The Future of Healthcare M&A: Regulatory Challenges, Private Equity, and Physician Transactions

Gary Herschman is a Member of Epstein Becker & Green, P.C., a firm specializing in healthcare and life sciences, where Gary co-chairs the healthcare transactions and M&A group. With over 30 years of experience in healthcare M&A, he represents hospitals, ASCs, physician groups, and home healthcare companies in consolidations, affiliations, joint ventures, physician alignments, and more. Among his many accolades, Gary has been listed in The Best Lawyers in America for Health Care Law from 2010 to 2025 and was named a 2024 Leader in Law by NJBIZ.

Here’s a glimpse of what you’ll learn:

• [2:10] Gary Herschman shares his background and how he transitioned into healthcare law and transactions
• [6:08] Predictions on regulatory changes and reduced antitrust scrutiny under the new administration
• [10:35] How the potential rollback on healthcare regulations will impact transactions
• [14:26] The difference between federal and state-level regulations and how they impact healthcare deals
• [22:24] Will private equity affect healthcare consolidation?
• [26:03] Why private investors are increasingly drawn to outpatient healthcare settings
• [30:51] Popular areas for healthcare investment: a glimpse into ASCs, home health, behavioral health, and specialty pharmacies
• [34:58] Gary talks about cardiologists transitioning from hospital employment to private practice
• [41:13] Key challenges in physician practice transactions and how to address them

In this episode…

Navigating healthcare transactions is more complex than ever, with shifting regulations, increased scrutiny, and growing consolidation across the industry. Private equity firms and health systems are rapidly acquiring physician practices, leaving many providers uncertain about their future. Simultaneously, evolving federal and state laws add compliance challenges that can delay or even derail deals. How can healthcare transaction advisors and legal experts help navigate these evolving challenges to ensure successful transactions?

Healthcare M&A attorney Gary Herschman explains that proactive planning is crucial to overcoming regulatory hurdles and structuring tax-efficient deals. He emphasizes the importance of early consensus among physician groups and understanding state-specific approval requirements that can impact transaction timelines. Additionally, private equity investors recognize consolidation opportunities in fragmented outpatient markets like cardiology and orthopedics. Gary advises physicians in these sectors transitioning from hospital employment to private practice to leverage private equity partnerships for growth and value creation.

In this episode of Transaction Healthcare, Zak Eisenberg interviews Gary Herschman, a Member of Epstein Becker & Green, P.C., about navigating healthcare transactions in a shifting regulatory environment. Together, they explore strategies for addressing compliance pitfalls, structuring physician practice acquisitions, and managing antitrust concerns in M&A deals.

Resources mentioned in this episode:

• Zak Eisenberg on LinkedIn
• Merritt Healthcare Advisors
• Merritt Healthcare Advisors email: contactus@merrittadvisory.com
• Gary Herschman on LinkedIn 
• Epstein Becker & Green, P.C. 

Quotable Moments:

• “Healthcare transactions are complex, but with the right preparation — regulatory compliance, tax efficiency, and physician alignment — deals can be successfully structured.”
• “Private investors are targeting outpatient care because it’s cost-effective, scalable, and aligns with the industry’s shift toward value-based healthcare.”
• “One of the biggest challenges in physician practice deals is achieving internal consensus — getting all doctors on the same page early is crucial.”
• “Regulatory scrutiny isn’t going away, but groups that proactively address compliance issues before a deal can avoid delays and potential self-disclosures.”
• “Cardiology and orthopedics are the hottest specialties for investment, especially with new procedures shifting from hospitals to ambulatory surgery centers.”

Action Steps:

1. Establish internal consensus early: Engage all physician stakeholders in discussions about transaction goals, equity distribution, and long-term alignment before pursuing potential deals.
2. Address regulatory compliance proactively: Conduct internal audits to identify and resolve Stark Law, anti-kickback, and billing compliance issues before investors conduct due diligence.
3. Structure tax-efficient transactions: Work with legal and financial advisors to optimize corporate structures, ensuring capital gains benefits and minimizing tax liabilities for physician owners.
4. Align employed physicians with long-term goals: Offer equity participation or structured incentives to ensure key non-owner physicians remain engaged post-transaction.
5. Evaluate state-specific approval requirements: Research and prepare for state-level notification or approval processes that may impact deal timelines and regulatory scrutiny.

Sponsor for this episode…

This episode is brought to you by Merritt Healthcare Advisors.

Merritt Healthcare Advisors is an investment bank with a unique focus on healthcare providers and their businesses.

Merritt leverages the healthcare industry expertise of its owner-operators, clinicians, investors, and advisors to develop surgical facilities that perform safe, efficient, and cost-effective procedures.

To learn more, visit https://merritthealthcare.com/.

