Equity Is Everything

I want you to take your medicine hats off and spend some time with me talking about money. Physicians are notoriously bad when it comes to finances. Perhaps since we are drawn to science and view finance as a boring or non-rigorous topic? I’m sure there are some reasons why and I can’t generalize for everyone as there are physicians out there just as savvy as business folks (some of them in IR), but the stereotypes are what they are. Perhaps you don’t really care about money, but I’m about to paint a picture for you that will make you reconsider.

If you are a trainee or an early career IR and you believe in the mission of being a clinical IR, you should hopefully understand that there is a financial opportunity cost to practicing what many of us believe is the right way to practice IR, particularly in hospital settings. Whether or not you choose to practice in a hospital, having an OBL and doing procedures and clinic visits in the outpatient setting can dramatically impact your ability to generate revenue. The real question is are you generating revenue for yourself or are you generating revenue for someone else?

From a pure financial perspective, an OBL is a business. The purpose of a business is to generate a profit for its shareholders. Expenses subtracted from revenue leaves profit. This isn’t very high level financial analysis, but it is so critical to understand the concept of profit. You must know where you stand in this equation. Are you benefiting from the profit, or are you an expense? Or are you in some weird position where your presence is an expense but you also benefit from profit? 

I found myself in a really weird financial position when I entered the OBL with a senior partner. I was a 10% equity owner to my partners 90%.  It wasn’t clear to me until we began negotiating a compensation package that I was essentially an expense to the practice seeing as my professional fees are considered expenses for the business. While I did benefit somewhat from having an equity stake, my distributions from profit didn’t really move the needle for me when it came to total compensation. My overall revenue however certainly helped my partner take home a nice monthly distribution. 

The financial position I found myself in is really no different than it is for many young IRs who enter OBL practices as employees or minority shareholders. While I’m sure many out there would be fine with their circumstances, especially considering the alternative of a purely hospital based existence in an IR/DR group, you have to realize that when it comes to finances, equity is everything. 

Minority equity is cute, but doesn’t really mean much honestly. In fact, for employed OBL roles, minority equity may be overrated since many practices won’t let you buy-in for 2-3 years after starting. Well guess what happens during those 2-3 years? You work your magic and hose yourself by increasing the valuation of the practice. 

Majority equity comes at a cost. Majority equity means ownership. It means you have to think and act like a business-minded individual. If you want to have the control that comes with practice ownership, it means that you need to literally handle your business. We are conditioned to be empathetic healers, but in the world of business, no one cares about that. You have to assume that profits are the ultimate motive. The problem of course is that medicine, when practiced the right way, is not necessarily compatible with this mindset. 

Perhaps you don’t want to deal with the headaches of owning a business. You just want to put your head down and practice medicine. That’s fine. In fact there are plenty of businesses out there who would love to hire someone like you. Why? Because they understand that you can make them significant profits. Hell, when I open another OBL in the future let me know so I can exploit your talents. 

Here’s the problem: When it comes to developing a clinical IR program, no one really knows how to do this, except for you, the talented IR with the skills, training and dedication to make it happen. You are the product. When you give up equity, you do so because you find value in those who control the cards. Perhaps they have systems and processes in place which will save you time and energy. When it comes to the OBL, an equity partner will claim that they can do one of a three things for you:

1. Get you patients.
2. Run your practice and have you focus on “just the medicine.”
3. Mentor you so you can develop your clinical skills.

There’s no right or wrong when it comes to giving up equity. While I’m of the personal belief that we as physicians give up too much control out of fear or uncertainty or in my case just plain stupidity, I simply want you to be aware of the pitfalls with each of these expensive value-add propositions.

1. Get You Patients

As I discussed in previous posts, referrals can be brought in organically, or they can be bought. If you have a senior partner who owns the majority of your practice, he or she may vouch for you and introduce you to their contacts. You can then derive referrals from their network and build from there. Of course, they will be incentivized to help you because you are going to line their pockets when you do those high dollar endovascular cases that will result from their marketing efforts. 

