Why it matters: Knowing how things go wrong can help you make sure they go right

Read time: The time it takes to calculate whether a buying the extra-large box of cereal is actually worth it or you should just buy two smaller boxes (6 minutes for real though)

Welcome back to our series on all things private equity in healthcare. Well, not ALL things, mostly private practice things, but you know, it applies.

Because you are a rabid fan, you have already read the first two issues in the series and have been counting down the days until this issue dropped, so no recap needed. And for those of you who are set on breaking my poor southern heart, here is a roadmap to where we have been if you want to catch up:

Part 1: The Sponsor-to-Sponsor machine
Part 2: The anatomy of a deal
Part 3: When the mechanics fail and the machine breaks (this is happening right now, literally, you are in it)
Part 4: When it all comes together and the machine makes an everlasting gobstopper

Let’s get to it.

Ok, wait sorry, not quite. I do want to say, if you have been here before you may be expecting and perhaps even looking forward to reading my less than rosy shall we say, stance on private equity. I am happy to circle back, talk offline, parking lot this, and reconnect if you want to hear my personal feelings.

But know that this issue is by no means meant to be an attack, merely an elucidation of what can and does go wrong after the Pennyloafer rolls into town.

Now, let’s get to it. Again. For the first time.

Harken back if you will to the practice, Dr. Kneesandhips Emporium Limited, which was acquired by Sire Kinsington Sweatervestman MXLI. Well, now the rubber has met the road, the practice is living life post acquisition and the numbers aren’t quite behaving in the way they assumed they would.

And this is a common occurrence, a practice is bought as part of the inklings of a roll-up and all of a sudden doctors are making less and the practice that was once profitable now seems to be losing money. Or at least, making much less of it. How?

Well, as you may know, private equity companies are not allowed to own medical practices directly in most states. But how then can they buy all of these intrepid clinics you ask? So glad you asked.

They use the fabled MSO-PC model. It is a contractual arrangement between the two entities that binds them together and connects their fates. It’s all very King Arthurian. And I have written about the arrangement here if you are interested. I know, I need a hobby.

Under this arrangement, the MSO needs to create value for itself. It does that by providing services to the PC and in turn charging a premium on those services, otherwise known as a management fee. There are several approaches, but in our illustration we are going to assume a cost plus model. That is to say every service provided by the MSO to the PC is billed to the PC with a 20% kicker.

It’s important to note the incentive misalignment here. Because MSO costs are PC costs and the revenue is on the 20% kicker, the MSO makes more money when costs rise. This is about as divergent as that movie that wasn’t as good as the Hunger Games. Costs drain the practice while the MSO is enriched.

In addition to that new and exciting line item, the practice now has interest on debt that it wasn’t carrying before. It has also lost its preferential rent rate on the buildings it once owned but are now being leased back to it at fair market value (plus a little sweetener for new penny loafers). Not to mention the system conversion which stretched receivables and knocked collections down a few points. We also can’t forget the new executive team that is being allocated to the practice squad.

And since no one is used to reading entire paragraphs anymore, I had my French associate make a chart:

So you can see, nothing has changed operationally (yet… dun dun dunnnnnnn) but the practice now has significantly more expenses to carry, dropping EBITDA and jovial 25%.

And for the physician partners, their slice just got resliced.

Here’s the issue. The rub. The juice. These were all terms in the contract. Maestro Goldenkeyfob knew all of this. And sometimes, these things are even discussed with the partners prior to closing. But the misalignment remains.

It can be multifactorial as to why this happens. Some combination of not fully understanding the terms, not modeling scenarios, or focusing on the eventual payoff thereby glossing over some of these realities. Whatever the reason, it often leads to the beginning of strife and tension between the practice and its new overlo… I mean partners.

No matter though, right? Sure, things may not be great and after any deal there are always growing pains. The real upside in all of this is that juicy second bite of the apple. Why they can’t just get a fresh apple with all that money, I will never know. Nonetheless! The second bite makes all of this worth it… right?

Right?

Cliffhanger… If you didn’t have a chance to fill out the reader survey from Thursday, it’s not too late, the internet never forgets or loses anything.

The survey of your dreams

You may remember this episode is about things breaking, so no. No it probably won’t. The first reason is grounded in current market realities. Remember when I said I needed a hobby. Well, a month or so back I wrote about where all the money was in healthcare and described the issues facing private equity including sitting on a ton of dry-powder having not returned sufficient capital to partners and now having trouble raising funds.

I know. Hard life.

Here’s a chart of the deal count just in case things were getting a little too wordy:

The issue is that the market is lopsided and time is running out. You would think it’s a seller’s market with so much sitting on the books yet to be deployed. The firms however, are out of time. That means they are looking for mega deals. Same plays we are seeing in VC over the last year. Still significant funding, but primarily comprised of only 12 mega deals.

Ortho rollups, any practice roll ups aren’t big enough at the moment. Not to mention over the last 5 years, many of the deals have seen distressed assets evolve as a result. Let’s just say it turns out that healthcare is hard and cost cutting profit maximization is a play book best suited for insurance carriers, not care delivery.

Who knew?

Let’s say that Dr. Hips and Charles Bromwell Wollsworth III do find a buyer for the new entity, which now boasts a much greater EBITDA, geographic prominence, and really great snacks at all office locations, including warm cookies. Here’s the eventual reality check of a soft market, high interest rates, and sponsors looking for larger deals:

Listen, are we going to get upset about making another cool $14M? I mean yes, maybe. When the expectation was $72M and it is about to get cut 8 ways, the physicians gave up roughly $4.8M in distributions over the 7 year holding time, which if invested may have yielded a greater return. Not to mention the payout of $1.8M each is simply $3M less than they would have earned in distributions.

I am not saying it’s all about the money, and I am not saying that this is a Steward Health Care (I cant believe they spell it that way) situation, but it does crack the foundation. Even without gratuitous mismanagement, this just isn’t a very good deal.

Broken? Not entirely. But it has started to break the machine. These occurrences added up across time, not to mention the horror stories, and the plain economic realities that these deals may just not be great, are leading to less PE deals.

Whether you believe that to be a good thing or a bad thing, it is a thing.

Now, I really need some ice cream. And a mimosa.

Obviously.

See you out there!

P.S. if you didn’t have a chance to fill out the reader survey, doing so with mimosa after reading tales of private equity is the best way to spend 72 more seconds on a Sunday.

72 second survey

Why it matters: The future depends on you

Read time: The time it takes to chug a Yoo-hoo (87 seconds for real though)

I will keep it short and get to the point - you will have all the time in the world to read my ramblings this Sunday when you read part 3 of our private equity series. Don’t miss it!

This off cycle issue is no issue at all. It is a reader (that’s you) survey. Here’s the link if you want to cut to the chase.

If you didn’t cut to the chase, here’s why you are receiving this. There are about 12,500 of you, which is an honor to say the least! And to give you the most value and continue writing in a way that you love and adore, I would like to know more about you.

The survey is 5 questions, (4 are multiple choice, so you can always just pick C).

It takes less than the time it already took you to read this.

Here’s a button to get there this time:

Survey Button

You can also click this button if you want to:

Another button to click

Thank you for taking the time.

See you out there!

… On Sunday… you better be there…

Why it matters: Knowing the specifics of a deal help you navigate the process from buyout to earnout

Read time: The time it takes to water taxi anywhere (8 minutes for real though)

If you are just tuning in, today we are continuing our series on private equity. Specially talking about the anatomy of a deal. For today’s episode I am going to use a wholly owned fictional subsidiary of my brain for illustrative purposes. Any likeness to practices living or deceased are entirely coincidental. Names have been changed to protect the innocent.

But first, if you haven’t, I 7 out of 10 recommend you go back and read Part I: The Sponsor-to-Sponsor Machine.

And so you can keep track and know where you are, here’s a friendly map of sorts:

Part 1: The Sponsor-to-Sponsor machine
Part 2: The anatomy of a deal (tiny red dot, oversized arrow, you are here)
Part 3: When the mechanics fail and the machine breaks
Part 4: When it all comes together and the machine makes a Wonka bar

Please meet our practice being acquired: Dr. Kneesandhips Emporium Limited. We’re diving right into numbers, so stay with me. If you get lost, scroll back to the map, or alternate ending, put your phone down and just grab a mimosa.

Now, this is a practice example, since most of y’all are all up in healthcare practices and hospitals. But the elements hold true for other private equity deals too. I just like talking medical practices. And we work with them. Well, you.

Back to business.

Here is the set-up:

Ortho practice – you met it already, it’s called Dr. Kneesandhips Emporium Limited. I say that only because I really want you to know how funny I think I am. 8 docs – all partners. They just got a sweet offer from Esquire Pennyworth the XIX.

Here is the simplest P&L you have ever seen:

Not too shabby at all. What you don’t see on the P&L is what is happening behind the scenes over on the cash flow statement and on the balance sheet.

Distributions.

Partners take distributions from the practice. In total, in this fictional scenario the partners are making about $700K in salary and then split a portion of the pre-tax earnings as distributions.

It’s a portion because they need to do things like pay taxes, maintain the capital equipment through maintenance capex, and likely keep some cash around in case a squirrel gets in the attic. Those things can get out of hand fast.

This part seems as random as a squirrel in the attic, but we are going to come back to these numbers.

In this case let’s say the partners distribute about $3.5M. Here’s a chart of comp plus distributions:

All right now that’s all the set up. Here’s how the deal goes down.

Pennyworth says, “I would like to buy your practice. It will go oh so nicely on my mantel next to the Renoir.”

You say, one moment please we will prepare our earnings report and you can base your multiple off of that.

Ok, you don’t actually say that and I am not even sure what a Renoir is, but the point here is that the practice is going to put information together to show to the buyer. As part of that, the practice, their banker, accountant, and best friend who made his money in sweater vests, are going to make adjustments to the earnings.

Basically, they are saying here is a bunch of stuff that we pay ourselves too much for and we are going to add that back into EBITDA. The proverbial and oh so coveted Adjusted EBITDA.

For Dr. Kneesandhips it looks something like this gorgeous waterfall chart that I made entirely on my own with no robotic help whatsoever.

Sire Pennyloafer thanks you with a courtesy and then unleashes a fleet of recently graduated MBAs to reconcile the practice’s adjustments based on what they found during due diligence. In this case, they agree with the practice’s initial adjustments but have more to apply.

Here is their finely crafted, definitely not AI-ified waterfall:

Here’s the table side by side:

The punchline here is that the gap between the two EBITDA numbers is a negative $12.8M impact to the valuation. Now, adjustment reconciliation is not always so clean and there can be some horse trading, but let’s just say the practice says, okidoke and keeps rolling.

Now the offer is on the table. 8x EBITDA puts the Valuation at $27.7M.

Shaaaaawweeeeet. It’s like beach weather in February. Christmas come early. Everyone is happier than a pig in, well the stuff that pigs are happy in.

But wait! There’s this whole really big long contract that comes along with the offer. And in it a host of financial terms, elements, provisions, clauses, all the good stuff.

I am just going to jump to the punchline and then go through the elements. Naturally, here’s another hand drawn waterfall showing the offer and the cash that actually gets paid at close:

Yes, the $27.7M deal pays out $13.3M today. Paid out to 8 partners on a pro rata basis (which is a fancy way of saying your cut is based on your ownership percentage).

Because I am in a charty mood, here’s two ways to look at the payout:

You can see that the payout cascades from senior partner to junior partner. It makes sense as the junior partner owns less and has a longer career pathway to continue earning. There is one more chart and then we are going to go back up to the waterfall and talk about how that $27.7M became $13.3M.

This one:

After the deal goes through, the partners don’t own the practice anymore. As a result, they don’t get distributions. Total comp for everyone drops to the baseline of $700K with varying levels of total impact to compensation.

What’s happening in the simplest of terms is that the partners are forgoing future earning for a payout today. They are also placing a bet on the fabled second bite of the apple, which brings us back to the waterfall showing the cash at close falling to $13.3M.

4 things on here are plain to see. You have to pay Pennyloafer’s banker cousin. Legal is always going to run the billable hour glass as long as they can. Escrow is a word.

The ones I want to go a little deeper into are Debt Repayments, Working Capital, Earnout Risk, and Rollover.

Debt repayments is the buyer inheriting none of the practice’s debts. It takes repayments out of the offer. In this case, the practice carries $1.2M in debt, which is paid out of the proceeds of the sale.

Next is working capital. This one can be sneaky. The buyer expects to be able to run the business day one. That means it needs a certain amount of working capital in the business to do so. Someone has to pay for Dr. Hamstring’s fountain pens, which are definitely a reasonable office expense. If the working capital at close is lower than a previously agreed-to amount, that money comes out of the seller’s cash faster than a Good Burger gets served up.

Earnout risk is a buyer’s move to protect itself against people leaving or swings in the business. It’s usually a profit target that if not reached, the buyer keeps it.

And last but not least, the rollover equity. Private equity likes to talk about eating apples more than a garden of Eden reenactment troop. When you hear, “second bite of the apple,” it’s about the rolled equity.

They give the partners in this case about $8.5M in equity in the new company, or NewCo if you want to be cooler than that guy who still wears v-necks and beanies in summer. And while it does take “cash” from the deal and locks it up until the company is sold again, it does represent potential upside for a larger transaction later. For example, if all goes well in private equity land, they end up being cool, buy more practices and end up with a sales that commands a 10x multiple on a much higher EBITDA amount, that may become meaningful money.

But before we wind down this mechanical journey I want to emphasize the last part with another important piece I flippantly mentioned earlier.

For the junior partners and really any partner or owner selling – you are selling the potential for future earnings. The deal is a trade. You get money now by selling them the future of the business.

Sometimes you win. Sometimes you lose.

You can see it here, that the partners are selling their future earnings – the distributions primarily – for the cash and rollover equity now. If we look at our example on a 7 year time horizon, forgoing distributions in favor of cash and rollover equity, the outcome is dependent on deals that are out of the partners’ hands.

In both scenarios, if (and that can be a big if) there is a secondary platform sale, everyone makes more than if they had held on to the practice. It does also assume steady state in the practice with no growth. But you catch my drift.

Notice how differently the downside lands. The senior gives up about a fifth of his advantage and is still comfortably ahead. The junior loses more than half of his and ends up barely above water. The major difference here is the senior retiring doc sold 2 years of distributions and took a bigger share of her money in cash and had almost no distributions left to give up, so the bet was a smaller part of her deal. For the junior it was most of the deal and the bet only gave him a slight edge.

That is just this one example, which was chosen for this fact. In these scenarios, like so many, the devil is in the details. It’s also in modeling the scenarios.

And of course there are tons of other factors at play. You can clear some debt, take chips off the table, have personal reasons for a sale. Knowing the mechanics is the key. And all in all this deal went ok. And for some of the partners it made a lot of sense.

If you have been here before, you know there are a lot of times when this goes terribly wrong.

But, your mimosa is empty. Go get a refill and tune back in to the next issue… Part 3: when the deal breaks.

Paging Dr. de la Torre…

See you out there!

What we’re breaking down: Sponsor-to-Sponsor deals in healthcare

Why it matters: Knowing the motivation and mechanics in the private equity exit is leverage

Read time: The time it takes to regret SPF 15 when you needed 50… (7 minutes for real though)

If you joined us last week, which you better have otherwise we can’t be friends anymore, we talked about the money in healthcare investing.

We covered two big buckets and different perspectives. The buckets were Venture Capital, those guys wearing zip up North Face fleece vests and Private Equity, those guys wearing zip up puffy Patagonia vests. And no, I don’t know why rich finance people never have cold arms.

The perspectives we covered were the seller, the limited partners, and the investors. Today, and for the next three issues (that’s right you are in a four parter!) we are going to talk about private equity.

Now, if you have been here before, you have read issues on Steward Healthcare, how private equity works from a structuring perspective, and private equity strategies. I told you The Breakdown is getting a glow up, so we are taking a beat on railing against the evils of Private Equity and focusing on the mechanics.

Because, and importantly, when you understand the mechanics you can eschew the allure or you can leverage it. Both are valid. We shall leave the philosophical musings to another day. You can call me toll-free any time.

Here’s how it’s gonna go:

Part 1: (you are already in this part, thank you for being awesome) The Sponsor-to-Sponsor machine
Part 2: The anatomy of a deal
Part 3: When the mechanics fail and the machine breaks
Part 4: When it all comes together and the machine makes a Wonka bar

Let’s go!

