Part 1 of Short Term Capital Dr. eric Bricker 

[00:00:00] Dr. Bravo: Morning, George. It's Tuesday morning. We're ready to record another podcast. 

[00:00:06] Dr. Rogu: Yes. It's Tuesday morning. Today we're gonna have for the second time the famous Dr. Eric Bricker join us on the podcast and we're gonna be talking about private equity and healthcare and young physicians and should it be allowed in healthcare to begin with.

And you know, the pros and the cons from a physician's point of view, welcome back, Eric. 

[00:00:27] Dr. Erick Bricker: Hey, thanks so much for having me. I appreciate you guys do a great job with your podcast. I really enjoyed our last conversation. 

[00:00:34] Dr. Rogu: That was a lot of fun. Thank you. 

[00:00:37] Dr. Bravo: In the tech world, VC Rules and they buy companies without margins like Amazon and no margins for a long time, Uber Meta, which is Facebook, and then they hope to turn a profit. What are they hoping to do with this strategy? Eric, 

[00:00:55] Dr. Erick Bricker: Yeah. So with the private equity acquisition of physician practices, , the private equity thesis is that they they already acquire or they acquire businesses that are already profitable. So typically, whether it's a, a physician practice or some other investment that they're making. 

One of the differences between something that has venture backed versus private equity backed is the profitability of the company. And part of the reason for that is that private equity is just a fa a fancy term, a more modern term for what in the 1980s was referred to as, as LBOs leverage buyout companies and LBOs use leverage i e debt.

And the only way you can put a debt, you can put a whole bunch of debt on a company is if they're profitable, because the bank is gonna need to have some sort of, you know, rationale. So venture backed companies can't really raise debt. Because they don't have any profitability, but private equity firms will sort of juice their returns by putting a whole bunch of debt on the company.

That's typically, sort of what they're doing. The original thesis for private equity acquisition of physician practices was to have to work with physician groups that were specifically, and this is before the no surprises act that were specifically out of network so that they could charge a very high out of network rates.

And so this was the ER physicians, the radiologists, the anesthesiologists, and the pathologists, those were sort of the main target of private equity firms. Because they would either take them out of network or they would threaten the insurance carrier and be like, look, if you don't give us much higher reimbursement, we're just gonna go out of network.

and before the no surprises act, then they could just, you know, they could receive, you know, hundreds or even thousands of dollars for an E&M code where, you know, your typical pediatrician might be getting 80 bucks for an e E&M code. And this is where you were getting er physicians that were getting thousands of dollars for an e E&M code.

And then the, the private equity firm would pay the physicians on salary and then they would so they would increase the top line by increasing the reimbursement per C P T code, and then they would put the physicians on salary. So they sort of had a fixed cost for their labor. And then the private equity firm would keep the difference.

But I, before I get too long-winded, I'll just stop there, . 

[00:03:00] Dr. Rogu: So, venture capital different, right? Venture capital is like a day trader or a gambler. 

[00:03:07] Dr. Erick Bricker: Well, venture tends to be for much earlier stage companies that are not profitable yet. Now the, the goal is for them to eventually be profitable 

[00:03:16] Dr. Bravo: Their view is the exit strategy, right. When they, when you either sell it to someone else or you go to market in an I P O and then that's where the payout is. 

[00:03:27] Dr. Erick Bricker: That's right. And that and that holds true for for private equity as well.

Typically, the private equity firm is either gonna flip you to another private equity firm or they're gonna sell you. To what's referred to as a strategic buyer. In other words, like another like really big company like GE would buy the firm or or they would take it public. In both venture capital and private equity, they refer to that as quote unquote harvesting because you can think of them as like, you know, growing a garden and then they're like harvesting the tomatoes and so they sort of harvest the companies in a similar way.

They're just growing very different vegetables. So venture capital company is growing sort of very tenuous vegetables, whereas the private equity firm is, is growing sort of much more hardy plants that have already been more well established. 

And, and so the, 

[00:04:10] Dr. Bravo: The venture capitalist have a different mindset to them, failure is part of the game. So if they buy 10 companies and nine failed, but they make billions on the one that goes to market, they've got a 10 or 20 x return on capital and they're okay with that. Right? 

[00:04:29] Dr. Erick Bricker: That's right. Which is why a lot of venture capital companies are, are really big into incredibly high growth businesses, which tend to be things like software and.