Episode Transcript

Zak Eisenberg  0:04  

Hello and welcome to Transaction Healthcare. I’m Zak Eisenberg, Vice President at Merritt Healthcare Advisors. Merritt Healthcare Advisors is an investment bank with a unique focus on health care providers and their businesses. Transaction Healthcare is a podcast focused on addressing questions and concerns at the intersection of healthcare, transactions and business. I’m Zak Eisenberg, a partner at Merritt Healthcare Advisors, and you’re a host for Transaction Healthcare where I address questions and concerns at the intersection of transactions, healthcare and business. This episode is brought to you by Merritt Healthcare Advisors. MHA is a full service investment bank with a unique focus on health care, Merritt leverages health care industry expertise of its owner operators, clinicians, investors and advisors to develop surgical facilities that perform safe, efficient and cost effective procedures and to advise other types of health care businesses to learn more, visit www. Merrittadvisory.com I’m joined today by Attorney Gary Herschman, who is a healthcare focused M&A partner at Epstein Becker Green. Gary focuses in major deals of any size, small, middle market and large. Gary balances the concerns of all parties, including physician groups, hospitals and health systems and ambulatory surgery centers, imaging centers, clinics and home health care, companies, lenders, investors and State Departments of Health to effectively structure and close complex deals. Hey, Gary, how are you today?

Gary Herschman  1:32  

Great. Zak, I just wanted to thank you and the whole Merritt team for having me on on this podcast.

Zak Eisenberg  1:39  

Well, great, Gary, glad you could join us. So Gary, I wanted to start by just digging into your background. How did you end up as an attorney, and how did you get focused on health care and then transactions and M&A separately, that’s a very niche area of of law, and maybe you didn’t have that in mind when you first went to law school. But I love to just get a little bit more about little bit more about your story and what brought you to to study law in the first place, but then what drew you to health care and transactions?

Gary Herschman  2:10  

Sure. Zak, so you know, growing up, I was always interested in becoming a lawyer, like even in high school and during college, I I, over the summers, I was a paralegal and law clerk, even in college at law firms, and was very interested in practicing law. And graduated from Lafayette College with a degree in government law. And I always, I always thought that being a lawyer would be interesting, like, you know, being a dentist, you know, doing the same thing over and over again every time a patient comes in. I just like the challenge of being a lawyer and the kind of intellectual challenge that each deal, each case is different. And so I did go to law school. From college, I went to George Washington University Law School in DC. And after, after that, you know, when in that era of the 80s, you know, everybody, every lawyer, wanted to be in court and be a litigator. It was the days of La law when it first aired, and so I left law school and I went to the Department of Justice and litigated cases all over the country on behalf of the federal government for the first few years of My career, and eventually continued to do litigation jobs in the in the next few years, but in the early 90s, I decided to relocate to New Jersey, and the job I happened to take involved health care law and transactions, and just fell in love with doing deals, and in particular, doing deals in health care, and just enjoy the expertise and specialty involved in working in a highly regulated industry and kind of the joy of getting a deal done. Both parties are on the same side in terms of wanting to get a deal done, even though there’s, you know, adversarial negotiations, you’re not kind of wasting time in court and depositions in a extremely adversarial way, which kind of got old for me very quickly, and I just kind of fell in love with doing deals.

Zak Eisenberg  4:31  

Yeah, thanks for that background. Gary, you know, it’s interesting that you you always looked at law as an opportunity for for new challenges. And I think the chosen profession you’re in now, and the sort of sub specialty of law, so to speak, is rife with new challenges, constantly, health care, and you know this better than I do is a continue. Doing continually evolving regulatory landscape, probably more than any other industry in the US, maybe with the exception of finance, I think those are pretty safely in in the government’s court. And on top of that, with transactions, I’m sure there are always new challenges that come up in each deal. So it sounds like you’ve landed in a great, great spot to fuel that, that interest of yours. So I’m just curious, you know, having spent time in the government like like you did, what’s your perspective on how things are are going to change now that we have this new administration coming in, and we’re just coming off the heels of the inauguration of the new administration. And, yeah, I don’t know your perspective on it, but I’m curious with that type of background and knowing a bit of the inner workings of the Justice Department in particular, which has a certainly a role to play with larger health care transactions for sure, how do you view this new administration coming in, and what do you think the changes

Gary Herschman  6:08  

will be? So that’s a great question. Zak, I think we all all heard yesterday of the executive order that was one of the many highly touted executive orders, basically putting a freeze on all new regulations subject to review by the incoming, the new incoming executives and of the different departments throughout the federal bureaucracy. I think that there’s going to be a move towards less regulation, which I think is common. I think we saw that in the first Trump administration. And I also think in terms of health care deals in particular, or any transactions, consolidations, that I think that the there will be subdued, reduced, mitigated, anti trust scrutiny. I think that the FTC was very proactive, uh, during the Biden administration that just ended, and there were a lot of challenges to many different types of of transactions. Some you know, hospital mergers, big systems merging with each other, other hospitals joining other systems and and also in other things, like, like physician consolidators. We saw some activity, you know, recently too. So I have a feeling that that’s going to be not as much of a concern once, once the new commissioners are in and the new chair, which may take a little bit of time, but it’s going to happen pretty quickly, and I think that’s going to unleash more transactions. I think everybody is of the mindset. Last year was a bit of a slow year. Transaction wise, we were still busy, but busy on smaller deals, like add on transactions, bolt ons to existing private equity platforms.