In the last episode we covered the macros, as mentioned above. To refresh you memory like a Frutopia on a hot 1997 evening, you saw this fancy new graphic, which shows $191B in deals, $156B in exits, and $1.1T in dry powder:

We also talked the Distribution to Paid-in-Capital pressure and declining funding as a result. If you haven’t, I 50% recommend you go back and read it here.

Now, let’s look closer at the Sponsor-to-Sponsor deals that are happening.

But first! What is a sponsor-to-sponsor deal and why is it happening so much more now than ever before?

Simply enough a private equity firm is a sponsor. When there is a PE backed acquisition that is sold to another PE group, it’s one sponsor selling to another. Shorthand because business people are wildly imaginative, is S2S. Tee, double ewe, oh, is just 2 much to spell.

Here’s how well oiled the money machine has gotten…

In 2025, there were over 150 sponsor-to-sponsor healthcare deals worth more than $120 billion. Over 30 of those exceeded $1 billion. And more than 70% of North American healthcare PE exits last year were S2S.

It’s even more pronounced in physician practices. A 2024 study published in Health Affairs Scholar looked at 807 PE physician practice acquisitions and found that 98% of exits were secondary buyouts.

More charts:

And why is all this selling to friends and family happening?

Back in the good old days, when your company was big enough and you needed capital infusions, you went to the public capital markets. You would call up your friendly neighborhood investment banker and they would take you on the road to shill your wares so that when you went public everyone who was cool wanted to buy your stock. The result was a large amount of capital in your coffers and a host of new headaches for your PR and legal departments.

Well, when Sarbanes and Oxley got together and the Lehmans decided to FAFO, the IPO market changed. While in a way it still remains the pinnacle of company velocity, it’s not as straight forward as it once was. There are also more alternatives. Well, one big one, but a lot more private equity than there used to be.

So, instead of rolling the dice in public markets, you can sell to private equity, take chips off the table, and go through a more predictable, faster transaction. We have seen hundreds of billions in private equity deals over the last 10 years.

Another avenue other than IPO is strategic acquisition. Think Pfizer buying your anti-toe-fungus drug that comes in eye drop form or Stryker buying your middle finger extender total joint. And those are still happening. You should actually probably call Zimmer, they love buying things.

Side quest: if this is your line of business, you should be trolling public filings for similar acquisitions and also see how much cash sits on balance sheets. That’s the dry powder for strategics.

But, for the healthcare services and digital health side of the world, it’s a little different. Strategics are health systems or perhaps other large service providers. Health systems come with their own bag of tricks and baggage. Increased regulatory gymnastics, payer battles that never end, fierce competition, capital constraints, and all that fun.

As for the larger companies in the same services areas, namely other digital health, health tech, etc. they are dealing with the same, “what do we do now,” dynamics.

Taken together, this leads to more volume in PE groups buying from one another. And as we discussed last time, PE is under pressure to deploy capital and to produce returns on currently deployed capital. Not uncommon, but the cycle is pronounced since the cheap money days of yore.

We also see specialization happening in Private Equity. In the same way it used to be cool to be a VC that only does seed and series A, private equity is small business, micro business, small-medium size, extra medium, and super double secret size. It runs the spectrum. And thanks to Codi Sanchez, your uncle Henry is now a laundromat private equity wiz.

Here’s a simple example of the cycle. Langdon Thompson III buys your company. He finds 2 more bolt on acquisitions and sells to Lord Pennington Woolsworth for 12x EBITDA, who then scales to 6 states. Then Maestro Charles Hethingford the 19^th of Buckheadshire buys the platform to hold, optimize and either take public, create a continuation vehicle, or chop it up and sell it for parts.

It can be argued that none of this is value creation, it’s more arbitrage and financial tomfoolery, but there are worlds, as we will see in future episodes in this series, where this plays out for the better. Where sponsors invest, creating technology, expanding access, investing in growth the right ways, where this all pays off.

No, not you Steward Health Care…. Can’t even spell healthcare right…

Here are some real instanced of the second and third sales of healthcare services:

Forefront Dermatology. They’ve been through three sponsors. Varsity Healthcare Partners built it, sold it to OMERS in 2016, who doubled the footprint and sold it to Partners Group for $1.5 billion in 2022. Physicians and management rolled equity each time. Three sponsors deep and now the largest single-specialty physician-led derm group in the country with 200+ practices.

That’s a lot of moles.

Or my hometown favorite, EyeSouth Partners. Shore Capital formed it in 2017 with one ophthalmology group. 5 locations, 12 doctors, about $2 million in EBITDA. Five years later, 155 locations, 270 doctors, 11 states, EBITDA north of $70 million. Sold to Olympus Partners for just under a billion dollars. The founding physician became Chief Medical Officer and the doctors who rolled equity got their second bite at a $1 billion valuation.

Headlands Research, Epiphany Dermatology, DOCS Dermatology, to name a few more, are all S2S. In derm alone there are now 35+ PE-backed platforms across 20 states.

Between investment and exit, PE firms increased the number of affiliated practice locations by an average of 595%. The machine rolls on faster than a Little Debbie at your nephew’s 5^th birthday party.

The point for today is this: once a practice enters the PE ecosystem, the data says it’s almost certainly not leaving. It’s going to pass through 2-3 sponsors over the next decade. It’s kinda like when you are almost 40 and you keep going through cycles of getting back in shape like you were in your prime. Not that I would know anything about that… At the end of the day you keep resetting and it takes 5-7 years, three times.

In the next issue we’re gonna go deep into the deal math. How the multiple arbitrage actually works. What gets bought, at what price, who gets paid at exit, and what happens when the next sponsor shows up at 12x and has to figure out how to make their own returns. If you want to read the word EBITDA over and over again, that’s going to be the issue for you.

I would also be remiss not to mention that Taylor Swift got married this weekend and I hope you had an amazing America’s birthday. May the odds ever be in your favor as you spend the afternoon working through your hangover with 7-12 mimosas. Either from the birthday celebration or Taylor’s celebration. Both valid.

See you out there… America.

Why it matters: Life comes at you pretty fast and if you’re not careful, you might not be able to raise a seed round or sell your practice

Read time: The time it takes for your sourdough to rise (9 minutes for real though)

Oh Hi.

I hope that since December 18^th you have missed me desperately and pined for the return of this publication. Well, here it is!

The Healthcare Breakdown is back!

Better than ever? Time will tell. But definitely back. And before we get all up in it, I’d like to take a minute, just sit right there, and I’ll tell you what’s been going on the last few months and what’s on the horizon for this periodical.

Where I’ve been

First, what I’ve been up to, since I know half the reason you read this is for my stunning personality and you are completely enthralled with my life outside this journal.

I put down the newsletter in December, because my company, Forward Slash / Health was working on launching a new SaaS platform and I was pouring a ton of energy into the launch. At the same time, my business partner, you know her – it’s Sarah Covington – had been taking on clients as one does when bootstrapping. Well, things got a little out of hand in all the best ways, she had a bevy of clients and we decided, hey, why not just make this law firm thing the real deal too. So, I also started helping run the law firm.

Strictly as a non-attorney of course. I am far too informal for that life.

The firm is Underscore _Law, it’s awesome and we do business and transaction law for healthcare startups and clinical practices. I never thought I would be in this space, but it’s fantastic to be on this side of helping startups form, launch, and continue to grow.

And a few weeks ago I was in New York for Tech Week, hanging out with some very wonderful folks, who all had very nice things to say about The Healthcare Breakdown, and I thought you know what, I am bringing it back!

It could have also been the mimosas who said that, but nonetheless it was said. And here I am.

I figure between the legal work, the finance work, the operations work in healthcare, and my uncanny ability to weave 90s references into a newsletter about healthcare, that this was the perfect time to bring back the breakdown.

So, that’s where I have been and that’s why we’re back.

Now, what’s different.

Not all that much. We’re still talking healthcare, healthcare finance, the business of healthcare, and will certainly be pulling back the curtain as to what’s really going on. But I want to take a step further to break down more mechanics that impact founders, clinicians, and investors.

Yes, knowing that United Healthcare pays itself $168B a year via intercompany eliminations so it can make the medical loss ratio a figment of its imagination, but the question was always, ok… and?

Well, here is the and. Because there is more going on in the trenches than just BUCAH shenanigans and big health systems bupkis.

And as I have stepped back into the world of startups, capital raising, M&A, and some other acronyms, I want to write more about it. The real operational and financial mechanics of healthcare that so many of us work in and are working towards.

To that end, I will be writing more about funding, fundraising, the startup ecosystem, deal mechanics, fund mechanics, and how the money continues to move in healthcare.

Yes, there will still be fist wagging. Don’t worry. But buckle up because we are still going to make all the jargon simple and breakdown healthcare so you can see what’s really going on.

Even better, so you can do something about it.

OK, if all that wasn’t enough, here’s what we’re diving into today.

It’s really a tee up to give you a flavor of the future and the next spate of issues.

We’re talking about where in the world has the money gone in healthcare daggumit! (Is that how you spell that…?)

The main part

Just to indulge myself, here’s the story that inspired this episode.

I was talking a couple weeks ago with an investor who runs a decent size VC in Nashville. Yes, that Nashville, best known as the adopted home of Queen T. He was sharing that money is tight right now for startups. The raising environment is hard for both funds and especially for startups.

And just last week I was talking with an investment banker, ya I know cool people, who was talking about raising tranches, active LPs, and deploying a ton of capital. Crushing it. I mean, the VC was too, but the tenor was different as he spoke about the environment.

Both in the flow, both with funds, but two very different perspectives and experiences.

So, what is going on? Well, both things can be true at once.

If you are a startup with anything that isn’t native “AI something something” with billing services at the core of the product after stripping back the AI candy wrapper built on someone else’s LLM, then it’s hard to raise money right now.

And if you are a physician practice out there looking for a buyer who is going to pay you 18x EBITDA, for some reason you can’t find them.

Meanwhile, we have seen a record year for Private Equity investment with over $191B in healthcare deal value in 2025, and a similarly large year for Venture Capital investments into healthcare. But of course, with everything, the devil is in the details.

Let’s check out what’s happening with Venture Capital right now.

Oh, by the way, there’s this thing these days, you may not have heard of it, it’s called Claude. I think he’s French. I have started using him to make some financial charts and graphics. Just trying to up my game on the comeback. The weird green, teal, turquoise, aqua stays though. Obvs.

Just wanted to give you a heads up based on how swanky some of these charts are going to look.

In Q1 2026, according to Rock Health, funding hit $4B, up 33% YoY. It was $4.2B in Q4 2025. And I don’t think folks were just trying to shrink their tax liability at the end of the year.

But here’s the thing. While there was more money dumping into “startups” it was dumping into fewer and fewer startups. And I put startups in quotes for a reason, which you will see in a moment.

The average deal size in Q1 2026 was $37M, the highest since Q4 of 2021, when we were riding high on anyone with a telephone and a multistate license just dumping money post covid. We also saw the share of mega deals, anything over $100M, double from 2024 to 2025. And in Q1 2026, 59% of all capital deployed was for mega deals.

Here’s the Frenchman’s chart:

That’s 110 deals total with 12 mega deals. What we’re seeing is capital flowing to fewer companies, but funds taking bigger swings on later stage companies that have shown a record of performance. We are also seeing companies stay private and continue fundraising longer.

Gone are the SPAC days (one hopes) and it seems we are back to a version of the good old days when companies with good mechanics IPO only when it makes sense as an organization, not just to make a quick buck. But as a result (and thanks to Omada and Hinge for snapping the dry spell) companies are still raising D and E rounds from venture firms.

Here are the mega deals we recently saw:

And now you also see why I put “startup” in quotes. Whoop and your company that is a deck and 3 people are not startups in the same way.

And then for Private Equity, we’re seeing something similar-ish. See, the Barron Von Sweatervestensteins raised massive funds during the cheap money era of 2020-2022. Well, the LPs (limited Partners) have come knocking. The flip time for PE is 7 years on the outside. We’re closing in.

In 2025 we saw record Private Equity activity. 445 Buyouts worth $191B in deal value. On the other side, $156B in exits.

But the part that makes this so interesting is that of those exits, 150 of them were sponsor-to-sponsor (S2S). Meaning private equity selling to private equity. Barron McMoneyFace selling to Tripp Pennyloafer III. It underlines the pressure to exit and bring investors liquidity events as well as operators their proverbial second bite of the apple.

The S2S deal flow:

The dynamic will continue to be interesting as an estimated $1.1T is waiting to be deployed in healthcare alone. Now, that’s global across healthcare sectors, but that’s still a record high. It’s another reason why we are seeing so many S2S deals in the mix. They need to deploy capital and also get a cash return for LPs.

Another acronym, DPI or Distributions to Paid-In Capital has become the metric that matters most. LPs want the cash money man. Until they see it, their investments are tight, so new dry powder has well, dried up.

We’ve already been seeing it. PE fundraising has been declining for 3 consecutive years. Without a strong DPI, investments aren’t flowing like they once were. The record deal activity we are seeing right now is being fueled by dry powder from the 2020-2022 fundraising cycle. And the exits are from 2018-2020 portfolios. With those two dynamics, we may be heading for a much slower deal flow in the coming years. Certainly a more disciplined one.

Oh man, money is fun right?

And great. Thanks Preston, what does this mean for me? Well, I am getting there, I just like to paint a picture ok? I’ve been gone a while, I’m savoring the moment.

Here you go Mr. impatient:

If you are a founder: Deals are consolidating and whether VCs are more disciplined or are focused on the new shiny things, the dynamics have changed. Even with a proven track record, without a defensible position against the AI Armageddon you are going to be on an uphill climb. It’s never been an easy thing to do, but now more than ever, with companies staying in the ecosystem longer and more VCs looking to larger rounds, the need for real results cannot be understated.

If you are a practice: I’m not trying to be that guy, you know me, I’m not that guy, but the people buying have a lot of money to spend. They are looking for deals. The devil is in the details here, but if I can say anything, it’s make sure the deal is structured right, there is skin in the game, and that you haven’t sucked all the economic value out of your practice before you are ready to sell. Funds aren’t buying patient panels any more. They also may not be as motivated for long. $1.1T in dry powder sounds like a lot, but it’s spread across all of healthcare, and with fundraising declining three years running, the pipeline behind it is thinning.

If you are an investor: Exits are taking longer and longer. That means capital is not a short game anymore. Meanwhile LPs are looking for their paper. There is still value out there, but blindly buying or investing in assets to either roll up or are trendy aren’t going to get you there. This is about fundamental operations and value. Can you find it, run it, and expand it.

Welp, those are about all the words I have for today. I hope you are as glad to be back as I am. Tune in again for deeper dives into all of this. The S2S buying machine, the hundreds of companies in limbo with nowhere to go from a funding and exit standpoint, what’s the deal with all these IPOs, and much more.

I hope even more that you read this over a mimosa with Taylor’s new banger blasting in the background.

Oh, and Happy Father’s day to all the Rad Dads.

See you out there!

Why it matters: Because we’re trying to make healthcare better dang it!

Read time: The time it takes to refill one last mimosa (3 minutes for real though)

When I first started The Healthcare Breakdown, it wasn’t actually The Healthcare Breakdown at all.

It was a newsletter I started called the unBA. The goal of that newsletter was similar to this. I wanted clinicians to know more about the mechanics of the business of healthcare, so that they, could take it back.

Clinicians owning practices and being independent, clinicians running startups, and clinicians in non-clinical leadership.

But since you are reading this and not that, the original newsletter petered out after 6 issues.

Some years later, The Healthcare Breakdown was born. Brought to you by way of my evolution and experiences in healthcare.

And I am honored that you have joined me in reading the irreverent, slightly derisive, occasionally apoplectic, never grammatically correct, (very) periodical.

However, as with all good things, this too must come to an end (for now).

As the years have gone on, I have searched for ways to make an impact in healthcare. My estimation is that my time and energy is best served helping doctors deliver incredible care and be financially successful, while maintaining control.

To that end, you may know that I have been spending most of my time… ok, all of my time building Forward Slash / Health.

The goal of which is in line with all the ramblings, fist wagging, and void shouting of this reality rag. We exist to put the power back in the hands of clinicians to run healthcare.

It is the next evolution and an actualization of what this newsletter has been all about.

Since you have very graciously lent me part of your Sunday mornings, mimosa clutched and Taylor blaring, I wanted to be transparent and share this update with you this fine Sunday.

