a hospital or health system, they also need an idea about what a medical practice may be worth.

Andy Colbert is senior managing director of Ziegler, a privately held investment bank that started in 1902 and that has focused on health care for decades. Colbert is the son of a primary care physician who practiced independently, and his brother specializes in internal medicine. They have helped him come to understand the challenges that physicians face when trying to grow their practices — and sometimes struggle on the business side.

“It really made me want to get into health care from a business perspective and really help physicians grow and build and ultimately realize shareholder value for what they've built,” Colbert said. Now he has a role working with colleagues and physicians to examine different strategic alternatives to maximize patient care by building on a foundation of sound practice finances. Options may include joint ventures, mergers, acquisitions, professional services agreements, partnerships, private equity deals, capital raising, and, ultimately, potential sale transactions.

Colbert spoke with Medical Economics about current trends around the ownership mindset needed to spur real growth in a medical practice and valuation.

This transcript has been edited for length and clarity.

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

Andy Colbert: We've gone through some waves. I think this is a sector where there are kind of peaks and valleys. The 1990s were a period of a lot of consolidation and aggregation of physician groups. Then, in the early 2000s, when I was getting into Ziegler, a lot of those physicians were back independent again and were out on their own trying to build private practices.

Over the last 10 years, you've seen another wave of active consolidation — private equity, health insurance companies, and even a lot of health systems getting involved and building aggregation and scale across the physician landscape. Now I think we're at another potential leveling-off point where it feels like the groups that really wanted to pursue something or were excited about partnering have largely explored or considered it. There’s now a cohort of groups that have decided they have what they need to forge their own path and stay independent.

The way I typically think about it is, there’s a minimum size threshold you need to remain independent and successful in today’s environment. It’s probably somewhere around 40 or 50 providers, to be totally candid. That’s the minimum to have a full suite of back-office and administrative capabilities, to afford a CFO, a CEO, have the leverage to negotiate with managed care, and maintain robust data systems and technology. Groups that have gotten to that scale and have that expertise have built moats around themselves and become pretty stable. Groups smaller than that need to evaluate where they want to be in three to five years and whether they should partner, merge, joint venture, or consolidate. That’s where we spend a lot of time, working with mid-sized groups or even larger groups that have consolidated and are now asking, what’s next? And where do they want to go from here?

It’s unfortunate, but a lot of these groups operate with the mindset of maximizing cash flow every year and thinking about the business as a means to a salary, as opposed to building equity value like you would a traditional investment in a corporation. Many physician groups make physicians partners with relatively low buy-ins, but they struggle with creating a real ownership mindset around what it means to be an owner and what the difference is between an employee and an owner. That’s probably the biggest differentiator I see today. It’s no longer enough to just do your clinical work and go home. If you want to be an owner and drive future value, you have to think like a businessperson. That’s a major challenge.

Medical Economics: When a physician group first approaches you about a potential sale or partnership, what do most of them misunderstand about what their practice is actually worth?

Andy Colbert: At the end of the day, you have to step back and ask, “What’s a business worth?” Fundamentally, a business is worth the cash flow it generates. The challenge with valuing a medical practice or any professional services organization is that the income-generating assets are going in and out the door every day.

Most medical groups can’t generate income passively. Physicians can’t just stay home and “clip a coupon” while the business runs itself. That is often the biggest misunderstanding, that someone builds a practice for 30 or 40 years and they think that there’s value there independent of their ongoing work. Yes, it has value, but only if production continues. Someone has to step in and do the work. So true profit is the difference between what a physician earns and what it would cost to replace them at fair market value. Generally, the industry standard is about 30%, often called the “scrape.” If a physician earns $1 million, the scrape would be $300,000 is considered transferable profit. An investor may pay a multiple on that $300,000, while the physician retains $700,000. The challenge is that physicians must understand the tradeoff: They receive a lump sum upfront in exchange for giving up a portion of their income and must continue producing at a lower level. Where the deals typically perform well and the physicians are happy are situations where, post-transaction, the investor or the acquirer is able to make the practice more efficient, lower overhead, maybe increase revenue and make the physician earn more so that their 70% is maybe now equal to 80% 90%, or, best case, back to 100%. Those, those are win-win scenarios. The downside is when income stays at 70%, and physicians begin to question the deal. They may feel underpaid compared to market alternatives, forgetting they sold a portion of their income. Sometimes expectations were overly optimistic at the outset. These deals are easier to evaluate if a physician has five to 10 years left in practice. If you’re five years into practice they have 30 years left, then you’ve really got to look at the math a little more, and think about it.

Medical Economics: 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?

