United States: Health Annual Report 2023 | Physician Practice Management 2022 Year In Review

INTRODUCTION

The physician practice management (PPM) sector is expected to continue its rapid pace of growth in 2023, with new PPMs emerging to seize opportunities in cardiology, orthopedics, ophthalmology, urology, gastroenterology, primary care, women's health and other specialties. However, a tight labor market, wage inflation and fixed reimbursement pose challenges to all areas of healthcare, including the PPM sector. In addition, new proposed rules governing physician transactions and employment agreements have the potential to fundamentally alter the PPM industry. This report offers insights from significant PPM developments in 2022 and provides a strategic look ahead at the regulatory and transactional issues that will shape business outcomes throughout 2023.

2022 STATE OF TRANSACTIONS AND WHAT'S ON THE HORIZON

While many physician practice owners may have once considered their businesses recession-proof, the COVID-19 pandemic demonstrated that being part of a larger organization during times of adversity can be beneficial. This perspective drove tremendous activity involving PPM transactions in 2022. As of Q3 2022, there were 170 publicly announced transactions involving physician groups, representing an uptick of 16% from Q2 2022 and a 63% increase over Q3 2021. Private equity investors and their portfolio companies dominated the space, accounting for almost three quarters of physician practice deals in Q3 2022. Transaction values also continued to hit record numbers, although valuations increasingly have factored in rising costs and stagnant reimbursement rates.

While a tightened credit market may make buyers more selective, and notwithstanding those other economic and regulatory headwinds detailed elsewhere herein, 2023 will likely be another active year for PPM transactions.

PHYSICIAN ALIGNMENT: KEY TO STAYING COMPETITIVE

A key feature of a successful PPM is to ensure strong alignment between PPMs and their affiliated physicians that extends beyond compensation to safeguard the business and retain talent. Involving physicians in decision-making and leadership is part of any successful alignment strategy. Investment in technologies and ancillary services intended to improve clinical outcomes and access to care, or to make clinical practice more efficient, is also important to the long-term success of the PPM business model.

Equity tools can drive alignment by incentivizing physicians to engage in recruitment, training, management and identifying opportunities for future growth (either organic or through acquisition). Equity strategies range from rollover equity issued at the time

of the transaction, to equity purchase programs available to non-seller physicians who achieve partnership status within the organization. These equity tools are usually paired with a compensation program that uses one or more different elements, often including productivity-based payments or profitsharing pools. PPMs do not have to choose a single compensation design; these options can be combined, offering flexibility to different groups of physicians.

As compensation plan design become more complex, however, it is critical to involve legal counsel to design and implement these arrangements. Compliance with federal and state self-referral and antikickback laws (including the Stark Law) will often drive the plan's structure and will be a focus in diligence for any recapitalization.

SAFEGUARDING ENFORCEABILITY AND COMPLIANCE IN PROVIDER EMPLOYMENT AGREEMENTS

As physician practices structure their employment relationships with physicians and other providers, they should be mindful of related legal considerations, such as the requirement to properly classify exempt and non-exempt employees and the enforceability of restrictive covenants.

Physician practices use a variety of compensation models that include salary and productivity-based compensation, and PPMs often service practices in more than one state, creating potential multijurisdictional complications around obligations for overtime payment requirements. While all physicians who are licensed and in practice are considered exempt from minimum wage and overtime payment requirements under federal law, certain states have different standards that may result in physicians in those states being eligible for overtime compensation. For example, in California in 2023, physicians must meet an hourly compensation threshold of $97.99 or a salary threshold of $64,480 to be properly classified as exempt as practicing physicians (and these thresholds change annually). PPMs should work closely with employment counsel to consider the various state law requirements and ensure compliance.

Restrictive covenant enforceability is another area of the provider employment contract that warrants close review. While most states allow noncompete clauses provided they are reasonable, certain states impose restrictions on any noncompetes executed by physicians, nurses and dentists. For example, certain states allow noncompete clauses generally but place additional limitations or requirements on healthcarerelated restrictions, such as requiring a provision allowing physicians to buy out the noncompete or applying limitations on injunctive relief. Some other states currently prohibit noncompete clauses in physician contracts without exception, even where noncompetes in other industries are permitted

Further, as discussed in greater detail below, the Federal Trade Commission (FTC) has proposed eliminating noncompetes in employment and contractor agreements, and the FTC, DOJ and National Labor Relations Board have applied heightened scrutiny to restrictive covenants in the healthcare industry generally, and particularly with regard to physicians in niche specialty areas where demand exceeds supply. As such, all employers— including and particularly physician practices— should ensure they have closely reviewed their non solicit, confidentiality and trade secret covenants to ensure maximum protection, and they should consider and discuss other tools for physician alignment.

solicit, confidentiality and trade secret covenants to ensure maximum protection, and they should consider and discuss other tools for physician alignment.

As PPMs continue to operate in a highly regulated space, they should be mindful of the evolving federal and state developments. In early 2023, a number of regulatory developments are top of mind for PPM stakeholders, including:

• the government's shifting approach to oversight of transactions in the healthcare industry (including those involving PPMs)
• the federal government's proposed rule with respect to noncompete agreements and
• the implementation of the No Surprises Act, which aims to protect patients from unexpected expenses for out-of-network services.

Antitrust Scrutiny and Transactional Review

The healthcare industry is currently under heightened antitrust scrutiny at both the federal and state levels. In 2021, President Biden issued an executive order that identified healthcare as one of four sectors that would be part of an enforcement focus by the Federal Trade Commission (FTC) and the US Department of Justice (DOJ). Leaders at those agencies have publicly suggested healthcare private equity investment models may be anticompetitive, with a focus on short-term profits and debt. Firms with healthcare transactions that exceed the FTC's Hart-Scott-Rodino Act notification threshold should expect to receive questions from the FTC, even if the transaction would not have drawn scrutiny in the past. Regulators appear to be taking a new approach to evaluating transactions' potential to impede competition, by looking at market power generally rather than in a specific geographic area. DOJ and FTC have also increased their focus on how mergers might impact labor, particularly whether a transaction could suppress the wages of nurses and mid-level practitioners.

Many states (such as Connecticut, Oregon, Nevada and Washington) in recent years have proposed or enacted processes for review of certain transactions involving healthcare providers and practices. Other states, including California, New York and Illinois, have active proposals to create and implement similar processes. These laws reflect the same trend toward additional oversight of consolidations involving healthcare providers. As more states move to enact or strengthen existing laws of this nature, PPM transactions may see delays in closing and more potential regulatory reviews. Stakeholders should closely monitor these developments and, if state actions are taken on such proposals, ensure that existing and future investment strategies are structured to navigate the changed regulatory landscape.

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