As this set of musings winds down, I will continue to write the Forward Slash / Health weekly newsletter, which you can find back there at that link. This one too.

There, I write about the finance across the spectrum from solo practice to bustling ASCs and community hospitals.

I also wanted share what I have been working towards and why these missives have not been hitting your inbox regularly.

First, we are building a product to help practices and hospitals run with more financial clarity. It’s called the Forward Slash /CFO (I know, I am so good at naming things).

It is a platform that will unify your financial views and give you the ability to implement financial and managerial accounting in your practice. Whether you are a solo doc or a large multispecialty, multistate group.

It will allow you to build budgets, track variances, manage expenses, view CPT level profitability, forecast cash, and more. All without spending 7 hours every week pulling together 19 different reports and still not getting it quite right.

You can learn more about it here: Forward Slash /CFO.

Second, we remain committed to helping doctors launch practices. It’s been such a privilege to help launch practices across multiple sates and specialties.

Lastly, we are a full revenue cycle outfit. We have a crack shot team and love nothing more (as you might surmise) than to wrestle money from insurers that they already owe you.

As you can see we are deep in the finances, which has led naturally to our building of the Forward Slash /CFO.

I can’t wait to bring this product to practices and watch it transform financial insights and management, putting more power back in the hands of those closest to patients.

If you have any questions about that product launch, which is happening January 7th, what else we get up to at Forward Slash / Health, or anything else, just reply.

I read it all!

So for now, thank you for reading The Healthcare Breakdown.

We may cross paths again through this forum, but for now…

See you out there!

Why it matters: Health systems are financial institutions because they have to be, this is why

Read time: The time it takes to decide on a Netflix movie (6 minutes for real though)

Ok, this may be a slightly different episode. A little philosophical perhaps. Mostly because I am not necessarily a systems expert, don’t have the data to completely support what I am going to type-say, and also because if it is long winded and slightly hard to follow, then it must be philosophy.

The health system as it stands today, is a sub-system of something much larger.

You all know it. Some of you love it. It’s our economic system.

There are other systems at play including political and societal. We are going to focus on the economic system, because I could argue that the other two design and influence this system while it has the most salient impact on the healthcare system.

Also the fact that the political system designs the economic system therefore is inherent within it.

See, told you. Philosophy.

Here’s the crux of the matter, we have some version of capitalism in the United States. I can’t really call it pure capitalism, because it’s not truly a free market, considering the regulations in our system.

Our capitalist system sort of sets the tone if you will for any enterprise in America. That includes entities like United Healthcare and CVS, but also Kaiser, Mayo, and Southeast Georgia Medical Center.

Let’s look at “payers” for a moment. These are by and large publicly traded entities who’s sole purpose is to maximize shareholder value. Say what you will, but when shareholders can sue the company they own for poor business decisions that impact the money it makes them, profit maximization becomes the only purpose of the company.

And just look at UHG, they aren’t doing too bad at it.

These companies arguably sit at the top of the pecking order. Deciding how much we all end up paying for healthcare access and how much our wonderful clinicians get paid.

Good for them I guess. But then here’s where it all gets weird and worse. I mean, the insurance thing is bad, but at least it’s obvious. These are for-profit companies that are publicly traded. We shouldn’t expect anything else.

Health systems on the other hand, we do and should hold them to a much higher standard. Most systems and hospitals are non-profit, or more appropriately, tax-exempt.

So, in exchange for not paying taxes, they are to give back to the communities they serve. Part and parcel is the fact that health systems are legally obligated to care for anyone who walks through the door. We all see it and understand it at face value. It’s great.

But, if you have read this newsletter you know there is always more to the story. Multi-billion dollar health systems with private planes, investments in the Caymans and Saudi Arabia, pouring billions into Private Equity, earning revenue from tax-exempt land used for non-healthcare related activities, I could go on.

Here’s a picture though in case you think I am wearing a tinfoil hat right now.

Here are some investments:

Here’s Atrium:

Here’s Mayo:

But, honestly, look at the system they are in. The capitalist system.

The financial design of the system has turned what should be a largely altruistic service, one designed for public good and societal benefit and forced it to act like a financial institution.

Along side the requirement to generate returns for the system, at the heart of that paradigm is the hospital revenue bond.

For a hospital to grow, to compete, to negotiate meaningfully with private, profit driven “payers” they have to have access to capital. Because there can be no investors and not public offering, they issue debt in the form of bonds.

But debt isn’t just a loan out of the goodness of someone’s heart. It is an investment.

Most larger health systems carry billions (that was a “b” back there) in bond liabilities.

Here are some:

That’s like $26B from 5 health systems.

And real quick…

Bonds – a super brief primer

Bonds are debt that a company issues. Non-profits use bonds because they can’t issue stock. It’s how they raise money from investors.

Health systems issue Hospital Revenue Bonds, which are a type of municipal bond. Municipal bonds are tax free. That means that bond holders, the people buying the bonds, are not taxed on the income they earn from the bond.

Real quick side bar, just because you read the part too fast. The bonds that health systems issue are more often than not tax free for investors.

Ok, back to it.

The bond issuer (the company), pays interest to the bond holder. Just like any other debt.

That’s the long and the short of it. No time for how bonds work after market… call your local investment banker for that one. Plus, I’m not over here tryna give investment advice. My cousin Rick is still pissed about the tip I gave him in 2008…

And while this may look like an obsessed love affair, it’s more like an arranged marriage.

Why arranged? Well, frankly, what choice is there?

Say a hospital wants to build a stunning 16 story surgical tower so it can attract all those saucy commercially insured patients for some highly profitable cardiac surgeries.

Well, unless Daddy Warbucks was delivered at your hospital, chances are you ain’t got the $600M to build the thing.

With all these bonds flying around, hospitals need to play the game. And the game is a bond rating. The rating indicates how likely they are to pay what is owed on the bond.

You’ve probably heard of Fitch and Moody’s. Those are the rating folk.

Here is Moody’s rating criteria for hospital revenue bonds:

See anything about patient safety? Patient outcomes? Quality of care? Patient satisfaction?

No.

And why would you? We are talking about finances, investments, and money over here people!

Not that one doesn’t drive the other in my opinion, but no one asked me.

So now we have this wonderful cycle we’ve created.

Hospitals want to expand, buy stuff, build stuff. They also need to have leverage and market power to negotiate with terroris, I mean insurance companies. To do that they issue bonds. To issue bonds, they need a high rating. To get a high rating they need to do well on the rating criteria.

Naturally the focus then goes to finances. Often at the expense of what’s really important.

But back to the point of this missive, this as a macro level systems issue. Hospitals and health systems HAVE to operate like this. It’s the way the system is designed.

Individual motivation, compensation, board seats on your buddy’s company aside, what are we asking when a hospital needs to expand service lines and grow?

We talk about public and community need, but then shift all the responsibility to a private entity to serve those needs with little to no oversight. Along with all the responsibility to operate in a highly complex, financially challenging industry to that entity.

There is little to no planning at county, state, or federal levels.

Imagine a world where we had all the healthcare services we needed, which were appropriately matched to the needs of the communities being served.

If that were happening, a hospital wouldn’t need to issue $139M bond to be used for who knows what, fighting for patients in the name of growth, profitability, and pleasing investors.

Oh wait, I know what that money is going to be used for…

Remember, market position is the highest weighted category for a high bond rating.

My point is, when you place to entire onus on private organizations to grow, serve, flourish, whatever, within the capitalist, profit driven system they operate within they are going to use the means they have. Those means are debt, investments, and operating with financial interests first. They are playing the game.

Bonus feature, now that you know a thing or two about bonds you don’t have to avoid that cousin who’s a bond trader at J.P. Morgan. I mean, you probably should for other reasons, but not about the bonds anymore.

Cheers to you both!

Why it matters: These dynamics are making healthcare less accessible, less independent, and more expensive (you’re shocked, I know)

Read time: The last 6 minutes of your drive back from the lake last weekend that took 86 minutes (7 minutes for real though)

Oh, hi. Missed you too.

I thought it might be nice, since we haven’t seen each other in a while and you are enjoying that lovely mimosa to talk about why all our awesome doctors seem like they are riding the express lane to health system employment. And because of that, why it’s hard for independent practices to hire those bright-eyed bushy tailed newly minted physicians.

You may also know that I have this thing about independent physicians. About happy physicians. About patients getting the care they deserve and allowing their doctors to truly be in charge of that care.

Call me a hopeless romantic.

Here’s a chart we all know and don’t really love:

The question is why? Why are we seeing employment continue to rise?

Another question is what does that mean for the profession overall and specifically my dudes in independent practice?

Most importantly, what are we supposed to do about it?

Well I have some ideas on all of the above since I’ve been at the dock of the bay for the last four months, thinking about this moment. So, let’s get into it.

First, why?

There are a couple of reasons, three big ones in my opinion.

1. The pipeline

Let’s do some fun math real quick. It’s why you’re here after all. That, the jolly humor, and to make a drinking game out of spotting grammatical errors.

Layup.

This is for my cardiology friends out there holding it down.

Between medical school, residency, and fellowship, a cardiologist is about 10 years deep past undergrad and has a fat negative bank balance of about $331,000 according to a random statistic I found on the internet.

Now, the good news is according to some other random internet facts the national average salary of a cardiologist is about $525,000.

Solid.

While that salary is nice, don’t forget all that debt to carry.

I also want to pause here before any of you out there dutifully reading about to decry the amount of money a doctor makes, may I just remind you that physician pay only represents about 9% of total healthcare spending.

Also, consider that these people literally save lives everyday, so the value tradeoff definitely seems to be there.

Sorry, tangent concluded. Don’t come at me.

If we play out the debt equation on a standard, non-refinanced loan at 6.8%, this genial cardiologist is on the hook for about $690,000 in total loan payments over the course of about 25 years.

Just think about that for a minute.

That’s a lot of quiche. And sure, she may be earning a lot, but paying over 2x a loan amount, trying to also make up for the income you had to forgo for 10 years is a deep hole to climb out of.

Not to mention that workload, admin load, moral injury load, and generally the load that our physicians take on a daily basis.

Here’s the kicker. This scenario plays out differently in different settings.

While this scenario may be true in private practice, or a large medical group, things change if you look into the non-profit sector.

Certain positions in large non-profit institutions may also come with loan forgiveness. Whether in the form of signing bonuses, stay bonuses, direct loan forgiveness, or eligibility for Public Service Loan Forgiveness. And while you may not make as much on an annual basis, total payments before loan forgiveness may be as low as $120,000.

That’s a $570,000 difference in payments and decades of time off a loan term.

So, just imagine, you have been grinding for 10 years at one hospital, staring down the barrel of nearly $700K and 25 years of payments, and that hospital sits you down and offers a sweet deal worth over a half a million dollars. What are you gonna do?

Not just that, what options do you think you have?

Because realistically, if you turn to the private practice route, there just isn’t necessarily the same scrooge McDuck money vault swimming pool filled with 340B, private equity, facility fee, and uncontrollable contract rates allowing them to subsidize these a $525,000+ salary, knowing how much return they will be able to make off a single specialist in their system.

Spoiler, it’s about 6x.

If you weren’t defeated enough (I know it’s kinda my thing), let’s move on to the next reason.

2. Insurance is effing around and finding out

All right, let’s give our poor fresh fellows a break. What else is drives the employment model?

Insurance. Duh. It’s always insurance.

When a company can unilaterally control the fees paid to a physician practice and predicates those rates on size, where does that leave most independent practices?

At the mercy of 100% Medicare rates from 5 years ago. And in some cases, 85%. Thank you sir may I have another.

We will leave this discussion for another issue, but know that this unfounded leverage strategy makes no practical sense other than to help line the processors’ pockets and help drive consolidation.

And finally!

3. The exit

Here’s another big one. Imagine you have worked for 30 years, building your practice and feel like you are ready to finally take that trip to Italy you have always dreamed of. But that Lake Como life costs $4,000 a night.

Listen, I am all about wandering around the Italian country side finding a passable hotel with 2 stars, hoping they have a room, and then toughing out the lack of air-conditioning taking turns with you buddy Dave for who has the bed that night, but sometimes you gotta treat yourself.

Not to mention that after that trip, you want to slow down and maybe think about riding off into the sunset of retirement.

So the question becomes: who’s buying?

Your junior partners? How much money do they have? Do they want to run a business? Do they know how?

The health system? They have the vault and all…

Barron and his dad’s private equity group? Everyone hates them, but they’re also cutting 10x EBITDA checks.

These are real issues all reshaping the dynamics of healthcare delivery. All with different calculations, earnouts, restrictions, preferences, requirements, and side effects. But you better believe that it is going to be hard for anyone to turn down the “big payday” from PE or from a health system.

That too is a discussion for another day, as there are about 39 ways they will make the deal look really good and somehow your $10M payday turns into $1.5M. And sometimes your $1M payday turns into you owing money.

Seent it.

Knowing there may be less upside based on loans, instability from being at the mercy or insurance, and a potentially limited long-term path to ownership, it’s not much of a wonder as to why the pipeline is dry.

Okay Debbie downer, what then? Because it seems like the pipeline is broken, not just dry. And even if you do go that route, it still seems like all roads lead back to consolidation.

So glad you asked, thank you. I knew I liked you.

Let’s back it up to the health system.

How do they get that juicy 6x return on salary? Sure, it’s the direct contribution of the physician and making most of your money on facility fees. But it’s all the other things they can make as a result of having a patient stay in their system. MRI, CT scans, procedures, drugs, and yes, more facility fees.

All the dollar signs.

The issue is we have been playing the wrong game.

The game isn’t salary. The game is ownership.

The path is building something.

It’s easy, and don’t get me wrong, important, to talk about, fight for, yell into the void about reimbursement.

But the bigger opportunity and what is going to move the needle is ownership.

Own the ASC. Own the OBL. Own the imaging equipment.

Participate in the fees where CMS and processors are paying the most. Direct contract. Get into value based arrangements after you are positioned to own as much of the continuum for the patient as possible.

Rheumatologist should provide infusions. Ortho, interventional cardiology, urology, go get involved in an ASC. Build one. Invest in one.

Find a physician owned hospital and get in there.

Hospitals and private equity play the game. They own as much as possible.

Now that I have type ranted a little, let’s go back to the pipeline, because realistically ownership isn’t easy. It’s hard, but the payoff is worth it.

But even if you buy it, we are still missing a couple of key ingredients. Like pizza without the sauce and cheese. Bread, that’s just bread.

First, it’s the education. They don’t teach you business in medical school. They don’t teach it in residency. And they definitely don’t teach it in fellowship. In fact, I would argue that it is detrimental to hospitals to have their doctors exposed to business.

Why?

Because then physicians could see that they are getting a short term, decent deal, but long-term raw deal. That the hospital is profiting disproportionately off of their hard work.

Remember: no doctor, no reimbursement. No facility fee. No contract rates.

And big love to every clinician on the team making it happen.

Second, they don’t get shown the outcomes. That at the end of a 30 year career, one which you were in charge of, owned your patient relationship the whole time and unequivocally, were in control of your time, and at the end owned several valuable assets.

We don’t see that outcome enough. But it is out there.

The flip side of that? The worst case scenario… the health system never stops hiring doctors.

So, yes, we have a people problem in healthcare. But really it’s a math problem. Large institution employment makes healthcare more expensive and less accessible.

Independent ownership, makes it less expensive and more accessible.

It’s up to us to show the pathway and the upside.

See you next time!

Here’s what I just said in one sentence: The current financial incentives and economic realities make employment more appealing, while undermining the long-term viability of the practice of medicine. The path forward is physician ownership and better pathways towards that end.

Sorry, for the extra sentence.

It felt important though.

Love you.

Why it matters: This could represent a defining moment where employers are forced to stop enabling the rising costs of healthcare

Read time: About as long as it takes to get to the center of a tootsie pop (9 minutes for real though)

Hello wonderful humans who love understanding the morass of the healthcare industry. It’s me, Preston. Could you tell?

Today, outside of this little intro, I won’t be talk writing.

Today’s episode is brought to you by someone much smarter, with wildly better grammar than me. She is an attorney, consultant, speaker, truth teller, disruptor, and thought leader.

I am talking about the one and only, inimitable, Chris Deacon!

Follow her on the Linky Land and stay tuned for her book coming out soon! Not only that, her daily posts will help you understand the latest developments in healthcare from the ever important legal perspective.