You know, buying physician practices is not really a venture capital gain. It's really a private equity gain because the, the way that the, the numbers work on the private equity side. The private equity firm doesn't need to have the sort of, monumental rapid growth like a Google per se, in order to make the economics work that, you know, the, you know, Google was started by, or originally funded by a venture capital firm, whereas physician practices don't grow as fast as something like Google did.

But that's okay. And that's kind of more why it's the realm of the private equity firms, not the venture capital 

firms. 

[00:05:08] Dr. Bravo: There are some like city MD and p m Pediatrics which , are very, in the earlier stages, the startup and they're doing you know, phenomenal growth. They're, opening stores all over the country and rapidly, and those are then sold to another company once they get to a certain rate of maturity. Right. . 

[00:05:28] Dr. Erick Bricker: Yes. To a certain extent you also have phy, you know, quote unquote physician groups like like one medical, which, you know, went public and then was sold to Amazon. That was started by venture capitalists. But that's a little different.

That's, starting a physician practice to novo from the ground up as opposed to, you know, acquiring a whole bunch of physician practices. That, that process of acquiring a whole bunch of businesses and putting them into one umbrella, it's referred to as a roll up strategy and roll up strategy. Used by private equity firms in lots of industries where you take lots of little, you know, mom and pop companies and put them together under one big company and then you sell that one big company.

That sort of roll up strategy is sort of very well established in the private equity. 

[00:06:10] Dr. Rogu: Yeah. But in a physician group, what are they buying? The exam tables, the stools, the computers, the stethoscopes, what are they buying? Revenue. 

[00:06:19] Dr. Erick Bricker: Great question. What they're, what they're buying with any business is they're buy, they're buying the, the revenue stream.

In the profit stream. Okay. So in the case of a physician practice, they're buying the revenue stream from the, obviously from the professional fees, from the, from that, and then to any, any facility fees that they might get. Or, you know, they might have in-house lab, they might have in-house imaging, they might have,, if it's a cardiology practice, they might do like echocardiograms.

What have. If the physician practice is a partial owner in an ambulatory surgery center or in if it's a GI group, they might be a partial owner in a , in an endoscopy center. And so there's revenue coming in from the facility, fees from that as well. But it's the revenue stream 

[00:06:54] Dr. Rogu: but the revenue is tied directly to the physician.

Correct. If the physician is not there, the patients are not there. Hence the revenue dries up. Right. 

[00:07:06] Dr. Erick Bricker: That, that's right. Instead of buying, instead of, you know, so like if they're buying, if you're buying a software business, you're literally buying the code of the software and in this case you're literally buying the physicians themselves.

[00:07:19] Dr. Bravo: There's a lot of games that are played in this, in this industry. So right now PE is very focused on acquiring. Dry cleaners, they're aggregating them. They're very small, mom and pop. They can buy equipment cheaper, run the payroll cheaper, and then put 'em all together and then eventually put 'em to market you know, and make a big profit.

One of the examples, I don't know if you remember, but Columbia hca hospital chain that was at one point public and then they wanted to restructure it and so they went private again. And during the process of being private, the private equity partners loaded it up with huge amounts of debt and gave themselves special dividends to basically out of the debt, against the earnings of the hospital.

They were able to borrow money against that, that revenue stream. give themselves special dividends. So they, they took out their original investment and then they flip it back into an I P O into the market with the debt and they wash their hands and they walk away with money. Yep. That's one, one example of how private equity can be dangerous.

[00:08:31] Dr. Erick Bricker: Oh yeah. 

[00:08:32] Dr. Bravo: Cause they will load you leave you with a bunch of debt you didn't have. Right. The other, the kkr, KKR is one of the big ones and within Right. And VN Health, I think it is. And all of these are now finding themselves in trouble cause of the new laws they can't just charge what they want now.

They have to like everybody else come to terms with the hospital and come to terms with the insurance payers. Yep. They also have a problem with culture. Right. These firms are not into relationships. , they're not into building long-term legacy companies. They are into making money and flipping companies.

Yeah. And that's all they care about. You know, if I can make money by selling this company or in a different kind of like Carl icon by selling the pieces of this company Yep. Into little bits and pieces and destroying the, the company itself, but, you know, there's, there's more money breaking it up.