Zak Eisenberg  8:12  

What are the size of those? Usually Gary a bolt on

Gary Herschman  8:16  

it could be, you know, anywhere from 20 million to 150 million give or take. It’s just adding on to an existing platform. So but I do think that this year, I think I think last year was also slow because it was an election year, and I think it’s somewhat common in election years for transaction activity to slow down pending you know, who wins the election and what, what could change going forward. So, you know, with interest rates starting to come down and inflation still up, but starting to come down, the new administration, which will be more friendly and less regulatory, you know, more friendly to business. I do think that, and many others I have heard believe that, you know 2025 and you know 2026 for sure, will both be very active years in health care transactions. Yeah, I

Zak Eisenberg  9:13  

I’ve spoken with many investors in the space who feel the same way. It seems like a pretty general consensus. And just to recap, you think M&A volume is going to go up, you think new regulations are going to go down. They just won’t be releasing as many new regulations. And you also think they’ll be less aggressive on in particular, anti trust enforcement at at the federal level, which, yeah, that all makes sense to me for what the Trump administration is is pursuing. I’m curious what you think about existing regulation, if there will be rollback of any, any existing regulations within HHS or CMS. And then, you know, this is all just talking. The regulatory side. There’s also the legislative side. It seems like there might be. There are a lot of priorities for this administration. I think it’s fair to say they have a big, a big list, like, like all administrations, but one of the areas that they’re, they’ve been talking about a lot, is health care. Of course, it’s always, it’s always on the list in some shape or form. I’m curious your thoughts about those two areas as well. So again, that’s older regulations. Will they be pulling those back? And then also on the legislative side, what are your thoughts on that? Yeah,

Gary Herschman  10:35  

well, I don’t know of anything in particular. I do think in HHS, CMS, you know, which is part of that, the Medicare agency, I believe that, you know, with the the new chair coming in, I think that there’s going to be a lot of changes. I think it’s a little bit of a wild card. What those changes actually will be. There was a lot talked about over the last several months, but I think it’s hard to predict what’s going to happen. I just believe that regulatory restrictions and burdens are going to be, you know, mitigated, going to be reduced or eliminated. You know, I don’t know about things like the anti kickback law and the Stark law, which have been around for a long time. I doubt those will change, although it’s possible they could, they could change, but that would need to be probably legislatively driven, although the agency could do certain things and amending its regulations. But that takes time. There’s still notice and comment period, you know, in regard to regard to changes to regulations, and that’s a long process. So I really, I think there’s going to be, I think the new regulations, anything in the pipeline, is going to be held up and new regulations, I doubt we’re going to see many that are going to be restrictive of businesses, you know, under a Trump administration. And just one thing, Zak, I want to add that even though we spoke about less federal anti trust scrutiny, you know, there are a bunch of states now that have followed California’s suit, including New York and a few others that that have laws that now require certain health care transactions to be approved by by state agencies. So I think that that previously were not did not require approval, just a regular deal that’s over certain thresholds. So I do think that states will still have some authorities under those approval processes that the states that have them, and there may be more states that implement them, and don’t forget, states have attorney generals that could enforce State anti trust laws, which are very similar, if they see an issue with competition within the state. Yeah, I’m

Zak Eisenberg  13:05  

glad you brought that up, because, you know, in my mind, and maybe we can dig into this a little bit at the federal level, lots of the most important regulatory changes seem like they really, or even just administrative changes really impact the very largest deal. So you mentioned anti trust enforcement. Those are for the very, very largest deals that the federal government, at least has has a lot of interest in, at least in the the outgoing administration had a lot of interest in aggressively enforcing those laws. But I’m curious how you think about federal versus state level for smaller transactions or medium sized transactions. Of course, there’s HSR filings for at the federal level, which maybe you can just give the audience a little bit of a definition of some of these federal notices, but mentioned some of these notification and approval process is at the state level, and it varies a lot by state, as I’m sure you’re much more familiar with than I am and and also varies by the type of business that’s included in those those definitions. So maybe we can just dig into that in particular because, of course, it directly impacts volume of M&A, and also how long it takes to actually get these transactions done?