Also real quick, here’s a little primer on some key elements of today’s episode:

ERISA - Employee Retirement Income Security Act of 1974. This act is supposed to protect the financial interests of employees and beneficiaries of employer retirement and health plans. Key elements include: fiduciary duty, coverage, protection of plan assets, and disclosure.

Fiduciary - This is a legal and ethical obligation to act in the best interest of a beneficiary. It’s also real easy to make immature jokes about, but I will refrain.

The Consolidated Appropriations Act of 2021 - a run of the mill $2.3T spending bill that included some key evolutions in healthcare including price transparency, limitations on gag clauses, elimination of surprise billing, and increased fiduciary responsibility for employer sponsored health plans.

With these items in mind, there has been a recent spate of lawsuits whereby employees are claiming their employers are breaching their fiduciary duty (so hard not to…) by paying inordinate prices for coverage.

Without further ado, enter the real brains of today’s episode, Chris Deacon!

Follow her already!

Almost three years ago, I was among the first to publicly predict a wave of ERISA fiduciary litigation aimed not just at 401(k) plans, but at employer-sponsored health plans. The Consolidated Appropriations Act of 2021 had just been signed into law, and it was one of the first congressional acknowledgements that group health plans—routinely the second-largest line item on an employer's income statement—demand the same level of oversight, prudence, and fiduciary care as retirement plans.

Back then, I imagined a near-immediate reckoning. I assumed general counsels and CFOs would begin poring over plan documents, PBM contracts, and data use agreements, asking hard questions about pricing, conflicts of interest, and whether they were truly operating in the best interest of their plan participants.

But unlike most politicians, I can admit when I’m wrong. And boy, was I wrong—at least about the speed.

That reckoning hasn’t happened at scale. Many C-suite leaders remain hesitant, disengaged, or overly deferential to their benefit consultants. And frankly, it’s not hard to see why. Many of the consulting firms most employers rely on for compliance guidance, strategic direction, and fiduciary insight are featured prominently in the allegations of these lawsuits—not as named defendants (yet), but as enablers of the very conflicts and overpayments at issue. So, it’s no wonder they’re not pulling the fire alarm.

If your consultant is a central figure in the alleged wrongdoing, they’re unlikely to wave the red flag and tell you to lawyer up. And yet, here we are. With three high-profile fiduciary lawsuits against household-name employers winding their way through the courts, the business of health benefits has never felt more exposed.

The Big Three Everyone is Talking About: Wells Fargo, Johnson & Johnson, and JP Morgan Chase

Over the past couple of years, three lawsuits have sought to hold large employers accountable under ERISA for the way they manage their pharmacy benefit plans. The core allegation is the same: that plan sponsors failed to act as prudent fiduciaries, resulting in higher costs for employees and the plan itself.

But while the facts are striking, the legal pathway is steep—and the procedural posture of these cases reveals just how hard it is for plaintiffs to establish the standing necessary to get their day in court.

Navarro v. Wells Fargo: The High Bar of Article III

Let’s start with Navarro v. Wells Fargo, filed in August 2024. Plaintiffs, former employees, alleged that the company’s health plan grossly overpaid for certain prescription drugs by selecting Express Scripts as its PBM without a competitive bidding process. The complaint cited drugs that cost the plan over $1,800 per fill when retail pharmacies could acquire them for less than $100.

And yet, the court dismissed the case—not because it found no wrongdoing, but because the plaintiffs lacked Article III standing. In short: the court held that the plaintiffs could not show a concrete injury directly traceable to Wells Fargo’s alleged mismanagement.

Why?

Because the plan operated like a defined benefit plan. Participants were promised access to a defined set of benefits, not cost savings. Even if Wells Fargo overpaid for PBM services, the court reasoned, there was no guarantee those savings would have been passed along to the employees in the form of lower premiums, co-pays, or deductibles. Absent a more direct harm, the injury was deemed too “speculative” and “conjectural” to meet constitutional standing requirements.

In other words: bad PBM deals don’t automatically equal standing.

Lewandowski v. Johnson & Johnson: A Tactical Amendment

Johnson & Johnson was hit with a similar complaint in early 2024. The plaintiff, Ms. Lewandowski, alleged that J&J breached its fiduciary duty by allowing its PBM to overcharge for drugs. The court acknowledged that she may have paid more than necessary, but because she met her out-of-pocket drug maximum each year, any overpayment ultimately accrued back to J&J, not to her. So, she too lacked standing.

Rather than appeal, plaintiffs went back to the drawing board. Just last month, they filed an amended complaint—adding more factual allegations to support the claim that overpayments led to suppressed wages and increased premium contributions. They also added a new named plaintiff who did not reach their out-of-pocket maximum, in an effort to avoid the standing trap that tanked the first round.

That amended complaint is now pending. J&J will almost certainly move to dismiss again, likely pointing to the Wells Fargo ruling as persuasive authority. The question now is whether the court will see the new facts as sufficient to establish standing, or if it will continue to hold the line on what constitutes a redressable injury.

Curtis v. JP Morgan Chase: The Expansive Complaint

Then there’s the newest—and arguably most aggressive—complaint: Curtis v. JP Morgan Chase, filed in March 2025. This lawsuit mirrors many of the themes in the Wells and J&J cases: overpriced drugs, failure to supervise PBMs, and plan participant harm. But it also goes further.

Plaintiffs allege that every generic drug in JP Morgan’s formulary was overpriced. They point to Hyrimoz, a biosimilar to Humira produced by CVS (Caremark’s parent company), as an example of a conflict-laden selection. Several lower-cost biosimilars were excluded from the formulary entirely, which plaintiffs argue was done to preserve a business relationship between JP Morgan and CVS—one in which JP Morgan reportedly earned millions.

Most interestingly, this complaint introduces a new fiduciary theory: that JP Morgan knew better and still failed to act.

The complaint cites JP Morgan’s active membership in the Pacific Business Group on Health (PBGH) and the Health Transformation Alliance (HTA)—organizations that have published clear warnings about the dangers of traditional PBM models. The plaintiffs argue that by knowingly ignoring best practices promoted by the very coalitions JP Morgan belongs to, the company breached its duty of prudence and loyalty.

It’s a novel theory—and potentially explosive. If courts accept the idea that knowledge of better strategies creates fiduciary liability, the floodgates may open.

That said, I predict courts will be cautious. Knowing a better path exists is not the same as acting imprudently. There’s still the question of market realities, labor contracts, cybersecurity needs, and the dozens of other factors employers must balance when selecting a PBM. Whether a judge will credit those constraints or deem them insufficient remains to be seen.

The Real Challenge: Constitutional Standing

Across all three cases, the common hurdle is Article III standing—a constitutional requirement that plaintiffs show an actual injury that’s concrete, particularized, and redressable.

This is where health plan litigation diverges from the 401(k) wave. In retirement cases, it’s relatively straightforward to show that excessive fees reduce investment returns. But health benefits are far more complex. Plaintiffs need to show not just that their plan overpaid—but that they personally suffered financial harm as a result.

That’s not impossible. The “perfect plaintiff” would likely be a current employee, in a high-deductible health plan, with evidence (EOBs, receipts) that they overpaid for drugs compared to market alternatives; backed by actuarial reports showing that different PBM models could have saved money, and; documentation that their premiums or out-of-pocket costs increased due to rising plan costs. When 90% of Americans have a hard time understanding the difference between co-payments and co-insurance, this seems like a tall task.

But given the magnitude of the value these cases hold for enterprising attorneys and plaintiffs alike, I believe strategies will be revised and refined—the bar may eventually be met.

A Legal and Cultural Inflection Point

The legal landscape remains fluid. The U.S. Supreme Court’s ruling in Cunningham v. Cornell University simplified pleading standards for prohibited transaction claims, potentially lowering the barrier for future ERISA cases. Meanwhile, Congress continues to scrutinize PBMs, and a handful of states have gone further—passing laws that actually designate PBMs as fiduciaries under state law. Combined with regulatory implementation of the Consolidated Appropriations Act and increasing state-level enforcement activity, we may be approaching a new era of accountability.

Or maybe not.

The pace of change is still uncertain. Litigation alone, as we’ve seen, may not be the accelerant we once imagined.

I’ll be the first to say it: I was wrong.

I once believed the threat of litigation would be the wake-up call—the thing that finally forced employers to pay attention to what was happening under the hood of their health plans. That fear of fiduciary exposure would drive scrutiny, reform, and better deals for employees.

But I don’t think that anymore.

I think the real catalyst will be discontent. Not from judges or regulators—but from plan members and employers themselves. People are angry. They’re tired of getting fleeced, nickel-and-dimed, and gaslit into believing this system is the best we can do. They’re watching drug prices skyrocket, premiums devour raises, and TPAs treat their data like proprietary secrets. They're watching their consultants and carriers grow richer while their employees skip care.

And yes, in tragic and extreme cases, like the recent murder of UnitedHealth’s CEO, we’re reminded that the disillusionment with the system is no longer abstract—it’s palpable, volatile, and dangerous.

Employers don’t need to act out of fear of lawsuits. They should act because it’s the right thing to do. Because their employees deserve better. Because they’re mad as hell and aren’t going to take it anymore.

And if that anger is what finally brings the change we’ve long needed in this space?

Then maybe I was wrong for all the right reasons.

Told you Chris is awesome sauce.

Oh, sorry, it’s me. Preston again.

Go connect with and follow Chris!

See you out there!

Why it matters: Because they are whack, and shocker, lead to higher costs and less doctors

Read time: The time it takes to actually cook dinner. No it’s not a 15 minute recipe Ina. (9 minutes for real though)

Here’s the crux:

Doctors are underpaid for the value they deliver in healthcare. The rising costs are made worse by the payment mechanisms. Those mechanisms drive the economic outcomes of the system. The economic outcomes of the system are too expensive for the value that patients and doctors receive.

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Here’s the fun part:

All right you boat shoe wearin, gold chain danglin, fist wagging, Wall Street Journal reading fiscal conservative but social liberal. Let’s talk economics.

The economy is largely based on simple principles. One being supply and demand. Another being price elasticity. And another being value exchange. I suppose we could bring in market structure too.

You may be asking, how did all this come about? Well, while I should have been working, it was scrolling on professional Facebook and came across an INCREDIBLE interview with the one and only King Maverick Emeritus (Mark Cuban) and Dr. Graham Walker.

What got me is when Marky Mark said while it costs $25,000 for a heart transplant (heh, he’s been slingin low cost drugs for too long and forgot how much this stuff actually costs), the doctor only makes $2,500.

He goes on to say that the doctor should be paid $10,000 for the procedure!

And I agree. Totes. I want my doctor to be paid a bucket load and not have to do tons of cases a day to keep the lights on. I don’t want them charting on the weekends, pulling 24 hour shifts, and making pennies while taking call.

But, there is more to the story. Let’s look at the detailed breakdown of what Maestro Cuban is talking about.

First, a heart transplant doesn’t cost $25,000. Maybe in Turkey. I don’t know.

According to this Journal of the American Cardiology College (JACC) article, here are some costs of a heart transplant:

Median Medicare: $216,927
Median Commercial: $418,997
Median Chargemaster: $935,473

If you want more info on the whackado chargemaster, we wrote about it here.

Ok, so CONSIDERABLY more expensive than $25K.

But here’s the real kicker.

Surgeon reimbursement is based on CPT codes. The Heart Transplant CPT is 33945.

33945 in Atlanta reimbursement: $4,717.34.

Oh, thank my lucky stars for that 34 cents!

To be fair, that million dollar heart transplant you just got isn’t like a quick stay. You are in the hospital for the better part of a month. ICU. Tons of nurses. Constant monitoring. All the drugs. A new heart for crying out loud. Not cheap.

The purpose of this illustration is less about the total cost, but an indication that payments seem to be unbalanced. Though I may argue that a heart transplant isn’t the best example.

Let’s look at one more. One that comes up always and is important for all kinds of reasons.

The knee replacement.

We’ve been looking at this thing economically for decades. And don’t worry, I haven’t forgotten about the economics piece. Just laying the foundation.

So, for a knee replacement, here are some thing to Big League Chew on.

According to this article in the Journal of the American Academy (way fancier than College) of Orthopedics, here are some costs:

Mean Medicare: $11,828
Mean Chargemaster: $85,115

Full transparency. I don’t love this article. There are some typos (I expect way more from the academics than from my own grammatical and spelling capabilities). It doesn’t look at commercial rates. And the info is from 2018. But I am about those back links and this still gives you an idea of what’s what.

These days, Medicare is paying around $13K to the hospital. Surgeon reimbursement?

$1,272.63.

All right, but we still have two things to talk about.

One, what are these numbers based off of?

Two, is you said we were going to talk about economics!

I am trying to sprinkle a little fairy dust here! I am setting a scene. Don’t yell at me!

First, all of these payments are based on several payment mechanisms.

1. The Physician Fee Schedule (PFS).

2. The Inpatient Prospective Payment System (IPPS).

3. The Outpatient Prospective Payment System (OPPS).

And to get these payments wrong, we use something called CPT codes, which are part of HCPCs codes, MS-DRGs, and APCs.

I am sorry. I hate me too.

But, it’s important to understand since everyone is always prattling on about facility fees. Well, here we are.

Let’s do a quick overview, since either we have been talking for like an hour, or this is just taking forever to write.

Physician Fee Schedule

I hate the name because it makes people think this is what doctors are paid. It isn’t. This is what is reimbursed based on the particular procedures or services provided by a physician.

Remember that forty seven hundo the surgeon gets paid for the heart transplant? If they weren’t paid a salary by the hospital, they would only have that much money to pay all practice expenses.

It’s revenue, not salary.

We’ll come back to this.

The PFS uses CPT (Current Procedural Terminology) codes. Each CPT code has a reimbursement amount assigned to it. If you want the breakdown on where those rates and what even the heck an RVU is, check it out here.

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Inpatient Prospective Payment System

The IPPS is based on MS-DRGs (Medicare Severity Diagnosis-Related Groups). There are rates associated with each DRG. Then, there are calculations made that depend on various factors within each hospital using the DRG rate.

Those calculations will account for room and board, overhead, disproportionate share, cost ratios, all the good stuff.

As you can imagine, hospitals spend a considerable amount of time figuring out how to justify these numbers to get their rates as high as possible.

Outpatient Prospective Payment System

The OPPS is similar to the IPPS. You can think of them as effectively the same. The difference is instead of being based on DRGs, it is based on Ambulatory Payment Classifications (APCs).

Again, similar to the DRG, but takes different factors into consideration. These factors have to do with the clinical setting and all the costs and overhead the facility incurs.

Hospitals are more expensive than outpatient facilities because there is a 24/7 ER among other things.

And one more little bonus feature, the Ambulatory Surgery Center (ASC). Obvs. P.S. you should totally open one. Forward Slash / Health can help.

Ask how they can help

ASCs are typically paid at lower rates if they are independent from a hospital. When a hospital owns one, it can apply full OPPS rates versus the discounted ASC rates.

Ok, that was a lot. And this is a lot of words with less numbers. But we still have a little ways to go, so stick with me.

Refill your Big League Chew.

The golden nugget in what I just did a poor job explaining, is the professional fees versus facility fees.

Promise we are super close to tying this to economics.

The IPPS and OPPS are designed and necessary to cover a facility’s cost. It’s expensive to run a hospital. Hospitals need that paper. And they certainly aren’t covering the cost of a heart transplant on $4.7k.

These are the facility fees you hear so much about. Naturally, they are way higher in a more expensive facility, i.e. hospitals.

The rub is that so many of these procedures can be done in different, lower cost settings. The other rub is a big part of the reason they aren’t is because the lopsided nature of the payment systems.

Listen, a hospital needs a booty load of money to give you a successful heart transplant. But there is also zero ways a surgeon can run a successful practice getting $4,700 per transplant. You can’t do 12 in a day.

So what happens? The hospital employs the surgeon, pays them $800,000 a year and then its overhead goes way up.

And I think it’s important to say this here: IT IS NOT PHYSICIANS’ FAULTS THAT COSTS ARE GOING UP!

Sorry for type yelling.

That’s a big salary. But remember how much the hospital makes off of the surgeries that physician brings in. All wrapped up in those facility fees. And not nearly enough in the professional fees to run diddly squat.

See the dynamics?

The total knee example also give some additional perspective here. Because while you need a heart transplant in a hospital, you don’t need a knee replacement in a hospital.

But, hospitals keep buying ASCs or building them and then charging higher facility fees. And the independent physicians are having to up their productivity because CMS keeps lowering the PFS.