Andy Colbert: Some of the same questions apply, but alignment with a health system often includes additional benefits beyond capital. For example, we advised a large multispecialty group in northern New Jersey that ultimately chose a joint venture with a local health system.

The system offered better reimbursement rates, creating an immediate revenue bump. They also brought incremental referrals, ancillary services, and volume. There’s also a defensive component—if they didn’t align, the health system might partner with a competitor.

The tradeoff is that health system partnerships are often more permanent, while private equity deals may offer multiple future transactions — what we call “multiple bites of the apple.”

Medical Economics: What do you predict for 2026 and beyond regarding private equity investment?

Andy Colbert: 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 much of it is funded with a viewpoint in mind. From my perspective, and this, I think, goes back to 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, 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 insurance claims and getting them processed and paid is harder than ever. And there's more red tape, more loopholes, more barriers, and so, it's a little naive for us to sit here and say, OK, private equity is bad, because then I really would push and say, well, what is the alternative? Because if these smaller independent groups don't have an option, there's really only two available paths. It's either they all go to hospital employment, or they become part of a big health plan. Over the years, we've seen other entrants try to move in, like the pharmacies, Walgreens or CVS, or even Amazon. What we've learned is those are harder than they look. Walgreens and CVS are both pulling out of health care delivery and physician services and realize that they're harder businesses than they anticipated. Amazon bought OneMedical, but hasn't really said, hey, we're going to double- or triple-down on this. I see private equity as an independent third option 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. In my mind it's a very healthy third option, and I worry that if you eliminate it, then I actually think as a consumer, we're actually worse off, because now we're in a situation where a lot of these groups are going to fold, and they're all going to be forced to pick one path or the other, and then all you're doing is creating way more leverage in the hands of the hospitals and the insurance companies.

Medical Economics: How do you see artificial intelligence (AI) affecting these dynamics?

Andy Colbert: It's absolutely going to be an attribute that I think could be game changing in the medical space. It's creating a more informed consumer where patients are able to do more research and information up front. It really — hopefully — lowers the risk around any sort of mistakes or issues or errors because you're kind of creating another layer of over-reads. I don't think it ultimately changes the trajectory of a physician's economic or ultimate value add. I think what it does is it enables them to focus more strategically with their time and maybe kind of automate some of the more manual, administrative, remedial tasks and perhaps practice more at the top of their license as we like to say to like. If you're a radiologist it enables you to be more efficient with your time and focus more on the cases that are really complicated, and breeze through the cases that are very basic and black and white. Ultimately, my hope is it'll help us alleviate some of these real shortages and staffing challenges and staffing shortages that we're seeing across the board, because there are just less applicants going to med school. There's less individuals coming out of fellowships and residency. Because of the challenges in the field and the headaches and the red tape, I think a lot of physicians are not always encouraging their children to go into the field. In many cases, they're kind of encouraging them to go elsewhere. And so my hope is it turns the pendulum back and creates more demand, enables physicians to be more productive, more entrepreneurial.

But the flip side is it, it does set a bar higher for groups to figure out how to incorporate AI, how to invest in it, where they should be investing and spending, and it's hard to do as a sole independent group. That's where, as a larger, 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.

Medical Economics: What should physicians consider regarding staff and overhead when pursuing mergers or partnerships?

Andy Colbert:Largely 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 with more opportunities and more upside. You might have a practice manager at a 30-staff practice who has been there for 20 years and starts to get a little bored with what he or she does. And they're kind of tapped out from an income perspective relative to the size of the group. If you can put them together with another group and another group and another group, and now it's a 100-individual practice, and that manager can rise up the ranks. 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 that should be exciting for the staff and the business side. You want to tread lightly. 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. When folks think that there's change or uncertainty, they may assume their jobs are going to be cut or redundant. It's important 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.

Medical Economics: What haven’t I asked that you’d like our audience to know?

Andy Colbert: One of the things I've seen a lot of discussion around lately is the concept of forming an MSO (management services organization), which is not necessarily a topic that physicians learn about in medical school. But it effectively is kind of creating two sister companies where you have the clinical practice that continues to be physician owned, that governs all the clinical decisions and where all your payer contracts are and your clinicians reside, and then you effectively create a sister administrative entity. That is the entity where all of the staff would reside, your leases, your real estate, your equipment, 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 extreme 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'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. Because one of the biggest complaints I often hear is the leadership team doesn't have any real incentive to really grow the business, if everyone's just going to split all the profits equally, per se. 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 in the individuals that are driving that growth. I love talking to groups about that because I think that is a great opportunity. The other thing that is great to talk about is, once you set that MSO up, you now could provide services to other medical groups as well. So it creates kind of an additional income stream, opportunity, revenue opportunity. 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.