Gary Herschman  14:26  

So, sure. So on a federal level, there’s the HSR law, the Hart Scott Rodino law that requires a notice of deals that have a minimum size. I think it’s up to 120, 6 million now as the threshold. And it just, and there’s a very complicated way that that’s calculated. It’s not just deal value, it’s it’s a complicated formula that you need an accountant who’s smart to calculate to see if you’re really over that threshold or not. And you get and you put. Provide a notice to the FTC and Department of Justice, which is DOJ, and if they don’t, if they don’t read object or file a notice of objection within 30 days, then you know, you already hear nothing. You can go forward a lot of things that a lot of times over the last four years, under the Biden administration, on some deals, they would provide a notice that, hey, we’re going to file a challenge, unless you withdraw your notice, so we have more time to look at this and then refile your notice. So I just think, I mean, they’ve been really scrutinizing a lot of deals, and I really believe that a lot of that is going to slow down or or not be existent, except for the biggest, biggest multi billion dollar deals. I don’t think they’re gonna be looking as carefully at deals on the lower end of that spectrum of a few 100 million. But you know, again, it all depends on, on the impact to the competitive environment, which is usually very local. You know, competition for health care, for health care services. In regard to the state laws, I believe that a lot of them have a threshold of $25 million so in the five or six states that have these laws, and I haven’t looked at a recent compilation, but you just Google and you and there’s plenty of law firms and other organizations that that have the states listed and what their requirements are, but some just require notice, like the federal government, and some require an actual approval. And again, there’s each state law has different specifics on how you calculate the threshold. It’s not just, you know, deal value, it’s it takes into account various factors. And there could be various other triggers that that you would have that would require you to give notice to so, you know, the states could, you know, states that are more progressive, like California, potentially New York may get more active, using their state laws in that regard. And again, there’s five or six other states to that that are doing that. But I just think it’s just a, you know, regulations and approvals haven’t stopped, you know, health care deal making before at the local level, like, you know, approvals for changes of ownership and things like that. So this is just adding other deals that that now don’t have to do with licensed facilities and and just adding to the universe of deals that that require notice and then sometimes approval. It’s

Zak Eisenberg  17:38  

interesting, because it seems like in a few of these states, they’re specifically geared towards private investment in health care from, say, the investment community, as opposed to targeting health systems. And it’s interesting that you said there’s always a concern about consolidation in your particular market, would seem to me, and maybe you have a different perspective on this, but if you’re trying to avoid consolidation in a particular market, the health systems already have, generally in most markets in the US, a very significant share of those markets. So I wonder if you have any thoughts about that, or if, if you have just general comments about some of the differentiation in state regulations on notification or approvals, because some of them don’t actually call out the type of organization that’s making the purchase, but some, some of them, I think, explicitly do,

Gary Herschman  18:40  

yeah, the state laws that I’m aware of and the Federal anti trust laws don’t really distinguish between for profit and non profit when especially with hospital systems involved. And so we’ve seen most major metropolitan areas, the hospitals have picked teams. There’s sometimes three, sometimes five, sometimes two, competing systems in a particular market. So what we’ve been seeing is that these systems are going outside their market to adjacent adjacent adjacent states, but that are not in directly in the same market to try to, you know, grow the system outwards, rather than in the same market where they’re somewhat dominant or one of the top two, three or four systems. I do think that way. If you see two systems in in a region that are directly competitive, you’re going to see an issue, and I think that would be the case even under the Trump presidency. But I think, you know, even under the Biden administration, we were seeing some talk about, well, even if you. Go outside the market, we’re still going to look at it, because it still impacts your market power. More generally, I think, you know, I don’t have specifics. I’ve heard anti trust lawyers speak about that, and I just think things like that you’re probably going to see loosened up, you know, under under the Trump administration, because, you know, systems are growing, you know, by looking outside of their direct competitive market, by going like, if they’re in the northern part of the state, the southern part of the state, or an adjacent state, or even several states over, you know, like atrium and advocate. Did you know North Carolina? You know Illinois? So I think you’re going to see a lot more of that because of of the restrictions on further consolidation within a particular geographic region. Yeah, I think also

Zak Eisenberg  20:51  

one of the things, from my perspective, that’s been driving some of this is the, I think, private equity boogeyman that lots of news outlets have been focusing on, which I think, you know, is a convenient, convenient punching bag. Because, first of all, they don’t generally punch back. They don’t really like to have press too much. So they’re, they’re a little bit of an easy target. But it also sounds, you know, extremely different than what we have now. You have these private investors. You’re consolidating some parts of healthcare versus the, you know, health systems, who, many of whom are for profit. So there’s a little bit of, I think, misconception there, even in the physician community. But yeah, I’m curious how you think some of this will and again, maybe the regulatory isn’t the biggest piece here. Maybe it’s more just overall, the deal making feeling among the investment community has has certainly shifted, as you said, the economy has also changed. Inflation is down, but I’m curious on that piece in particular, how how you view those transactions, versus, say, hospital system transactions, if there’s more or less scrutiny from your perspective, if they end up, you know, consolidating as much of the market in general and just your overall perspective on that would be, would