Mark is definitely right. I also want the doctors making WAY more money per procedure. But it isn’t the whole story. The whole story is worse and leads to ever rising healthcare costs.

Ok, now that I have been typing all day, here’s the economics part. Real quick.

Health systems benefit from Oligopoly market structures. Meaning few firms in a market. That drives consolidation and raises costs as competition is reduced. Health insurance companies do the same, though their goal is to lower THEIR costs, by paying less to the folks actually delivering healthcare and shouldering real costs.

So, then it seems that competition, naturally, is the answer. Yes and no. Knees? Yes.

Heart transplants, cancer, heart attacks, trauma? No. You can’t shop healthcare when you’re dying.

MRIs? Yes.

It’s a mix then. And market structures play a big role in the healthcare economic landscape. But we have to consider price elasticity. You will pay ANYTHING you can to live. So price becomes irrelevant. Hospitals know that.

In terms of supply and demand we are effed. Demand is increasing. Supply is decreasing. Doctors are in short supply. Nurses and all other clinicians too. Why?

All that junk I just talked about up top. Also the unrelenting moral injury.

Also this: value exchange.

Sure, give the hospital $200K for my new heart. But $4,700 to the surgeon?

The surgeon who took my beating heart in her hands, cut it out of my body, then put a new beating heart into my body in one of the most complicated biological systems on the planet, all while keeping me alive.

That’s $4,700?

The value equation is broken. All of these elements are coming together to break the system. And not in a good way like a Kit-Kat bar. In a really dangerous way. A way where we aren’t able to carry on this way much longer.

Good talk.

Here’s what I just said in one sentence:

Physicians are the value driver in healthcare delivery but do not earn the commiserate value exchange, therefore exacerbating the economic breakdown of the healthcare system.

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Talk to those handsome devils

Why it matters: UHG is the largest healthcare company in the world and they control access and the cost of healthcare for over 100M people… so ya, it matters

Read time: The best scene in My Cousin Vinny, so all of it (9 minutes for real though)

Here’s the crux

UnitedHealth Group is the 8th largest company in the WORLD. It control access to healthcare for over 100 million people, showing no signs of slowing down.

And unfortunately, people with UHG coverage or are in-network physicians often feel like a deer in south Alabama drinking from a little brook. BAM!

It’s financial prowess is underscored by its devious practices that directly impact patient lives. Understanding the financial picture, how the money flows, and where the company is going will help to elucidate issues with the system and possible uncover opportunities.

Here’s the “fun” part

Let’s start this party off with a good laugh. According to UHG’s 10-K, this is the business UnitedHealth Group would have you believe they are in:

“UnitedHealth Group Incorporated is a health care and well-being company with a mission to help people live healthier lives and help make the health system work better for everyone. Our two distinct, yet complementary businesses — Optum and UnitedHealthcare — are working to help build a modern, high-performing health system through improved access, affordability, outcomes and experiences for the individuals and organizations we are privileged to serve.”

No, no. I know. It’s hilarious.

And, since it’s hard to keep up with all the business UHG does do, here’s a little overview:

UnitedHealthcare = individual, employer, Medicare, and Medicaid insurance
Optum Rx = PBM and specialty pharmacy
Optum Insight = Change healthcare and analytics
Optum Health = Care delivery employing over 100,000 physicians and a bank (ya, a bank)

Cool, now that we know generally what UHG is up to, how they doin over there?

Not too shabby although I am sure Sir Witty would like to see better than flat returns. It has outpaced the so called S&P 500 Health Care index. Basically a more apples to apple situation to make UHG feel better about itself.

That’s more than half of the work that UHG does by the way, making it feel better about itself.

Now that we have an overview of UHG, let’s dig into the numbers to see what these two yutes have been up to, shall we?

Naturally, Balance Sheet first:

Oh, look at that, UHG is rich AF and has all the money. More shocked than Ralph when he got popped on murder one when all he did was cop a can of tuna.

And just because UHG has any Goodwill at all, let alone $107B worth of it, there is more to the balance sheet story.

Liabilities:

After all, UHG does provide, health insurance? Whatever that means. So naturally, we need to scrutinize the liabilities to see 1 of 2 of the biggest heists in the UHG (and all US vertically integrated alleged payors) playbook.

The float.

We see that UHG has $86B in current assets. It also owes $104B in current liabilities.

If you are a graduated master of my Healthcare Breakdown - The Finance Course!, you know this is all kinds of a red flag for the liquidity of the company.

But, this is an insurance company. Meaning, that while they do owe those medical costs payable, that’s other people’s money. In other words, that cash shows up as a liability that is owed, but currently UHG is holding all of that money since you have already paid it in premium dollars.

In other, other words, UHG uses your money to make itself rich AF.

So, I guess we were right to assume the rich AFness in the beginning.

Float, by the way, is what made Warren Buffet so rich. He owns Geico and when people pay their premiums, Warren takes them and invests those dollars. They are recorded as a liability, but all the money made off those liabilities go into his tiny pockets.

But, enough about the float. If you want more, you can read it in past issues here.

Let’s see how UHG makes all it’s cash in the first place. Cuz we know it’s not by hustling J.T. at pool. That guy only has a roll of ones with a twenty wrapped around it anyways.

Here is a detailed income statement:

As you can see, I have pink boxed some interesting items. Namely that premiums have gone up, but so have medical costs. Now, this alone doesn’t tell us a lot. Because with more people served, that means more premiums, and naturally more costs.

The proportion of increase is important though. Premium revenue has increased less than medical costs. This year was “tough” for UHG having to pay for stuff it didn’t want to. There were also Medicaid redeterminations and Medicare Advantage base rate adjustments. That means more cost for UHG.

And we can see that the MCR (medical cost ratio) has increased YoY.

Maybe UHG is incurring higher medical costs. It does deny a lot of care and drives unreasonably high out-of-pocket costs landing people in the ER, which is super expensive. And maybe, juuuuust maybe there is more in that MCR than medical costs which are inflated anyways (foreshadowing).

Fun fact about medical costs. Did you know things like quality improvement initiatives count as medical costs? Whatever that means.

Bottom line, between the inflation of medical costs (more foreshadowing) and the bogus padding games UHG can play, what I see is solid positioning to raise premiums across the board.

But despite this cost increase, UHG has tightened up and fired a bunch of people to keep it’s operating margin right about 8%.

Next! The second best trick in the playbook and one of the reasons our healthcare keeps getting more expensive.

Intercompany Eliminations! He said with a booming voice. We’re that the foreshadowing part by the way.

You can read up on intercompany eliminations here if you are so inclined.

You see there that UHG eliminated $151B last year. That means, in my humble opine, it took too much money out of one pocket and put it in its other pocket.

Because the beauty of intercompany eliminations is that you can pay yourself as much as you want and still make oodles of cash. All while boosting the ole’ MCR.

Here’s a picture of how it works:

We can also see it’s significant growth of 11% YoY. So, while medical costs have increased 9%, eliminations have increased 11%.

I obviously don’t have all the detail to do a super detailed analysis, but when your eliminations are growing like this, to me it seems like a driver of costs. Not the opposite like UHG would have you believe.

Anyways, let’s take a stroll down revenue lane to see the segments and where all the scrilla comes from.

This is UnitedHealthcare revenue by segment:

Holy CMS Batman. If we look at the total portfolio, UHG earns 74% of its revenue from Medicare and Medicaid.

What that means is tax payer dollars are enriching UHG. Because last I checked and as we are about to see and have seen, UHG makes a ton of cash.

P.S. UHG exited Brazil faster than Vinny got out of town before the New York Clerk came back and was about to get busted by Judge Chamberlin. That’s what the big swing in the Global segment is. It also accounts for a significant expense on the income statement, which you may have caught.

Money is one thing, people are another.

Below is the breakdown of covered lives in the insurance business. Interestingly, the CMS covered folks only account for 39% of covered lives. Meaning a disproportionate contribution of this population in revenue compared to the amount of people covered. Translated, there is a lot of money to be made of Medicare and Medicaid.

Just so long as you aren’t a doctor or a patient.

INTERUPTION!

Whoa whoa whoa, Preston. Hold on second. We at Forward Slash / Health respectfully disagree. There is money to be made with both Medicare AND Medicaid. And we’d be very happy to show you how.

We work with private practices all over the country, helping them grow financially successful practices and stay totally independent. All while taking Medicare and Medicaid.

Just hit this link here to learn more or the button below to set up a call.

The schedule a call button

Ummmmm, that was a weird interruption. You let someone sponsor your newsletter one time and they just keep popping in unannounced.

Anyways, back to the amount of covered lives for UHG on government programs.

Finally, we come to the statement of cash flows. And a couple of interesting items.

First, Medical costs payable, as you know are premiums paid by customers, held and owed by UHG. This number has gone up year over year and represents a positive cash flow into the business.

Don’t be deceived by every liability.

And of course, over the year, UHG has pulled $24B in cash.

Sweet.

For investing, UHG does it. It has plenty of cash, using that float to buy investments to the tune of $27B last year.

And interestingly, it classified the loans made and repayments received as the results of the Change Healthcare cyber attack as investing activities. I suppose someone smarter than me can give a good explanation, but since UHG constantly has cyber incidents, I would consider this part of operations.

But I am more George Wilbur and less Ms. Vito when it comes to things like this.

Nevertheless! That cash needs to be accounted for somewhere and it is accounted for here.

Lastly, as we should all be way too aware, UHG takes your money and buys back its own stock and also pays its shareholders dividends every year.

To the tune last year of $16.5B.

Now, to be frank, it’s good business. If you feel the stock is undervalued and/or a good investment you should buy it back. And you should incentivize and reward shareholders with dividends.

So, this may be more of a commentary on the healthcare system at large (shocker, I know), but it does seem contrary to the spirit and necessity of society creating mechanisms to help ensure and supply healthcare in this country. Surely we are better and stronger the healthier our population is.

As such, while it may be financially prudent from a publicly traded, for profit company perspective, it is antithetical to a healthcare system designed to provide benefit to those which it serves.

Oh, UHG is also a bank. I said that at the beginning but you may have missed it. So wild right?

That’s part of the numbers below. Customer funds administered from HSAs and the like.

And here is how much UHG paid to buy back its stock:

Creating a ton of value for patients right?

Welp, that’s all folks!

I have a new wrap up section below. But if you are exhausted from trying to figure out my movie references and can’t fathom reading any further, just know, I heart your face.

Here’s what I just said in one sentence

UHG controls access to healthcare for over 100 million people and will continue to operate as it has for the past 60 years creating very little patient value and extracting as much as it can from the system it purports to serve.

Heart hands.

Why it matters: This program allows the rich to get richer while the poor stay that way

Read time: As long as it took Sanka to win his 7^th push car championship (6 minutes for real though)

Let’s be real for a minute. If you really want to go deep and get the real deal look at the 340B program, put down this newspaper and head to Drug Channels. Adam Fein is THE authority on drugs. Yes, even more than Walter White. Nicer too.

And since he’s smarter and more attractive than me, many of the graphics you will see in this episode come straight from the illustrious Adam Fein himself.

Ok, if you stayed to hear my take, the simpleton’s version, let’s get right to it.

Let’s start with the obvious question:

But Preston, how can it be bad for poor old rural hospitals to buy drugs at a discount from big old mean drug makers?

Well, sweet little Jason, I will tell you. But first! What even is 340B?

It’s a no longer little program that went into effect in 1992. The year before the perfect retelling of the triumphant story of the Jamaican bobsled team that forever changed the world of bobsledding, Disney magic, and lucky eggs. The program allows “covered entities” the ability to purchase outpatient drugs at a steep discount from drug manufacturers.

Covered entities used to include a very limited number of facility types that you might expect such as Ryan White centers, Federally Qualified Health Centers, tiny little, baby little rural community hospitals, and the like. Nowadays, thanks to everyone’s favorite punching bag, the ACA, the qualifications for a covered entity has greatly expanded. The darling of that expansion is the so-called Disproportionate Share Hospital (DSH).

A DSH like metro Atlanta’s very own, Wellstar. That same one that runs a $100M venture fund and bought a hospital for $800M right after closing one of two of Atlanta’s only level one trauma centers that happened to serve a low-income community.

No, no, I’m not bitter.

But you probably can start to see the issues.

And here how the program has grown in dollars, both program value and purchase price:

That’s a lotta cheese. And in fact, is now the second largest drug program right behind Medicare Part D. Ya, the big dog.

So, in 2023 covered entities purchased $124B worth of drugs for $66B.

Back to the original question of why is it so bad for hospital, even those really rich ones, to buy drugs at a discount? Especially since the drug companies can afford it? Well, sit down here on grandpa’s knee and let me tell you how capitalism works.

If my profit margin is eroded by say, mandated discounts and loopholes in a well intentioned but poorly governed program, that allows organizations like Ascension, Cleveland Clinic, and NYU Langone (Ya, that hospital that made $1B in cash and burned $8M on a Super Bowl commercial that wasn’t even funny) to buy drugs at half the price, then I’m just gonna go ahead and raise the price.

Don’t start telling me I’m wrong yet, you well educated lot. Drug companies do have to provide rebates if they raise the price of covered drugs more than inflation. Good thing drug companies don’t just make one drug now isn’t it. Also good thing that there are lots of channels in which to sell drugs.

We’re talking about the ripple effects to the whole system here.

This is the basics. When you are trying to maximize sales and profits, you look at your mix and raise prices where you can to offset lower margin drugs.

Yes, the expansion and rise of 340B utilization definitely has helped to propel the rise of drug costs.

But it’s not just manufacturers. I know everyone likes to pick on them, but don’t forget about the darling PBMs. And those lovely covered entities too.

So, around the time of the program’s expansion, the government also told hospitals that they were allowed to contract with pharmacies to dispense 340B eligible drugs. That meant that the hospital didn’t even need to touch the drug. It could just send a patient on their merry way to Walgreens or CVS to pick up their covered drug.

Or better yet, they could do a mail order script. Love those. And guess who manages all this fun?

Ya, Pharmacy Benefits Managers. And when hospitals were allowed to use contract pharmacies instead of in-house, the number of contract pharmacies exploded to over 30,000. Not to mention the over 200,000 contractual relationships between all of these pharmacies and covered entities.

OK, I know we are having more fun than a Jamaican bobsled team line dancing in Canada.

Here is how things flow when a patient who is 340B eligible gets their meds:

A simplified version of course. There are a couple more middleman missing as you might imagine, but this is the gist. What’s wild is the hospital doesn’t even need to touch the drug. Oh, and there’s more…

And again you are thinking, so what Preston pants? The patient must be getting some of that savings, right… right????

Ya, sure all you healthcare junkies. Sometimes.

Like this many times:

Ya, less than half the time.

Fun right.

What does this mean? This means that hospitals are pocketing profits and not passing along the savings to their patients. And not just the hospitals. The contract pharmacies too.

You know Optum isn’t leaving someone else’s money on the table.

Here’s one more example from the master of pharmacy himself, Adam Fein on how much profit a hospital and a contract pharmacy stand to make through this program:

Herein lies the crux of the issue. Consolidation is afoot in healthcare. Mega systems are getting super mega. And when a rich af health system buys a small little community guy, they also buy access to the 340B program. That allows them to open clinics as extensions of the little community guy and give rich white people expensive drugs that the hospital bought at a discount, but reimbursed at the full amount, then pocket the profit.

See, now that the hospital can buy drugs at half price, doesn’t mean that a patient gets the drug at half price. The plan still reimburses the full amount of the drug. The PBM takes its cut. The contract pharmacy its cut. And the hospital gets the rest. The patient and the plan still pay the full reimbursement amount.

And if I sound a little salty this week, well, sorry not sorry. We’re talking about entities making billions of dollars, invested in private equity, hedge funds, and venture capital, stashing money in Venezuela and The Caymans, flying private jets around the world, opening hospitals in Dubai, while closing them in inner cities, all while taking advantage of the very people they supposedly are on a mission to save.

But don’t take it from me, take it from the wolf’s mouth:

And that $685M in cash is with an insane $1.5B increase in A/R from their own and Change Healthcare’s cyber attacks.

The loving ministry of Jesus Christ, serving Private Equity with billions of dollars while divesting in low-income markets. Pretty sure that’s what he would have done.

Also, this is one hospital. Now, extrapolate across all the large mega systems in the US. Yes, even Cleveland Clinic. 340B is definitely keeping them afloat. Or they are for sure passing on those savings to patients… ya…

Ok, I’m going to eat some ice cream not to get this salty taste out of my mouth.