And so that's better for the shareholders. So that's what we'll do. Seems to me that there's a total clash of cultures when you see physicians. apart from the anesthesiologist and neonatologist, the ER physician, which are not really an radiologist, not really relationship based you know, they see you once and never see you again and they're fine with you, right?

But most other physicians, after the first or second practice, they go into kind of a marriage. They're in the same practice for 30 years and in the same community, and they're seeing the same people. And so most physicians are in the relationship business and in a long-term business, sort of like banking, you know, when you're, you're, when you're lending people money for their house on a 30 year note, that's a long-term relationship.

That's not a six month or two year relationship. And so it seems just from looking from afar that when. Goal is to make money and you're not interested in the relationship, and timing is not important to you. That's kind of antithetical to what a bank and a physician practice does when it's part of a community.

Am I getting that wrong? 

[00:10:46] Dr. Erick Bricker: So I would say that the types of physician practices that tend to be bought by private equity firms, they tend to be specialist practices that are much more transaction driven and not relationship driven to your point. So the types of practices that private equity firms acquire now are things like orthopedic, orthopedic practices that tend to not have as long term of relationship with the patients.

It's very transactional. Related to their surgery. Let's just talk about fee for service as the revenue model. So for specialty practices, when private equity firms buy them, they are essentially substantiating and their main source of revenue is fee for service. So that is that's their main driver, is the procedure, right?

 You don't make a lot of money in p in fee for service talking to people. So that's, that's not the main driver. Now, conversely, where private equity firms or investors have invested in primary care is a very different type of relationship. It's specifically for Medicare Advantage, where the, the primary care practice is being paid a very large capitated sum, like between 15 to 18 grand per patient per year.

Visa vi fee for service. So, private equity firms, by and large are not buying pri primary fee for service primary care practices. Historically, that has not been.

[00:12:08] Dr. Rogu: Yeah. All this, all this sounds like it's just about the money and nothing about healthcare. Rarely like that. 

[00:12:15] Dr. Erick Bricker: That's exactly right. It's a hundred percent about the money. And the reason is that the way that a private equity fund work is that they have to raise money for the quote unquote fund from what are referred to as the limited partners or the LPs.

And an LP might be a pension fund, an LP might be a an insurance company. These people that have, you know, ver an LP might be a university endowment and they have to diversify their portfolio. Well, they'll have like 60% of their portfolio in bonds and maybe they'll have 30% of their portfolio in stocks, and then they'll have 10% of their portfolio and other stuff.

And other stuff includes private equity investments that they then invest with the private equity firm. And when the private equity firm goes to those limited partners to raise money for their fund, it is all about just the return. I mean, that's literally what it is. They're looking at their portfolio of investments of bonds and stocks and commodities and private equity, and they're looking at the variability of the risk and return across that portfolio.

That private equity firm could be investing in widgets or makeup or physician practices that is of no consequence to the limited partners. The limited partners just care about the risk and the return. 

[00:13:26] Dr. Rogu: How is that good for healthcare and humanity as a whole? 

[00:13:29] Dr. Erick Bricker: It's only good to the extent that the financial relationship between improved patient care and the practice making more money are aligned.

So if we live in a world where the physician practice can make more money to the detriment of the patient, Then that is not good for patients. And I would argue in much of healthcare, there is financial misalignment such that what makes the most money is not in the interest of patients.

 The way that financial incentives exist in healthcare today. All private equity does is put kerosene on the fire of financial misalignment. 

[00:14:16] Dr. Bravo: In a way that I can understand this if I was, a small practice and it was bought by a private equity firm, they would want me to start upcoding.

[00:14:26] Dr. Erick Bricker: So do more 99, 200 fours and more, more, more. 99, 200 fifteens. Correct. And do more volume, you know, don't, don't bring that asthmatic once every three months. Like the guidelines say, bring 'em in every month. So. . 

And if you're a proceduralist, then you're financially incentivized to do more procedures. And, 

[00:14:47] Dr. Rogu: and the outcome of that asthmatics is not important to them.

It is how much money am I bringing into you know, am I meeting their metrics? However, they wanna measure work vus or, you know total collections, whatever it is. And they probably would also say, forget about taking care of a Medicaid patient. That doesn't pay enough for us to take care of that.

You know? That's right. 