Gary Herschman  22:24  

be great, yeah. So I think, as you know, there’s been some stories recently of a number of for profit health systems and some non profits filing bankruptcy, you know, over the last several months, or the last year or so. So I do think that, and there’s allegations about price, raising prices and sucking money out, and, you know, not be caring about service to the community. But, you know, I think that every now and again, I think that there’s, and I see this elsewhere, you know, they pick the worst example that they publicize, right? And then there’s kind of this carryover effect on other players in the market. So I do think, though, that because private equity is involved in hospitals too, there have been some reports that have been publicized in the last few months about about impact on quality of care of private equity owned hospitals and all that kind of stuff. But I think that when you come to other types of providers, like direct caregivers, like in you know more outside of a hospital, acute care setting, more into an outpatient setting, like physician specialists and home health care, behavioral health care. I don’t see, I don’t see a lot of negative press on that, because I really think that the consolidation there, you know, is predominantly, and again, there’s always maybe a bad actor or two, but predominantly the investors, the private equity investors, are looking to create value. They’re looking to to in fragmented industries to be efficient, save on costs, and use the professional, corporatized infrastructure to help multiple, you know, divisions or companies that they’ve acquired within the same specialty to provide better care and and otherwise, you know, improve the economics and care to the to the community. So I think there’s a lot of efficiencies that are being gained. But of course, those things are not things that hit the headline, so that’s good question.

Zak Eisenberg  24:46  

Yeah, good news never travels quite as fast as bad news. And look, we’ve been spending a lot of time so far talking about regulation at a few state. But most states in the country do not have these sorts of approval or notification requirements. And I guess just a general, general question about and it ties into, I think, what the federal government is doing, because ultimately, I think the federal government is the market setter, and has caused a lot of this consolidation to happen through certain legislative changes or regulatory changes, but just in general, what’s your perspective on why private investors over the last really, 1015, years, have entered into the outpatient setting in particular, but yeah, also inpatient, more acute settings overall, and you know, with a few states aside, where transaction volume is hindered a bit by by these approvals, what is causing the massive, massive consolidation going on across the Country in these spaces, you know, from your from your vantage

Gary Herschman  26:03  

point. So it starts with the very like 10,000 feet, like everyone sees data about how care in the US is not the best from other countries and but yet is three times more expensive than other countries like and that’s a problem. That’s a problem that has been, you know, everyone has acknowledged it, and, you know, has tried to solve it. The ACA, AKA Obamacare, took the first step at trying to push value based care, as opposed to just fee for service, so that the doctors think about providing good, efficient care, catching things early, like don’t wait till people are super sick, like preventative care, and then when you have to provide care to try to do it as cost effectively as possible. So that has pushed consistently over the last, I would say, 10 to 15 years, CMS and private insurers and self insured health plans are all pushing care in an outpatient setting and trying to keep people healthy, to exercise preventative care, and when you need care, let’s catch it early and let’s treat it in the outpatient environment. So I think all of that has slowly but but significantly over the years, pushed care to the outpatient setting, and it presents opportunity for investment. Hey, let’s invest in this. We can, there’s so much inefficiency in this system that we can invest in and and and do it even a little bit better. You know, the doctors will do better, the patients will do better, and we’ll do better, because we’re all kind of investing in this together. So, you know, the growth of ASCs. I mean, so much is done in an ambulatory surgical facility nowadays, like same day hip replacements, knee replacements and and now, very complicated, you know, interventional cardiac procedures for the last couple years could be done in ASCs, and when that changes, it continues when CMS changes its rules on what’s on the inpatient only list versus not, more and more can be done in an outpatient setting cost effectively, and there’s definitely opportunities To invest in that, to invest in preventative care, urgent care, and in order to do value based care effectively, you can’t just say, Hey, we’re doing value based care. It’s very expensive. You need to invest in advanced electronic medical record systems, data analytics, care coordinators. It’s very data and tech enabled capabilities that you need in order to actually not lose your shirt on value based care. So all of that are areas we’ve seen, outpatient care, you know, advanced IT capabilities that you’ve seen investors investing in. And that’s

Zak Eisenberg  29:23  

a great segue to another area. Is thinking, in fact, Gary, which is, you know, obviously different parts of the market are consolidating at different rates. And I’m just curious where, where you’re seeing today, or as you’re looking forward down the beltway a little bit. What areas of health care are you paying particular attention to and thinking about as, quote, unquote, hot areas where there’s a lot of activity, where there’s a lot of opportunity. I think, for practitioners to grow their businesses, but also where there’s going to be more and more investment. And I’ll just set the stage a little bit. I think the dental space, for example, had a lot of consolidation, say, seven to nine years ago. There was a wave of dental transactions, and there are still dental transactions today, but the very largest dental practices have almost all been either consolidated or sought investment from third party investors to really scale their platforms and operations. So just with that, that transition where, what are you thinking about these days, you mentioned cardiology and health. IT systems. Are those some of the areas, or are there other other sectors or sub sectors that you’re paying particular attention to?