Feel the Rhythm!

Why it matters: Health insurers are denying claims and delaying payment to protect float

Read time: As long as it takes to get too full from IHOP’s endless pancakes (6 minutes for real though)

I think we can all agree, insurance companies suuuuuuuuuuuuuck. Like they really, really suck. Healthcare costs the US $5T and 5 health insurers rake in about $900B of that.

20%.

5 companies.

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Ok, back to the rafts.

The float we are here to talk about, is insurance float.

First of all, what the heck is it? Why does it matter? And how can you get you some?

Foray one: what is it?

It’s this:

It’s also this:

For those keeping track, this means…

UHG
Working capital ($20.6B)
Current ratio: 0.79

Cigna
Working capital: ($11.4B)
Current ratio: 0.77

From first glance you may be asking, why in the world does UnitedHealth Group, the largest and most nefarious of all insurers, owe more money than it has?

Isn’t that a problem?? You spend all these Healthcare Breakdown issues telling us about why you shouldn’t get overleveraged, managing cash, and all kinds of boring conservative stuff and now this???

Wait, don’t go!

First of all, check this out:

Sorry for the tiny writing. See, one more reason to hate insurance companies. They make everything harder.

It’s easy to see that while it may seem like a problem, these two puppies are doing just fine. And by puppies, I mean large, soulless, evil empires.

Cigna made a TON of money and UHG made even more TONS of monies.

So, what IS going on then? How do they owe all this money but still make so much money??

Well, insurers in their infinite wisdom and trickery use something called float.

And it’s all about this:

And this:

What you are looking at is cash received but not yet paid out. Cash that these insurers have, but owe. Later.

The dark arts is in the “later” part.

Here is how it works:

You pay your premium.

UHG’s 7,900 actuaries estimate how much you are going to cost them over the next year.

That number, the estimate, goes onto the balance sheet as a LIABILITY. It’s not an asset because it’s money they will eventually pay out.

Key word: eventually.

As in, you pay them $400 bucks this month, they keep $60, and record $340 as a liability. To be paid at some point in the future.

Here is the magic though! They don’t just let that money sit on an old dusty mattress in their Scrooge McDuck money vault to go swimming in on the weekends.

They put that money to work. They invest it. They buy stuff with it. They use that money to make more money.

Then, eventually, after they have denied your claims as many times as possible to prolong the eventuality of payment, they pay that $340 out.

But, unbeknown to you, that $340 is now worth $470.

Free money.

What looks like a liability to you and me, is free money for them. Your money.

It’s all about timing.

Which brings us to…

Side quest 2: Why does this matter?

It is literally (am I using this word right? Maybe it doesn’t mean what I think it means…) the underlying cause of so much of our insurance woes.

Remember the “eventually” part?

That’s the whole game. The longer an insurer can wait to pay you out, the more money it makes.

What does that look like for you and me?

Denying MRIs ordered by your physician. Denying medications you need. Denying surgeries. Denying treatment that couldn’t be more medically necessary.

Denials for the sake of delay.

Insurers will do anything to protect the float. And unfortunately, it’s not the good kind on the Hooch. It’s the evil kind.

And that’s all I have to say about that.

Final countdown: How you can do it for good, not for evil.

Remember your best friend, Cash Flow and why it’s so important?

The reason is timing. It’s also why float is powerful.

Sure, you owe that money, but not yet. What can you do with it to grow it before you owe it?

Ohhh my. I like that. “Grow it before you owe it.”

Trademarked! Can’t steal it! You heard it here first. Where’s a lawyer?

Freakin lawyers, never there when you need one, always there when you absolutely don’t.

Here’s how you can apply the concept.

Find ways to get your revenue upfront to deliver a service or product later.

Practically speaking that could look like preselling 4 month’s supply of something upfront to be delivered over the coming 4 months. Use the money to get more customers, more product, or invest in something else.

Discount memberships for the full year so you receive payment upfront but deliver over the coming 12 months.

Bundle services that someone will use over time, but the cash is received before services are delivered.

Here’s a picture of the concept. Cause I know you love hot pink pictures:

(By the way, ignore the simplicity of how revenue hits a balance sheet. This is just for illustrative purposes.)

In this totally made up example, you have a customer who pre-pays in some way for the service or thing you sell.

$613 of those dollars are a liability since you owe delivery on something worth $613 later. But there is nothing keeping you from using all of that money to get the customer flywheel going.

Since you are savvy AF, you use that money to get more customers to pay you upfront, to get more customers to pay you up front, to get you more customers to pay you upfront, to…. I think you get my point.

Customer financed customer acquisition.

That’s one way to adopt the concept. In insurance land it’s use premiums that should be paid out in covered services to buy more investments from your bestie’s private equity fund and stock buybacks to increase returns and share price to get a bigger bonus and higher profits.

I mean, tomato, tomahhhhhhtoh (phonetic spelling of snarky posh British accent).

And while you may not be operating in the financial sense of float, the concept can be applied in the same way insurers use it.

Get max money upfront and then grow it. Be careful not to overextend it. This isn’t a Ponzi scheme. This is a focused way to grow through customer financing.

Use this tool for good. Not for evil.

By the way, unrelated side note… let’s stop calling insurers, “payors.” They are processors. And gate keepers. It’s your money, not theirs. They don’t pay for anything. They take. You pay.

Love you.

Why it matters: Understanding this new age math can help private practices stay that way and patients/employers understand what they are really paying for

Read time: As long as it took you to realize He-Man and Ivan Drago are the same guy (7 minutes for real though)

And now, a word from our illustrious sponsor:

Forward Slash / Health works for physicians. Yes, they work FOR Physicians… to escape the unrelenting crush of administrative burden, run financially successful practices so you can take your significant other on Disney cruises whenever they want, and stay totally independent after you let the private equity company fly you somewhere fancy to eat caviar and drink champagne on their dime just to say politely but not too politely…. ummmmmm pass.

*Unnecessarily silly language added for style and because that’s how I roll. They are much less silly, but still, the right amount.

Give ‘em a call!

The call scheduling button

I totally missed you too.

Now that we have the sappy stuff out of the way, let’s jump into math that makes less sense than common core math. IYKYK. What’s up parents.

That’s right, today, we are talking about charges, chargemasters, and how in the world your bill went from $22,000 down to $1,700.

Ya, you wish.

On the flip side, for all my doctor fraynds, it’s also key to your practice. Because while you are charging $238, they ain’t paying you that. But then again, if you charge less, you may be leaving money on the table.

Let’s start with the patient perspective, because we’ve all been there.

Here’s a bill from the internets:

Thank you Kaiser Bill of the Month Club. This poor soul went for a colonoscopy and got charged for two. Classic.

But what I want to point out is the this top section here:

We’ve all seen it. We don’t love it. We don’t know what it means, or why it exists.

But I’ll tell you.

The what it means part:

First up we have “Charges.” This one is going to come up a lot and it’s common from all the perspectives and settings. This is what the hospital, the doctor, the practice, the whatever, charges. This is the same charge for everyone. It can be for a private plan or Medicare. It can be for you or me. Doesn’t matter, this is the “price” set by the care provider.

But they know, now you know, we all know this isn’t what they will or anticipate being paid.

Silly right? It gets better.

Next column, you see, “Adjustments/Ins Payment.” Sometimes this is broken out into two columns, but why waste paper space or make things easier to understand. This is healthcare dang it.

This column shows both what has been adjusted and what insurance has paid. Since that makes no sense, here’s what that meaning means:

A doctor (you, if you are a doctor) contracts with an insurance company. I would say that you both agree to what they are going to pay you for certain services, but we all know that’s not entirely true…

Anyways, you have a contract with the insurance company for an “Allowed Amount.” That’s the contracted rate. Another column would then show what the plan or the “payor,” paid.

And if you decoupled the “Adjustments/Ins Payment” column you would also see the adjustments made. That would simply be the difference between the charges and the allowed amount. Good old subtraction.

To be fair, from the payor perspective it does make sense to lay it out this way. When they do, it shows why you have insurance in the first place. If not, look at those charges! You would be on the hook for all of it without those nights in shining armor. Or in He-Man’s case, shining speedo armor thing.

This is the game.

Blue Cross Blue Shield actually has a nice little example on one of its 12,000 websites. Here’s the image:

To bring it all together, here’s what the the first bill and the above Explanation of Benefits tells you:

1. What the “price” of the service is

2. The difference between the charges and the allowed amount, or the adjustments made

3. How much the insurance company is contracted to pay (sometimes)

Shweet. Then you can tell how much you are on the hook for.

Not too shabby. Why do I even write this thing (I constantly ask myself), you could have totally figured that out.

But wait, there’s more!

Why, good madam, do we even have these wily charges? The fanciful things that everyone knows no one is going to pay?

I will explain by asking you two questions….

1. Does Africa have more or less than 10 countries?

2. How many?

Don’t peak at the answer!

It’s 54.

How many did you guess (unless you are a geography wizard and know)?

What just happened to you was anchoring. Anchoring is a point of reference that you subconsciously set based on some potentially unrelated or arbitrary input. The first question anchored a low number in you mind. When you do this, the majority of people will guess a lower number than 54.

If I had asked does it have more or less than 60, you probably would have been closer and guessed a higher number.

Weeeee psychology!

Soooo…. When you see this:

(And who said that L&D was a money loser…)

You know this is anchoring in action.

This too:

I had to make my own chart, because chargemasters ain’t pretty.

Not too shabby for a gross charge. Just a little 317% mark up over the discounted cash charge.

And anyone’s guess what private insurers are reimbursing this for.

If I had more time and patience, I would have calculated the Medicare rate, but as reliably as He-Man yelling that he has the power unnecessarily, like we know guy, we know… it is a huge pain in the tuchas to get all the info together from CMS.

Honestly, it’s no wonder that hospitals have to spend so much money and time on their billing departments. It’s not an easy game.

They do make it easy to look up physician fees though. Which is mighty nice of them.

Here’s what a physician is going to make from Medicare for the procedure:

That’s sweet.

Who is it that’s driving up healthcare costs again?

Anyways, back to this code provided courtesy of Wellstar. It provides a glimpse into the complexity and the madness of charges, adjustments, and all the morass.

But back to the anchoring for a moment. Two reasons charges are silly/not silly. They serve as a foundation for negotiation with these alleged payors. Anchor high as a starting point.

Additionally, in every contract the language stipulates that a payor will pay the lesser of charges.

That means that if your contracted rate is $125 but your charges are only $115, they gonna pay you $115.

I mean I would.

This brings me to my next point.

This one is for you my private, independent practice homies.

Get your charges right. There is some art and some compliance science to it. But what you definitely need to know is that your charges need to be higher than your contracted rates. If not, you will get the lesser of the two.

Silly game? Yes. Game you have to play? Yes. So know the rules.

And I agree with everyone reading this that’s like, “well it’s the insurance companies, and opt out, and Bucky Fuller, and other fist shaking shouldas.”

But we are here, right now. And for a physician working to remain independent, care for their patients, and stay in business, this is how it works.

Change? Yes, please.

We can do both at the same time.

Ok, I think that’s enough high horsery for today.

I still love you.

Why it matters: Because its essence is actually pretty simple, giving way to opportunities for better care, cost, and access all around

Read time: All Too Well, Taylor’s Version from the Vault

Ever feel like you’re taking crazy pills?

And no, not like when you are debating with your spouse about whether you actually talked about the plans you allegedly forgot about.

No, like when you stare into the unabashed eyes of an employer who is like we need to go with a BUCAH cartel plan.

In fact, I feel like I am on a crazy IV drip because I have no idea why we need the likes of the carriers in the first place. Yes, yes. They take on and pool risk, blah blah blah.

They also do a whole lot of terrible things in the name of profit maximization and I cannot seem to find any particular value they do bring. Only that which they extract.

Hence, the crazy.

Anyways. This episode is not about that. It’s a little too easy to take shots at insurance companies these days. Instead, I am going to go into something that’s pretty cool. Something that will hopefully do two things:

1. Show you that insurance in principle isn’t all that complicated.

2. Show you an example of partnering with insurance companies that can be a boon for private, independent practice with a real example.

First up, at it’s core, let’s talk about what insurance is. You know the history of health insurance, since you have been with me since the beginning and never miss an episode. If for some reason that isn’t the case, which there’s no way that’s possible, you can refresh yourself here.

So, in the beginning it was a way to make more steady money for hospitals and it gave teachers access at a reasonable price to a single health system. The teachers paid a monthly amount, then got the discounted access.

Cool.

If we break that down, what’s happened? A group of people had a contract with a hospital to pay it a certain amount for a defined set of services.

That. Is. Literally. It.

Here’s a picture if you’re more into that sort of thing:

You can come for me all you want and yell about actuarial things, risk modeling, pools, and all the stuff. But at it’s core, it’s a person or organization contracting with healthcare organizations to provide care at a certain price for a certain set of services.

Hooray, insurance.

So the question is, why do we think it has to be so darned complicated?

Well the money of course. It’s always about the money.

Great, money.

Fun fact. Employers spend about $1T a year on healthcare. The rest of the $4.8T comes out of our pockets, Medicare, Medicaid, and Tricare. What’s really fun is that we fund those programs and so it all comes out of our pockets.

I digress though. The point is employers can very simply choose to contract directly with healthcare organizations just like insurance companies do on their behalf. The best part is no middlemen taking way too much money out of the value chain.

Like DeSoto Memorial Hospital, which saved 54% of it’s healthcare spend and saw $1.2M drop straight to the bottom line. Imagine the rural hospitals we could save with these plans and this savings.

Or a 150-year old local pharmacy that saved $40,000 a year with an employer built health plan. Imagine the local independent pharmacies we could save.

Just common sense contracting and solutions we know that work.

Speaking of things that work, now that you know health insurance is actually pretty simple, here’s how one private independent practice is taking the principles to heart to help improve access for patients.

Gwinnett Clinic was started in 1983 by Dr. J.J. and Meena Shah. In better words than I could have written: It is an independent, locally owned, multi-specialty medical group with seventeen (17) locations throughout northeast Atlanta. Gwinnett Clinic was among the first practices in the nation to offer same-day and walk-in visits and direct scheduling with in-house specialists as well as onsite imaging, laboratory, physical therapy, and pharmacy services. In addition to primary care, family medicine and internal medicine, GC offers specialty care including allergy and asthma, lifestyle medicine, obesity medicine, neurology, and orthopedic surgery. Gwinnett Clinic patients avoid urgent care and emergency room costs by having easy access to doctors they know and trust in a comprehensive care model. Having served over 500,000 patients, Gwinnett Clinic consistently performs in the top quartile nationwide in cost and quality metrics.

Here's where I stole that marvelous introduction.

Now, Gwinnett Clinic under the leadership of Dr. Deep Shah is partnering directly with Ambetter. Ambetter is a health plan brought to you by Peach State, which is brought to you by Centene.

While there is no love lost between Centene and I, although I am quite sure not a single person who works there knows who I am, there is something to be derived and replicated from this partnership.

First, a boon for private, independent practice. Independence is getting harder and harder. But look at Gwinnett Clinic. 41 years, 17 locations. PRIMARY CARE!

Ya, it’s possible. And we need it.

Because I don’t know if you caught the last part…. But, “Gwinnett Clinic consistently performs in the top quartile nationwide in cost and quality metrics.”

In fact, here’s a graph showing that:

What you are looking at is CMS data showing that Gwinnett Clinic outperforms all of Georgia and the same zip code in terms of cost.

Let’s go back to the principle, insurance is just a contract between two entities for a certain set of services. Centene has now contracted with Gwinnett Clinic to offer a health plan which has the clinic as the cornerstone.

It’s called Ambetter Health Gwinnett Clinic Select. And if you live in Gwinnett County Georgia in need of an exchange plan, it’s there. Outside of the clinic, the plan includes Piedmont health system for hospital care.

But good thing Gwinnett Clinic does a darn good job keeping people out of the hospital.

The plan comes in Silver and Gold, just like Simone Biles’ necklaces from Paris. The economics on the patient side are a bit of a moving target since this is an exchange plan, but here are the Silver and Gold rates for a median family in the county.

Household size: 3
Household income: $84,000
Applicant: Male, 37, non-smoker

Silver

Premium: $448.51
Deductible: $5,000
Fam deductible: $10,000
Max out-of-pocket: $8,000

Gold

Premium: $469.76
Deductible: $1,500
Fam deductible: $3,000
Max out-of-pocket: $7,800

Here’s the specs on Gold and Silver if you are curious.