I joined a senior partner with this mindset. It turns out however that the majority of my revenue did not derive from his network. In fact, the far majority of my revenue was derived from my own contacts that I had built from being in my market for two years working in the hospital. So there you go. Not a good reason to give up majority equity. Being a young IR with no business savvy, people will find ways to take advantage of you. Be careful. 

Perhaps your partner is a non-physician. Maybe they are a company that specializes in dialysis access interventions, or they are a managerial services organization (this topic deserves a series of posts) that has expertise in OBL management. They can claim that they can get you patients, but the fact of the matter is they have no idea what you can offer or what you can do. In fact, I bet you’ll spend more energy and time trying to explain to them what you can offer your patients than they’ll spend helping you. You’ll have to create your own protocols and marketing strategies to help them help you bring in business. 

If your non-medical partner is particularly savvy, they will use financial incentives to get you patients. Perhaps they’ll bribe podiatrists or if they’re hopefully more ethical they’ll abide by Safe Harbor provisions and partner with referring physicians appropriately to drive business to your practice. This may be an acceptable reason to give up equity, but to me it doesn’t substitute for the hard work you’ll spend working with these physicians and getting to know them over time. All these financial relationships do is drive patients to your practice sooner than you’d be able to do if you did it on your own with no financial incentives. There is a reason time matters which I’ve alluded to before and I’ll certainly discuss in more detail later in this post. 

At the end of the day, building a practice takes time and it is a critical component of being a comprehensive physician. You will not print money overnight. If you’re going to build a practice, then you might as well do it the right way and maintain some semblance of control over how you do it. 

2. Run your practice and have you focus on “just the medicine.”

This is a pipe dream. There are many managerial services organizations, and even medical device companies which offer “turnkey” OBL solutions. They claim that all you need to do is just show up and take care of patients like you were trained to do. Most of these companies will not only require a hefty monthly fee for their services, but they will go the extra mile and demand a sizable equity stake, usually no less than 25%. 

A good managerial services organization (MSO) is certainly worth its weight in gold not necessarily for their HR brilliance, but for their ability to negotiate insurance contracts and leverage their economies of scale to help you bring in medical devices at the lowest cost possible. Dealing with insurance companies is the biggest hassle ever. Not only that, it is the most important thing because unless you’re running an all-cash cosmetic practice, you need insurance payments to survive. It is worth paying for someone to help you with this. But to think that someone will take away all your headaches is bogus. You will have HR issues. You will have turnover as you find the right people to work with. You’ll learn a lot about yourself and how you interact with others at work through the experience of owning your own practice. It isn’t all roses, and this is especially the case when most MSOs don’t have experience working directly with IRs who tend to have a different personality (less assholish) than their vascular counterparts and do procedures which the MSOs may not necessarily have significant experience with (namely embolization work). You’ll find yourself in a position where you will spend significant time counseling your MSO on how you’d like your business set-up only to quickly realize that you could have simply paid them or someone like them to help you with this without giving up significant profits to them in perpetuity. 

3. Mentor you so you can develop clinical skills. 

A mentor should be a mentor without a financial incentive. Anyone who states that you are giving up equity for their mentorship is simply looking to use your hustle to their advantage. You are merely clinical labor (an expense) to derive additional profit. Yes, having an on-site mentor can be very beneficial. If you are fresh out of training, I’d say it’s almost necessary to have one which makes entering the entrepreneurial world of the OBL very challenging as a new graduate.