Gary Herschman  30:51  

So I think the answer is, everything outpatient. I think hospitals are no longer, you know, the focus of investors, I think it’s everything outpatient. So we’re seeing a lot in ambulatory surgery centers. We’re seeing a lot in home health care. We’re seeing a lot in behavioral health. Behavioral Health is a huge and growing problem in the country and then, and also in, you know, a specialty pharmacy, other types of pharmacies we’re seeing there’s still, even though there’s some big like retail pharmacies, we see specialty pharmacies. We’re doing a lot of deals in that sector. But when you move to the physician services sector, which is super hot, yeah, dental even started 20 plus years ago, but, and it’s still fragmented. Ophthalmology and eye care started 1015, years ago. Still lots of deals, but where we see the the predominance of of deals last year, the year before, and going into this year is orthopedics and cardiology are the two major physician specialties where now you could do these interventional cats and other advanced cardiac procedures in an ASC you couldn’t do that two years ago, and now they’re doing hip replacements, and more and more orthopedic and spine surgeries in an outpatient and an ASC. So we think there’s been, and I’ve done probably dozens of deals in orthopedics in the last three years, and almost that many and growing in cardiology, you know, urology, again, anything surgical that could be done in an output in an ASC is where I think the investors are going. So ophthalmology was big and still there’s deals. Dermatology is big and still are, you know, we see deals urology, still seeing urology deals. So any surgical areas, but those two areas, orthopedics and cardiology, we see as the hottest right now. And we’re also seeing plastic surgery and med spas. Med spas are, they’re so fragmented and they’re becoming so popular with cosmetic and other types of of procedures and preventive care. We’re seeing a ton in plastic surgery and or cosmetic surgery and med spas, a lot of activity Gary,

Zak Eisenberg  33:34  

I think we could have an entire podcast on just Med Spa. We could or any of these specialties, but I just want to talk about one in particular, because I think it’s a an interesting, an interesting case study, which is for cardiology transactions. I one of the trends that we’ve been seeing and hearing about in the market is as opposed to some of these other specialties, where many of the physicians historically have always been private practitioners, like orthopedic practices. You’ve had a large number of them historically were not employed by hospitals. That’s not true in cardiology. What we’ve started to see happen in Cardiology is that now the transactions are looking like taking a cardiology practice out of a hospital. So the actual group of cardiologists, which are employed by the hospital, and establishing a new entity outside of outside of the hospital, and really taking that group private. And I’m curious how many of the transactions that you see in cardiology fit that mold, and what are the unique challenges that come up in that type of transaction? And not saying that that can’t be the case for, say, a urology group or an Orthopedic Group. Of course, there are hospital employed orthopods and urologists. It’s just it seems like it’s much more common in cardiology. Well, I think it’s

Gary Herschman  34:58  

common in cardiology. Technology, because back in the 2010 2012 time frame, there were significant cuts to cardiac imaging done at physician offices, and that caused, like 30 plus percent cuts that caused cardiologists to make a lot less money, and hospitals reached out to them to say, Come be employed with us, or come do a PSA professional services agreement, pretty much like lease your practice to the hospital. We’ll all bill it under the hospital or Hospital Medical Group umbrella. So because of that, which was now, you know, 1212, to 15 years ago, that change is why a lot of cardiologists are employed or under PSAs with hospitals than orthopedic surgeons are and other specialties. So I am seeing a a an increase in the number of those deals with cardiologists that are closely aligned, either employed or have a PSA with a hospital. So so I did one of the first of those deals in cardiology two years ago, and it’s starting to catch on, because I have two other deals I’m working on right now in in the same thing, where you have cardiologists with a PSA with a hospital looking to leave and have a soft landing with an orthopedic platform that will invest in them going back to private practice, or if they’re employed by the hospital, that whole group that came into the hospital together, and they’re all employed together and still in the same offices coming out. And we actually have a little white paper we put together a couple years ago when we did our first deal, which I’m happy to share with you and you could share with listeners. Yeah, we’d love to on the website, but there are particular challenges. And the particular challenges are, if you’ve been with a hospital all this time, right, for many years, you don’t have managed care contracts anymore. You’re all under the hospitals managed care contracts. You don’t have offices, although some some groups, when they did their PSAs, continued to own their or lease their real estate and sub lease it over to the hospital. That makes it easier, because they could just cancel that sub lease and have an office back. But they still need staff. They don’t own the equipment they need an EMR is that expensive? Yes, and to get those managed care rates. So those are big challenges. And so what we’re seeing is, is that it’s kind of, you know, a big deterrent, if you and I, Zak, are part of a big cardiology group working at a hospital, PS eight, are employed to look at what, what’s it going to cost for us to get leases and space and EMR and payer agreements. It’s a big undertaking. So what we’re seeing are, instead of borrowing money and and a lot of money to capitalize us doing that ourselves, they’re looking to private equity firms. And private equity firms are are looking to these groups, because there’s not a lot of, like you said, independent practices that haven’t already affiliated with one of the large cardiology platforms that’s private equity sponsor or or a big company. And so what we’re seeing is

Zak Eisenberg  38:45  

it can be a real win, win for both. Yeah,

Gary Herschman  38:48  

they offer. We’ll set you up. We already have the infrastructure. We have the corporate infrastructure, and it works really well. I’m telling you, though, that it works better if that car, if that platform, already has a presence in that state, and the reason is they already have managed care contracts for that state, as opposed to first coming into that state and negotiating with the payers in that state for the first time. And so we’re seeing a little advantage to having, you know, at least a PLA a group, a location in the same state, but we’re seeing some that don’t, but it makes it a lot easier.