Before I go on, let’s not get it twisted, I am not out here promoting health insurance plans. I am trying to show what’s possible out there with the current system. And the independent physicians and practices can pull a set up right to the table and get some sh… stuff done.

And in Dr. Shah’s words:

"Taking care of our patients - many of whom are friends, neighbors, and community partners - is a singular privilege…. Primary care is the foundation of our practice, and we will continue to expand access to care that leads to superior outcomes. This is the type of creativity we will need to help patients and local businesses find value when they go to the Marketplace.”

An incredible clinic contracts with a health plan to agree on pricing for a specific set of services.

That’s all we are talking about here. Dr. Shah has found a way using the mechanisms of our traditional system to create a product expanding access to members of the community to receive higher quality care.

And it shows, along with what the folks like Carl Schuessler (DeSoto Memorial) and Cristy Gupton (Moose Pharmacy) have done with Mitigate Partners for employers.

This is basically just a really long, rambly intro email.

Just like you don’t need to listen to all the ivory tower health system administrators going on about how complicated health system finance is, you don’t need to buy into the cliché that health insurance is too complicated.

A contract and a network.

Now, go have another.

See you next time, planet earth.

Why it matters: Non-profit health systems save billions in tax dollars, but they may not be earning that privilege

Read time: The length of that Sarah McLachlan commercial with the dogs where she makes you cry with her haunting mezzo-soprano (7 minutes for real though)

You want to hear some crazy ish?

The NFL was a non-profit until 2015. In 2023, the NFL generated $20B in revenue.

That’s 1/5 the revenue of Kaiser. Which at $100B in revenue is larger than everyone’s favorite mouse ear ice cream company.

Disney, it’s Disney.

Yet, in 2015, the NFL gave up it’s non-profit status and started paying Uncle Sam.

Today, we’re going to talk about it. Primarily what even does “Non-Profit” mean. What is profit really? Should health systems pay the piper? And how much are we even talking about anyways?

But first, an exciting announcement from my friends at Forward Slash / Health! And before you wonder why they show up here so much, it’s because I sincerely believe in the mission of bringing back, strengthening, and enabling private independent practice. They’re doing the things.

On November 8th, they are launching a comprehensive course to help physicians launch their own direct primary care practice. If you pre-order, it’s at the insanely low price of $599.

That price goes up after November 8th, so act fast.

In additional to all the great course content, which will literally walk you step-by-step through how to setup and get rolling in DPC, you get one-on-one time with the team.

Check out the course here

They are also launching a community for clinicians looking to start practices or grow their current practices. If I were a clinician I would be all over it.

Check that out here:

Sign up for community access

Cool. Check those awesome cats out. Now back to the show.

First, what do we really mean when we say “Non-Profit?”

A Non-Profit or Not-For-Profit if you’re long winded is a type of entity that usually, most of the time, pretty much all the time, doesn’t have to pay any taxes. On more or less anything.

No tax on property. No state tax. No sales tax. No federal tax.

The obvious first question you are going to ask, is how much taxes are health systems not paying?

Great question and a little hard to quantify. Obviously, because they are messy and healthcare entities’ favorite word is obfuscation. A haughty word that means, the action of making something obscure, unclear, or unintelligible.

You know, like most political speeches over the last 8 years.

Here are two takes on how much health systems benefit from non-profit status exemptions:

From the AHA: $13.2B in 2020 and clearly a joke.

From KFF: $28.1B less of a joke.

Even at the high side, it doesn’t seem like all that much. But, if we look at the context of those potential taxes a little differently, the picture becomes clearer.

There are 2,987 non-profit community hospitals in the United States.

That’s $9.4M in taxes not paid by each hospital each year. Imagine what that amount of money could do for the communities these health systems… ahem… serve.

Ok fine in order to get this magical designation, health systems do have to provide services to the community. Here’s another moving target that lives in the grey. And not like the entertaining Liam Neeson type.

If you listen to the AHA, community benefit clocks in over $100B annually. Not too shabby.

KFF on the other hand doesn’t look at total community benefit, but rather only charity care as defined by care provided for free or at a discount for qualifying patients. The estimate clocks in at about $16B.

Comparing apples to apples or kiwis to kiwis if you are feeling exotic, the AHA reports charity care provision at around $57.4B. Now, that is still more broadly defined and includes Medicaid shortfalls.

See, it gets all complicated.

But here is my big contention outside of the fact that we really just need some better definitions around things:

Charity care calculations are like Kris Kross. Wiggity Wiggity Wiggity whack.

Here’s how charity care is calculated:

Cost-to-charge-ratio times the value of the care provided. Sounds simple and great Preston, what’s your issue? Why do you get all bent out of shape over hospitals all the time?

Beeeecause Becka, that value of care provided at a discounted amount is inflated. It’s totally made up. And while the cost to charge ratio should take care of it, it doesn’t.

Here’s an example:

See there, the higher the made up gross charge, the larger the discount and the more charity care is recorded. Fun time.

Let’s keep digging into the madness.

Total community benefit includes shortfalls from Medicare and Medicaid. Medicaid I can get behind, but Medicare, nuh uh. You can make money on Medicare.

Annnnd I am not sure who need to hear this, but running a low margin on Medicare doesn’t mean squat. Non. Profit. Remember? Breaking even should be fine if you are serving the public good.

Sorry. Sorry. I got heated.

Community benefit also includes things like professional education, you know, educating people who work for you to make them better at their jobs and drive more value and quality in your organization. K.

Community activities and services. So, marketing. Word.

And some other things I can get behind.

So maybe there is a middle ground. But I am not entirely sure we’ve seen the entire picture here.

Because while these health systems are enjoying non-existent tax bill, they are still making plenty of money.

Here’s the deal, just because a company isn’t taking all the money it has left over and paying distributions to shareholders or increasing shareholder value, doesn’t mean it can or doesn’t spend all kinds of excess on things like travel, compensation, bonuses, and a whole bunch of other perks that have nothing to do with providing community value.

Let’s just look at some fun things shall we.

How about Atriums $52M in the Cayman Islands:

Or Atrium’s private planes used by it’s executives:

Maybe we should ask about how much of this tax exempt money is being poured into Private Equity. Just look at Cleveland Clinic. There’s almost $7B between PE and Hedge Fund investments.  And that’s just one system.

I am not entirely sure that is the best and highest use of the tax payers money, while these profit only driven organizations are destroying healthcare left and right in the name of profit.

Or, Ascension’s private equity fund:

A cool $1B under management with companies generating around $60B annually in revenue. Cool story Hansel.

Or Wellstar’s venture capital fund:

You get the point.

Health systems forgo paying billions in taxes every year, trump up what they are allegedly providing to their communities, all while they are focused on generating as much cash and building as much wealth as possible.

One more, because I have been talking a lot.

Let’s just look at Kaiser over the years:

Yes, that’s my own LinkedIn post. No, don’t make it weird.

On the flip side, what’s up with the for profit health systems. You know em, you love em, HCA, Tenet? Those guys.

Surely they must be way worse….

Well, Rebecca, yes and no.

If we look at the dollars, which is what we’re about here at the Breakdown, HCA made $5.2B in 2023. It paid $1.6B in taxes. ANNNND provided $3.7B in uncompensated care.

Inflated? Yes, but that’s grapes to grapes.

Lookie:

To be fair and I am sure I can find a nurse in about two seconds that would vouch for this, HCA ain’t a beacon of quality, but from a financial perspective, all the money. While paying taxes. While providing all kinds of uncompensated care.

So, let’s get back to the original question, should non-profits be tax exempt?

Yes, if they were run properly. But no, probably not, because they aren’t nor are they living up to their end of the bargain.

Now, ending caveat. There are plenty of smaller, rural hospitals on the struggle bus right now. Hitting them with taxes and the burden of uncompensated care would be a death blow. So it’s not a one size fits all situation like that oversized sport coat every 12-year-old boy in the 90s owned. Yo.

But those are two different stories with much broader implications of the system’s financial designs that we will tackle another time.

Until then, love you, mean it.

Why it matters: Oh, just because they decide if you get treatment or not

Read time: The length of that one Grey’s Anatomy episode (no, not an eternity, 6 minutes for real)

Right about now we are on track to spend around $5T on healthcare.

But before we get to all that…

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In 2013, we spent $2.9T on healthcare. At $5T by the end of the year, that’s a mere 72% increase. Meh, 0.72 isn’t even a whole number.

In 2014, the Affordable Care Act took effect. That’s important to note, because while this landmark legislation was well intentioned and had a lot of good, there also came a lot of downside. Mostly because the various lobbying organizations made the bill look more like Anakin Skywalker post lava dip versus the adorable pup we all met on Tatooine.

One of the items in the bill was the Medical Loss Ratio, familiarly referred to as MLR. Insurance carriers are beholden to an MLR of 80-85%. That means they have to spend at least that much of premium dollars on medical costs.

Funny, I know.

Let’s part with reality for a moment and assume that if an insurer coughs up the requisite 85% that it’s all legitimate, fairly priced, and actually goes towards medical care. I know. I hope you didn’t just spit out your mimosa.

Now that we are living in the floating realm of make believe, here are the strategies and reasons for the strategies that your friendly neighborhood insurance provider employs to make themselves as rich as possible, while you wonder if you can afford to pay for that procedure your doctor told you that you needed but United Health Group said wasn’t covered.

1. Deny, deny, deny

We’ve all seen this rodeo before. You need an MRI, but your insurance company, which apparently is allowed to practice medicine and somehow formed a physician patient relationship with you has decided you don’t need an MRI. Or a procedure. Or a medication.

This does two things. Well three if you include how much it pissed you off.

From the insurance company’s perspective, it improves its bottom line and its cash flow.

In terms of profit, a denied claim means premium dollars it doesn’t have to spend. That’s money it gets to keep.

For cash flow, that’s money that stays in the coffers, not money going out. Cash in hand son.

Yay money. It’s a big part of the reason UHG, for example, is looking like a cash king in Q3 2024:

Who doesn’t want a cool $21.8B? I’d for sure be drinking my mimosa out of a 10th century Han dynasty chalice.

It’s also mega profitable.

As an aside, you may have seen UHG stock slipping lately. Them and all the other big dogs. Well that’s what happens when you only make a billion dollars a month instead of two. Get your act together United!

2. Prior authorizations

Prior Authorizations, if you know, are like pre-denials. Well, really they are pre-approvals. But you know what’s happening here.

For many procedures and things like MRIs you will need a prior auth to make sure your insurance will pay for the thing.

Fun fact, only about 10% of Medicare Advantage prior auth denials were appealed in 2022.

Just look at the denial appeal rate. If you were in the business of getting a lump sum from the government and told you can keep what you don’t spend, wouldn’t you love denying and banking on the fact that only 10% of the time anyone would come knock on the door and say, “Where’s my money man? That was a loan.”

Speaking of loans, the prior auth game is really about protecting the coveted float. Turn the page. Figuratively. Not like a literal page. I know you don’t bring books into the bathroom anymore and you are reading this instead of your morning doom scroll.

3. Protect the float

Guess what made Warren Buffet extra super rich? That’s right, Geico’s float.

Float if you haven’t heard is the money that insurers collect in premium dollars and know they will need to pay out but haven’t yet.

It’s a liability on the balance sheet, like-a-so:

Despite that being a liability, it’s also cash. Cash that the insurance company can use for other stuff. Presumably investing in things. Like yachtspitals probably.

Just like your bank doesn’t just take your money and throw it on a musty mattress in the vault, waiting for Al Capone and his tommy gun to come steal it or for you to come withdraw it for that matter, your delightful insurance company isn’t just sitting on your premium dollars waiting for you to twist your ankle.

They have deployed that capital and are making money off of it. Just like the old dude in Mary Poppins singing about your deposit being invested in railroads or some quaint old timey thing.

By delaying payments in the form of denials and prior authorizations, we are all giving Sir Andy Witty the pleasure of making free money off the other free money.

Take another sip, you’ll need one for this next section.

4. Increase the cost of healthcare, I mean revenue

Remember that MLR thing? Hypothetically speaking, if you ran a business and I said you were never allowed to make more than a 15% margin, what would you do to earn more profit?

Not a trick question, you would raise prices. If the profit percentage stays the same, the only way to increase the bottom line is to raise the top line.

But here’s the rub, if you raise the top line without matching spending, your percentage will necessarily increase.

Buuuuut, if you also increase spending so you stay at 15% but on a bigger number, then you just won the game.

Last but… that also means in healthcare land, cost have to go up.

So while insurance companies are always trying to pay less and complain about reimbursement and costs, they really don’t give a hoot, scoot, or boogy.

They need healthcare costs to go up. If costs don’t go up and they just raise premiums, they have to pay back their customers. Blech, who wants to do that.

Looky, here’s an example of how that works:

So there you have it. The upward spiral of healthcare costs in three way too simple pictures.

Here’s your TL;DR:

Insurance carriers are in the business of making money, not paying for your healthcare.

To do that they employ these macro strategies:

• Deny claims to improve margin and cash flow.

• Require and deny prior authorizations to improve margin, cash flow, and protect the float.

• Focus on keeping the float high so our premium dollars can make money by sitting on the balance sheet. See the first two strategies.

• Let healthcare costs balloon so they have justification for raising premiums and making greater net profit.

Well, I hope today’s issue made you want to fire your BUCA plan, go rogue, and join the revolution. And remember if it made you want to start something crazy and you want the baddest folks around on your side for the most wildly incredible deal, you know where to clicky.

It’s here. Click here.

Or Here

See you out there!

Why it matters: Private practice is challenged to say the least, understanding MSOs is critical for physicians

Read time: Much shorter than Apocalypse Now (6 minutes for real though)

I hope you have your espresso martini primed, because we are about to dive into some topics that are changing the landscape of healthcare.

Yes, that’s right, it’s the MSO.

First of all, what is an MSO?

Thank you for asking the most obvious question since asking, if Tay and Travis Kelce breakup, what does that breakup song sound like? And do other teams use it as a hype song against the Chiefs?

P.S. I would sooner quit healthcare than see Tay and Trav breakup. It’s too adorable.

Speaking of adorable, there’s a super adorable guy putting on a webinar this coming Wednesday. You should totally check it out if you’re into this whole private practice thing.

Click on this gorgeous picture for details:

There may even be some extra awesome stuff if you tune in live. See you there!

Here’s a button too in case you forgot to click the picture:

Register dang it

Sorry for the digressions. MSO…

MSO stands for Management Service Organization.

Aside from the obvious that an MSO is an organization that provides management services, what pray tell, does and MSO actually do?

Well, that can depend. At the simplest level, they do in fact provide management services. Think the business junk that is everything except clinical care.

Not like McKinsey consultants that drop a PowerPoint on you after charging you $250K to annoy the people who actually do work in your company.

Management services would be things like billing, accounting, compliance, human resource management, general practice management, etc. That day-to-day grind.

MSOs can do even more depending on the model, which we will get into in a second, like buy buildings and lease them to practices, manage all the bank accounts, invest in additional growth capital, serve as in-house counsel, and negotiate contracts on behalf of a practice.

What you may not know about MSOs, except for all that stuff I just told you, is that they aren’t new.

Shocker, I know.

They used to be called PPMs, or Physician Practice Management organizations. The darling of that original ilk was PhyCor.

Check out PhyCor at it’s height:

Yup. A billy plus in revenue. Though margins were pretty slime. I guess it’s hard to run a practice after all.

And at it’s demise:

From a cool $1.5B in revenue to $300M, with losses in the hundreds of millions.

Not to mention its balance sheet…

Yeesh. What happened?

And what can we learn from it.

PhyCor essentially did what the modern MSO does today. They would buy or contract with practices to leverage scale, take on capitated payment structures, provide administrative support, and help navigate the ever evolving regulatory and payment landscape.

It was much easier to take on risk as a group with thousands of physicians as opposed to 7.

Not at all familiar, right?

Before we look at the modern marvel, let’s chunk down the types of MSOs into 3 buckets.

1. The private equity MSO

Private equity can’t own physician practices outright. I have written about the structuring a few times, which you can check out here.

Essentially, a company is created and a series of contracts are written whereby the physicians retain ownership of their practices on paper, but all the value transfers to the MSO and the physician cannot sell the practice without permission.

The PE group uses the MSO to provide admin services, consolidate negotiating power, roll up practices for higher valuations, and then sells the whole thing in about 3 years.