[00:15:09] Dr. Erick Bricker: You even put the asthmatic on a better regimen of, long acting beta agonist, you know, rescue inhaler inhaled steroids, and you actually titrated their medication so that you actually didn't need to. That's good for the patient. It's bad financially for the practice.

[00:15:26] Dr. Bravo: That's right, that's right. But, but I would've to do a little bit 

[00:15:29] Dr. Erick Bricker: of, so they're your, they're, they're your financially misaligned to actually operate for the asthmatic. 

[00:15:34] Dr. Bravo: So I've been a little ary, right. So I, I have to force that parent to come see me once a month to get their op, their their maintenance medications, just so that I can pat the books so that my owners are happy.

[00:15:47] Dr. Erick Bricker: Yep. And that's, I think, the biggest danger, private equity in primary care. I wanna talk a little bit about some recent bank failures in the news, cuz I think it's very important to me. It highlights the tremendous danger of having private equity or venture capitals, or what I call short-term capital as your friend or part, or they're not really your partner.

They own you. Mm-hmm. and silicone Valley Bank was a darling of these people and. They grew tremendously and it just, it just mind boggling people, mind boggling. This bank went from like 50 billion in assets to 220 billion in assets just because of the amount of IPOs that were out there. Now there's many reasons for this failure.

I'm gonna let Eric, you know, who's much smarter than me dice it. But in essence we had a policy that made no sense that started with Obama and bernacki of negative interest rates. And so a lot of money when private equity, cuz that's the only place that they could park the money and get a return on investment.

Then for some unknown reason, I don't understand it, we got away with no inflation. Finally the Biden administration was able to light the fire on inflation by putting what 3 trillion into the economy was, it was unnecessary. And now the Federal Reserve in Mohamed Algerian said it best.

The Fed had been driving under low visibility on a windy road at high speeds, and all of a sudden when they rased the interest rates, they slammed on the brakes. And now we're seeing the car crashed, one after the other. The pile ups and Silicon Valley Bank had over 120 billion in the safest investment you can have, which is US treasuries.

but the P E V C community in California, which was their number one client, got spooked on a Thursday that they weren't gonna be able to pay out their bills. And so they all texted each other and all at once in one day, they tried to withdraw 45 billion of assets from the bank, and the bank didn't have the cash.

And that's the worst example of what can happen to your business. If you do business with private equity that day, they sour on you. They will pull everything out and leave and you won't have a business even if you have 120 billion in safe assets. Yeah, I think that's called the run on the bank. That's run the bank guess.

[00:18:54] Dr. Rogu: Yeah. But again, I guess these things happen. I guess because of communication and internet and posting and news and propaganda and people talking about it. And I mean it happened back in when was it when you had the bank crisis that was totally different, that kind of idea run on banks. But the problem here was that, that they decided, they soured on this bank, which is a community bank, which is supposed to be in long-term relationships with the community and the private equity VC funders and all the companies that they had invested in all at once decided this isn't good for us.

[00:19:32] Dr. Erick Bricker: And they're all out cuz they're not in the relationship business. Wow. And that's what they can do to your practice. If they buy it tomorrow, they decide I can make more money selling ketamine on the, you know, and now Ketamine's legal, I don't need you. And they leave. You're done. 

Well, think is important to, to have an understanding of, and your and your listeners might already understand this, is that when a private equity firm buys a practice, they actually need to, to set up a shell management company because of state corporate practice of medicine laws that actually, you know, quote unquote forbid physicians for working for corporations.

And so physicians are allowed to work for other physicians or for hospitals. And so what the private equity firm does is they set up a shell company that is headed by some, you know, random doctor. They find Joe Doctor to be the head of the shell company. And so all the physicians actually work for that shell company.

They don't work for their practice anymore. So, to Dr. Roku's Point, the private equity firm actually owns the stethoscopes and the exam rooms and , the Swingle manometers on the wall and all that good stuff. But the physicians themselves work for a. Physician practice that is separate from the actual they used to own, they don't even own it anymore.

And then they become employees and their salary. Now oftentimes those salaries do have productivity bonuses, but the relationship between the physicians and like the employees, like the nurses and the med techs and everything like that. Like they don't even they work for a completely separate company from the physicians.

So they used to all work for the same company. They don't work for the same company any, 

[00:21:08] Dr. Rogu: Hmm. Sounds like a whole lot of shenanigans .