Zak Eisenberg  39:26  

Yeah, well, that’s a real risk if you engage, if an investor engages with a practice that doesn’t have rage, because then for all the patients you’re seeing, you’re out of network. And

Gary Herschman  39:38  

you can try to plan for that, though, Zak, because some of these like contracts have big like notice periods, like you gotta give 90 or 180 days notice sure terminate. So during that notice period, or even before, when you’re planning on giving the notice, you could try to start to set the stage for that. But again, it’s very hard and for a new. Practice coming out, it’s hard to get good contracts, but, but we’re seeing it, and we’re seeing it because now the hot now these same doctors can invest in an ASC and and do very well in that in the long term. Sure. So

Zak Eisenberg  40:16  

we just talked about, you can have a unique situation with cardiology, and I think this is really the last topic I wanted to talk about, is just zooming out to, let’s say physician or provider practices in general, which, as we talked about earlier, are really for similar reasons and some different reasons as well, are all consolidating, maybe at different rates, but they are all consolidating. From a macro perspective, there’s a lot pushing that to happen. What are some similar challenges or features to these transactions across the board, across the US, not dependent on state? So say, you know, corporate practice of medicine is different in in different states. So not that type of challenge, but other types of consistent challenges that come up in every single physician practice deal or provider, provider business deal. Any any thoughts on that? Yeah,

Gary Herschman  41:13  

well, well, some of the challenges, I think you mentioned this macroeconomic challenges that are pushing them in that direction are higher costs and lower reimbursement, which is Medicare’s reduced, you know, physician reimbursement every year for, I think, five years now. And so that means less money in the doctor’s pockets, right? So by going to a platform they have, you know, they could buy things, you know, across hundreds of doctors and hundreds of locations, and save money that way. And they could negotiate potentially better rates being being a larger group, and they can help doctors navigate like corporatized management of the medical practice, not just doctors managing or an office manager, but a real CEO. So we’re seeing that, and we’re seeing that they are looking to the expertise of these platforms for value based care and other types of investments in ASCs, investments in advanced EMR. But in terms of challenges with the deals, is that what you were getting at more Right,

Zak Eisenberg  42:27  

right, like the actual transaction terms, just think come up in these transactions. So an example might be negotiating compensation arrangements with the physicians. But there are others, and I’m sure, again, you’re probably more familiar than I am with with all the different colors that those come in. So

Gary Herschman  42:49  

I think the four biggest challenges with every deal are, number one, getting consensus within the group, with all the doctors being on the same page, the younger doctors, the older doctors. The truth is, is that when the doctors are educated about this, even the younger doctors and they and they don’t just think, Oh, this is about the older doctors cashing out. There really are advantages, and they really need to be educated. So we always say that, you know, this is a challenge with a deal, educate the full, the full group of doctors early on in the game, so everyone’s bought in, and there’s consensus, because we see issues come up down the road as you’re getting closer to a deal where, you know, sometimes certain doctors dig their heels In and really cause problems and deals. So I think educating early and often gets around that challenge, but it is a challenge. I think a a second, a second challenge in these deals is making sure they’re tax efficient. And the first thing I do when I speak to a group that’s at least haven’t even engaged me yet or just engaged me, is what’s your corporate structure? Because there are ways that you can make modifications to either corporate structure or corporate agreements that set it up for down the road, getting more favorable tax treatment. And I don’t want to, I don’t want to get into the details now, but suffice it to say that there are challenges in S corps with splitting proceeds differently. There’s challenges in any corporate form, LLC is or regular corporations, if the shareholders agreement says it’s split based on ownership the proceeds of a transaction, and that’s not the plan, you need to address that early on before you even start, start moving ahead and looking at options. Options so corporate agreements is that could be a snafu that if you don’t look at early and make adjustments if needed and you want to split proceeds differently, because different doctors are contributing differently towards the value that needs to be done early, very, very, very early. Yeah,

Zak Eisenberg  45:20  

and that makes a lot of sense, because one of the key financial drivers of M&A generally is that the proceeds of a transaction are taxed at capital gains, or as much of the proceeds as possible can be taxed at capital gains versus ordinary income.