2. The old, but now new model

The modern MSO such as Privia, Astrana, Aledade, Pearl, and agilon to name a few function eerily similar to PhyCor and it’s best friend MedPartners. Although these days, with such diverse payment models, they each focus in slightly different areas.

At the end of the day though, it comes down to three main things.

Enablement, Aggregation, and Management.

While some focus on one area more than others, it’s really about these three levers. The same levers that PhyCor used to pull.

Now, PhyCor was heavy into buying practices, got way over it’s skis in debt, and realized (as PE soon will) that there are two kinds of leverage in this world and they were playing with the risky kind.

Without dissecting each in great detail, the highlight is this:

Aledade - ACO enablement all day. Still private so the jury is out

agilon - MA now into ACO, losing all the money. They also sign like 10 year term contracts… Yeesh. PhyCor used to sign 25 year terms. Even 2 years gives me hives.

Pearl - ACO, still private. Founded by investment bankers and hedge fund managers so who knows.

Privia - Public, most diverse revenue, though largely in the FFS game. Meaning, it’s value prop is owning the administrative headache and having you in their medical group. Revenue as a percent of collections is mighty high and I hear it’s hard to get out of a deal.

Astrana - Also public and heavily in on risk based contracts. Most of it’s revenue is capitated payments. It’s profitable too. Imagine that.

They all come in slightly different focus and flavors. At the end of the day, it’s about what makes the most sense for the practice. The major drawbacks I see are that these organizations are another means of shipping out autonomy. Because if you decide to bring things inhouse or change partnerships, you may be looking at an uphill climb.

3. The other guys

This is the fragmented world of MSOs. Smaller boutique style firms that serve as contract organizations to help practices run better. They provide many or if not all the administrative services, but are not as involved in value based arrangements. They can often help work towards VBC readiness, but will not bear risk along side of a practice group.

The folks are pretty straightforward and can be helpful. If they know what they’re doing.

To sum it up, there are three main types of MSOs:

1. Private equity – we own you

2. VBC redux – we kinda own you

3. Outsource – we don’t own you

Now that you know what they offer, here’s what they take.

Private Equity takes it all and leaves some scraps to everyone they didn’t fire so long as you crank your production to unsafe levels.

The big dog enablers can take a lot. For a long time. I am sure some folks out there have more specific numbers that this non-investigatory journalist cold find, but I have seen fees amount to 12% of revenue in some cases for a small practice up to 40% of collections.

Here’s what that looks like for Privia:

Now, there is a lot more to this, but it states that of its representative physician groups, owned and affiliated, those groups bill $2.84B. Privia earns $1.66B in revenue.

That’s 58%.

It does pay out $1.3B in provider expenses. But the devil is in the detail of these contracts where someone else isn’t pulling the purse stings, but controls the entire purse.

Here’s it’s P&L:

It’s taken some time, scale, and lots of aggregation to get to where it is today. The question remains, will history repeat itself?

It comes down to this, which I have said before and I’ll say it again, man I love being a turtle. Wait, sorry, 90’s movie reference.

There is no one way. Only your way.

Speaking of your way, if you are an independent physician making your way, you should talk to my friends at Forward Slash / Health. Their mission is to help independent private practice physicians escape the crush of administrative burden, build a financially successful practice, and remain totally independent.

They’re one of those boutique ones I mentioned.

Here’s an large logo you can click and check out their newly gussied up website:

Tell them I sent you.

While MSOs have been around for a hot minute, they aren’t going anywhere. And with private practice becoming increasingly difficult in the face of reimbursement challenges, the rise of private equity and health system predominance, and the tricky regulatory landscape, MSOs can be a boon to stay in the game. And even, dare I say, thrive in the game.

But then again, that’s what PhyCor said.

Go in with eyes wide open.

Unlike Nicole Kidman that one time.

See you out there!

Why it matters: Private equity is messin up all kinds of things and making you doctor want to bail

Read time: That time you told your spouse it would only take 5 minutes to fix that shelf (12 minutes for real though. Not the shelf, the reading. The shelf will take an hour).

Today we are re-visiting private equity. That thing you hear about that’s really effing things up for doctors and patients in healthcare.

And as you will see, it’s none too great for the likes of all of us… cough… Steward Health Care… cough

Before we jump in, a quick reminder that if you are in or around Atlanta, GA, the Hotlanta, The ATL, October 6th, and happen to be a doctor looking to bail on this PE mess, and have been thinking about Direct Primary Care as an option, come to the DPC mixer, hosted by my good friend Dr. Michelle Cooke.

Here’s a flyer you think can clicky:

Here’s how this is gonna go. We’re gonna rundown what private equity is, some of the mechanics, and why it’s all up in healthcare’s business. Then I’ll dazzle you with the strategies it uses to maximize returns. Hint: It’s never about better patient care..

So… What is private equity?

I’ll keep this one short. Private equity is a group of people who raise a bunch of money and buy private businesses. It’s a way for investors to invest in private companies, expecting returns they otherwise couldn’t get in the stock market.

Imagine you have like $40M and you want to invest some of it but the old S&P workhorse just doesn’t do it for you anymore. So you meet a slick 30 something who’s dad set him up with his own private equity fund and all the fleece vests he could ever want.

He tells you that he can get 20%+ returns through his new $500M fund that he’s raising. He focuses on healthcare, buying practices and selling them in 3-5 years. And brother, business is a boomin.

So you and 27 of your closest friends plus a number of pension funds throw in and he raises $500M. He starts buying companies, increasing their value, and then selling them in the time frame promised.

Boom. A bunch of besties, pooling money and buying companies. That’s really what it boils down to.

Fine, maybe there’s a little more to it or they wouldn’t be able to afford all the sweater vests. Here’s some more of it.

And how does this magical game work?

Sub-part: the structure of a private equity fund. This part has pictures, yessssssssssss.

Funds are setup like this: A General Partner (GP) goes out in his awesome vest and raises money from Limited Partners (LPs). The GP is the front man, makes the decisions, buys the businesses, and does all the fancy stuff to make lots of money for himself and his investors.

It looks like this:

All the lines are money lines. Not unlike the 80’s in your favorite stock broker’s private room at the club. The main difference is the lines were white then, not hot pink.

When this stately fellow is done raising his fund, he goes out and buys businesses.

Sub-part: how the money flows. More pictures!

The GP makes money on fees and performance. The most common structure is called 2 and 20.

This kindly lad charges 2% on all the money that gets deployed by the fund. So if he has a $500M fund and has bought $372M worth of companies for the portfolio, he’s making a meager $7.4M. Poor guy.

When he sells one of the fund’s businesses or exits it by going public, the LPs get their principle back plus 80% of the returns (the extra money the business was sold for). Young Beckham gets 20%. He’ll also get his principle back if he invested.

Like so:

That’s the fund structure. Now, how are these gracious gallants buying these businesses?

Debt, baby!!

Sub-part: how businesses are bought, the debt jams. Also, pictures.

Fun fact: HCA was bought by private equity in 2006 and then taken back public in 2011. It demonstrates on a large scale how this works.  

Here are the high level deets:

HCA was bought for $21B.

The private equity gentleman borrowed $16.8B (debt).

They invested $4.2B of their own money from the fund.

They owned it for 5 years.

During that time they distributed $4.3B in dividends.

They decided to exit by going public again in 2011 and raised $3.8B in the IPO.

Investors made $1B through the IPO.

They kept equity stake in the company worth $11B.

So basically they invested $4.2B and earned cumulative returns of $16.3B (dividends + sale profit + current equity).

Not a bad slice of pie.

I made another picture:

Check out the numbers behind this ole leveraged buy-out bonanza. Debt in 2006 before the private equity saddle and after it went back public in 2011:

That’s quite the debt increase.

And in the Private Equity world, the company holds the debt. That’s the best part.

Another way to think about it is sort of like buying a house and flipping it. Basically you can learn everything about private equity by following those guys on Instagram who boast about how much debt they have in their rental portfolios and using OPM (Other People’s Money).

You put down 20% of your cash and then get a loan for the other 80%. The house is collateral.

For a company, you put down 20% of your cash and get a loan for the other 80%. The magic here is that the 80% goes on the company’s books. The business is on the hook for the debt, not you. And in theory, operations covers the debt. Just like your renters cover your mortgage.

Then you increase the value of the company and sell it in a couple of years. While in the house example you would need to pay off the debt from the sales money, in Private Equity world, you don’t. You leave the debt behind for the business to take care of over the next 30 years or so.

Winner, winner, chicken dinner.

See the game? No wonder Beckett just bought that chalet in Big Sky.

But why does Private Equity love it some healthcare?

I think you know. We all know. It’s a $4.8T opportunity for cryin out loud.

As you may know, PE groups have had their eye on specialty practice groups for a couple of decades. There are two main reasons PE targets specialty clinics in their pursuit of happiness.

1. It’s hard as shoot buckets to delivery care these days in a highly complex regulatory environment, not to mention individual and population dynamics, and trying to figure out how to get paid through value-based contracts

2. Reimbursement suuuuuuuuucks. Sorry, not sorry. CMS isn’t paying doctors enough. Doctors, not hospitals. Hospitals make enough. And to boot, commercial plans don’t care about your 3 physician practice being out of network so they are going to go ahead and cut your payments 40%. Because.

That’s also why a PE buyout is appealing to docs. Not only do those headaches go away (don’t worry, new ones are right behind them), you also get a nice payout which is better than riding into the sunset with a satchel full of thank you notes.

Don’t get me wrong, satchels of thank you notes are amazing. They warm the soul. But so does a yearly vacation to the Mediterranean on a chartered yacht. The weather is positively soul warming.

The play for private equity in any of their acquisitions is to maximize EBITDA for a sale at a higher multiple in 3-5 years.

Financial returns are the name of the game.

Now, as you can imaging there are some different ways an organization can go about improving EBITDA and multiples.

The first is grow a great business. Treat people right, make good decisions, try really hard, all that good stuff. If you love that kinda thing, you should talk to my people at Forward Slash / Health. It’s all they do.

Orrrrrr, if you’re way more awesome, use financial engineering to pump up the valuation.

What’s financial engineering you ask?

So glad you asked. It’s basically the use of financial strategies to improve the financial position and hence the valuation of a company.

To help think about it, here’s what financial engineering is not:

• Operational improvements.

• Value creation for the patient or clinician.

To help even more, which is the reason I spent my donut fueled Saturdays writing this, we’ll look at some perennial favorite tools of Blair’s PE fund:

Sale and lease back

This is when you sell an asset and then lease it back from the buyer. You get a lump of cash and then lease payments become an expense. You were depreciating the asset before as an expense on paper, now it’s just become a real expense. Here’s the upside:

Lower tax payments
No maintenance costs
Risk transferred to buyer
Cash available for distributions, I mean investing in the business

Optimize cashflow

Ok, this one is a little more on the up and up. Basically we are just bringing cash in faster and optimizing our outflow. The bring cash in faster makes sense, but optimizing outflow deserves a couple extra lines.

Sometimes waiting as long as possible to pay is well and good. No penalties and more importantly, no incentive to pay early. In some cases you have the option to pay within say 15 days and get a 2% discount. That might be worth it depending on your cash flow cycles.

Them PE boys will look at all that and get the cash machine humming. When you are collecting faster and paying more efficiently, costs go down and cash conversion cycle gets faster. For the distributions, I mean investments.

Financial incentive alignment

Here’s the real thorn in everyone’s side. When a PE firm buys a physician practice, they can’t employ the doctor directly. That would violate Corporate Practice of Medicine laws. And although hospitals do it all the time, Brighton’s dad’s firm isn’t allowed to.

What you can do is setup a management service organization (MSO) that has a master service agreement (MSA) with the practice you just bought. Then the MSO does everything except tell the doctor how to practice medicine… sort of.

Sort of, because the doctor(s) have vested interest in the financial success of their “new” practice. It’s new because the PE firm sets up a separate holding company in which the doctor receives equity on top of the buyout (that’s the MSO). Then the PE maestros will put all kinds of “incentives” in place to increase the valuation.

Like-a-dis:

That’s the gist of the structure and how not to run afoul of CPOM laws.

Not saying that docs are doing nefarious things by any stretch. The usual situation is the doc becomes a minority owner in the new company with little say in how things roll. And yes, on paper the doctor still has full control over clinical decision making, but when someone else has all the operations under their control and controls the money and controls your financial future, it becomes easier to see why a private equity owned OBGYN practice does significantly more C-sections than practices not owned by PE.

Just sayin.

Multiples arbitrage

This one is fun and ties directly into the big strategic play.

A business’s sale price is based on a multiple. Usually it’s a multiple of EBITDA. Private Equity yacht jocks love them some EBITDA.

A practice for example may sell for 2x EBITDA. The “2x” is the multiple. This completely made up, hypothetical practice is smaller and has about $500K in earnings.

Another practice in the same specialty with $4M in earnings may sell for 5x EBITDA. Bigger is better after all. It shows more stability as a larger organization, which would command a higher multiple, not to mention the gross values.

So, now, here’s the trick. Write this down. Wait, I’m writing it. Just don’t delete this email.

Buy 10 small practices at a 2x multiple on $500K EBITDA for a purchase price of $10M. Don’t worry, you only need to front $2M and load the new business with the rest in debt.

Now, you have a business with $5M in EBITDA having done… NOTHING. Well as you know, this bigger business commands higher multiples. So you can turn around and sell it at 5x EBITDA.

$25M. You only put in $2M. Nice return. The goal.

Ok, I did make one more picture:

Listen, this is a simplified version, but you wonder why every finance major wants to go into private equity and why everyone who is super rich at least plays in the arena.

Tax structuring

I’m not an accountant so I can’t give you all the nitty gritty here. And frankly you probably don’t want it. Even I can’t make tax structuring interesting.

My two cents, they do all kinds of stuff with leases (as we saw above), refinancing loans, new debt, etc. to lower the tax bill. Cause damn the man, save the Empire!

It’s very American to avoid taxes. In fact, it’s the exact way and reason this country got it’s start. Huh. I guess tax evasion is about the most American thing there is.

Raise prices

I obviously don’t need to go into this one much. Aggregate that buying power with all the newly owned practices and negotiate better reimbursement. Also raise cash pay prices.

Do what you have to do. But raise prices.

Thus concludes our stroll down Goldman Sachs lane.

Outside of these financial engineering chicanery, PE firms will do some operational things. They’ll get you a bigger, worse EMR. They’ll cut your support staff. They’ll centralize a lot of functions, firing some of your favorite front and back office team. They’ll streamline processes and make things more efficient.

All in the name of cutting costs. The goal again, improve EBITDA. That’s how you get a strong exit.

And here’s The Big Strategy: Buy practices in the same specialty and put them onto a single platform. The PE firm reaches economies of scale in the new business, has a net higher EBITDA to drive a higher multiple, and how more leverage across all it’s contracts.

It’s essentially an economies of scale play. Classic. But the real question… Is economies of scale the way to make healthcare better?

We’re not making sweater vests.

All righty, now you know what in the heck is going on with this financial engineering stuff. And just like is sounds, nothing is really happening in terms of how the business serves people. These are just activities to increase valuations to generate returns on the sale in 3-5 years.

Cool. I am going to call my friend Barron now and see if he’s hiring.

Good day to you.

Why it matters: Because relationships are the lifeblood of life

Read time: The time it takes to finish a Wendy’s Frosty if you only use french fries (2 minutes for real though)

Hello gorgeous souls. It’s so nice to be with you on a not regularly scheduled Sunday.

The reason for this special half edition is that it occurred to me that you know all this stuff about me, and I know very little about you.

Like what’s your favorite color? Mine is black and hot pink.

I know that’s two colors, but you know we aren’t about convention here.

You also may or may not know that I have two kids (6 &4), am married to the coolest lady ever, and I am kinda tall. Sometimes I wear t-shirts.

I also have strong opinions about the Healthcare system and want to be a part of fixing the mess.

But back to you. This is about you.

Would you be wildly opposed to filling out this survey?

I would love to hear all about you, what you like, what you love, what you want to hear more about in healthcare. All of it.

Here’s a button in case you missed the first survey link:

Button

You can fill out as much or as little as you like. There are no rules here. We’re like Outback Steakhouse, just without the awesome bread.

Sorry about the bread.

Thank you for being you and all the incredible things you do everyday!

Here you go (it’s that survey, remember?):

Thank you for filling this out you awesome human you!

See you out there!