Let me tell you about my story with on-site mentorship in the OBL. My former business partner was originally a clinical mentor before we did business together. He was a fantastic clinical mentor. The man knows how to get a CLI case done. When I was in the hospital I used to hit him up for advice and quick chats regarding patient work-up and procedural approaches to complex CLI cases that I boldly took on as a total rookie with zero on-site support. I do have to admit that he was quite gracious with his time and through his remote mentorship I learned a lot and helped develop great relationships with a few referring physicians who continued to work with me when I got to the OBL. During my first three months in the OBL, my partner agreed to pay me a small stipend of $3000 each month as I built up my practice and he would teach me what he could to get me up to speed to handle complex CLI work on my own. He would punt some of his referrals to my clinic to get me going. During my cases he would scrub with me and teach me some advanced techniques including pedal access, antegrade pedal sticks, direct peroneal access and deep venous arterialization. It was actually a pretty awesome three months, despite the fact that I was getting paid less than our lowest paid employee. The spirit of the agreement was that his clinical mentorship in combination with our dual marketing efforts to new practices neither he nor I had pre-existing relationships with would help build my CLI volume and allow me to stay clinically productive and would afford him some time freedom after the three month period where I transitioned to an eat-what you kill arrangement with profit distributions. He also agreed to give me all vein referrals since it was in direct violation of his non-compete with the hospital and he has no passion for venous disease. 

Here’s what happened. I learned some great CLI skills, but I was actually successful building my own practice and it turned out that I would have been far better off financially eating what I killed during those first three months. His mentorship, while invaluable at the time, proved to be an unnecessary safety net because as soon as the three month period expired he all of a sudden decided that he wanted to control CLI referrals and his venous referrals and have me focus on growing my prostate practice. Money speaks volumes and it is clear that I was successful enough generating revenue independent of what he could do as a cardiologist that he didn’t feel the need to have me do vein cases or split CLI referrals with him. I afterall had a rapidly growing embolization practice of which he benefited from 90% of the profits. As an asset to his business, it made more financial sense for me to do work that he couldn’t. 

So what do I gain from this experience? In hindsight, I would have been fine learning these CLI skills on my own over time as I built a practice organically that I had control over. Nothing is easy and shortcuts always come at a cost. I don’t care who you’re working with. If they’re bringing you on, they’ll have a financial motive. Understand that and realize that this isn’t some academic environment where you assume people are interested in your professional growth. This leads me to my final point in this post. 

Equity matters because it’s how you really make money whether that’s your motive or not.

In America, you become wealthy through diligent savings and investing. As a doctor, max out your retirement accounts, save 10-20% of your income in broadly diversified index funds and you’ll be financially independent in 10-20 years.  You become ultra-wealthy through owning income producing assets. The OBL can be a fantastic income producing asset. I should probably dedicate a post to this matter in the future, but long story short is for a majority OBL owner, the OBL should become a 7 figure enterprise making those IR/DR hospital salaries look pathetic. Of course there is risk involved, but I’d contend the risk is really no different than building a comprehensive IR practice in any given setting.

Non-medical business folk want in, not just to have a share of the profits, but to package this asset along with other OBLs and sell this network to a large buyer such as a private equity firm who will gladly pay a ridiculous multiple (perhaps 10-15x) of the valuation of the OBL. The problem is, once you cease control over your clinical environment, you may not be able to practice like you would. You’ll probably have some APP doing all your clinic visits as you crush cases. A very highly paid endovascular monkey. Certainly an upgrade from a line monkey, but the concept remains the same. You end up with golden handcuffs and find yourself not practicing in a true clinically oriented fashion. Sounds familiar, right?

So to my readers out there, you don’t need to be a financial wizard, but you need to understand some basic concepts when it comes to OBL finances. Failure to acknowledge these principals may put you in a position you’d rather not be in. Much more to come on this topic including OBL valuation, profit margins, billing, having an exit strategy and why doctors need to do a better job of supporting other doctors. I’m trying my best and want to do what I can to support you. For better or worse, I’m an open book so you might as well take advantage. Feel free to email me linemonkeymd@gmail.com or reach out on Twitter @linemonkeymd. Have a topic you’d like to hear more about? Drop a comment below. 

Until next time.