When Investors Come Knocking, Physicians Should Guard Their Independence
By Sean Price

Physicians and physician groups looking to court venture capital to finance their practices need to remember the value they bring to the deal and keep a sharp eye out for efforts to curtail their medical independence. 

That was the advice of two experts who kicked off the Texas Medical Association’s 2018 Fall Conference at the Dawn Duster presentation.

Jay Zdunek, DO, is chief medical officer of Austin Regional Clinic, a medical practice with more than 300 physicians in the Austin area. Kevin Wood is a lawyer with Clark Hill Strasburger who specializes in business deals for health care organizations. Both pointed out that it's easy for physicians and physician groups to be tempted by agreements that are lucrative in the short term but sacrifice a medical practice's long-term independence.

Many medical practices urgently need to acquire more capital, Dr. Zdunek said, because operating costs have risen sharply since 2001 while the level of Medicare payment — which sets the pace for payment from other payers — has not kept up with physician expenses.

"It is very hard to stay in business when you are consistently having to work harder and harder," he said. "You can only be a hamster on that treadmill so long before your legs give out. … [This problem of needing outside capital] is not unique to Texas. I have not met a physician group that has not been struggling with this for some period of time."

Mr. Wood said most successful business deals he's seen are ones where physicians held firm on what they wanted and maintained their own governance. 

"[The investors] are coming to you for a reason," he said. "Whatever size group, whatever size market, whatever size patient base you have, you're the one bringing value to the table. The key to remember in those negotiations is, that's why you're there. … If [the proposed deal] is not what you want, it's OK to walk away from the negotiations."

Texas has strict "corporate practice of medicine" laws, which, among other things, forbid a business from practicing medicine or employing a physician to provide medical services. (See "Austin Hospitalists Sue TeamHealth Over Corporate Practice of Medicine.") The laws are designed to preserve doctors' independent medical judgment. However, some legal agreements can give non-physicians effective control over medical practices, and that frequently happens when doctors don't guard their rights to make medical decisions, Mr. Wood warned. 

"When [capital groups] are throwing around their money, they expect to have the control," he said. "It's a rare instance where the physician group maintains total control or has a majority piece for that. I think the advice would be that for decisions that you've made, be sure that the physician group is still at the table [once the negotiations are over]."

There are many different ways to structure a business agreement, depending upon the investor — whether it’s a private investor, a hospital group, an insurance company, or some other entity, Mr. Wood said. But most physicians should focus on the how the agreement will affect their organizational structure, governance rights, and contract rights.

"Knowing who you are and where you want to go are the key pieces," he said. "Culture is everything…. What you do with your partner and what you do going forward is going to be key. You want to make sure the culture of who you're partnering with marries up with the culture of your practice."

Having clear goals is also important, Dr. Zdunek said. A practice made up of older physicians may be more interested in maximizing their financial return so the physicians can retire sooner. For them, maintaining self-governance might be less important than improving liquidity. But a practice of younger physicians might want to guard self-governance and instead give in on the amount of money it receives.

Physician practices that give up too much of their independence can quickly find investors dictating policy, Dr. Zdunek said. When Austin Regional Clinic recently sought to expand services, it needed a large influx of capital. But it was determined to preserve physician independence and control, so finding the right investor was difficult, Dr. Zdunek said.

"I got to tell you, there are a lot of people who want to talk to you, but there aren't a lot who want to give you the things that you want," he said. "It's a labor-intensive thing looking for that right partner."