Gary Herschman  45:36  

So you can address that. If there’s going to be split differently. You can address that early on, not not as you’re as you’re, like, negotiating the deal, yeah, or closing the deal. The earlier, the earlier, the better. The other challenge, the third challenge that we see. Oh, and by the way, going back to my first challenge, getting consensus. When you get consensus, you should also get consensus on how the proceeds are going to be distributed. That’s a separate issue that you need consensus on early on, even before you start exploring and and then immediately thereafter, if it’s going to be split differently, to look at those other issues of corporate documents and structure. Great point. The other issue we see in all of these transactions that can cause devaluation are things like regulatory issues. The groups all think that, oh, we bill appropriately, we’re very careful, and we have outside auditors, and, oh, we comply. We have a local health care attorney, we comply with all the, you know, Stark laws and anti kickback laws. We’re seeing that they’re in at least 50% or more, I think more now of our deals, like the deals we’ve done in the last two years, a lot of them have regulatory issues where they’re following the Stark law, you know, in some respects, but not others. And it’s a strict liability law, so we’re seeing potential self disclosures being part of deals. And I just think that those types of things could be addressed early on, very, very early on to to avoid this coming up and being a big, a big, you know, a big challenge, or a big delaying tactic, uh, because it’s not a tactic, but it will cause to cause delay in the transaction and potentially cause a self disclosure to the government to try to resolve those regulatory issues. We are seeing that in a lot of deals. So again, I always go back to how do you how do you address this? You address it early on, before you get proposals, and early on in the process, so that when due diligence happens, if you do strike a a deal and a letter of intent, the due diligence shows that you know this has been fixed early on. They still may require, you know, a self disclosure for prior years. But the earlier you fix those things, the better. And there’s just so many easy ones that are inexpensive to fix that, like some groups don’t do exclusion checks for every single member you know of their staff. It’s not just doctors, you know, it’s billers, it’s the receptionist, it’s the you know, the MA’s, everybody. And we’ve come across groups that maybe do that when they get hired, but not on an ongoing basis, and it’s required to be done on an ongoing basis. And you know, there’s certain requirements of how you split money for designated health services like imaging, durable medical equipment, physical therapy that you know, the groups think they’re following, but they’re really not following it. They could get caught up in little traps. And there’s notices required in advance of doing advanced imaging, like Ryan CAT scan, we’ve seen groups get caught up on, oh, they never heard that. You have to give that notice. Or they get reimbursement for an x ray. Like orthopedic groups they get, they get reimbursement for imaging, like for an x ray, and it’s global reimbursement. So even though the doctor interprets the X ray, they didn’t take the x ray, the tech did. So you have to break out the technical component from a global fee. So there’s things like that that all these big law firms that represent the investors catch on to and better to fix those in advance, for sure. Yeah,

Zak Eisenberg  49:45  

this goes back to our conversation earlier about regulatory there are just so many ways to, you know, foot fault or have penalty penalties within health care using some sports references, uh. It’s, it’s always helpful to have competent counseling and compliance advisors to to help cash those things. As you said early and often. I think is, yeah,

Gary Herschman  50:09  

but listen, if the legend, if the federal legislature just, kind of, you know, passes a law that rescinds the Stark law, all this would go away, but it didn’t happen in the first Trump term. Or do I think it’s going to happen, but so you’re not going to it’s not like all these laws are just going to go away. So you do need to address these things, even though there’s going to be a more business friendly, less restrictive administration,

Zak Eisenberg  50:36  

sure, sure. So what’s the, what’s the last way? Gary, I think you said four, four different

Gary Herschman  50:42  

calendars. So we covered regulatory issues. Oh, the fourth one is how to deal with employees, employed physicians, associates, who are not owners. That gets pretty complicated. And so we always think it’s good to think about that in advance to some of them get accelerated to partnership before the deal, so they could get the benefits of tax free rollover equity, even though they might not get the benefit of long term capital gains if they haven’t owned for a year. And they don’t have to become equal owners. They could become half owners or quarter owners. So there’s, there’s so many different ways to deal with employed physicians that are, you know, are calm associates that are important to the practice. They could get, you know, bonuses, you know, transaction bonuses. They could get equity. They could just be granted equity. And how do you do the grant of equity in a way that’s not taxable to them? So I think looking at how you deal with these other non own owner physicians, because the investors are going to want to know that, if they’re important and generate a lot of business, if they’re important and generate a lot of business, how they’re going to become aligned and participate in some of the upside of the transaction, either, and usually it’s some cash at closing and some a lot equity rollover equity to align them. Yeah, we

Zak Eisenberg  52:13  

see that too. Gary retention is always critical of both owners as well as the future of the business, the younger doctors, the associates, also advanced practitioners, pas and even lots of mid levels. There’s a lot of thought that goes into retention, because that’s the life blood of the business. They’re the ones seeing the patients and treating the patients and and really be, you know, providing, providing care, of course.

Gary Herschman  52:41  

And if there’s a larger group that has a CEO and CFO, it could be for management folks, too, to have a management and SEC incentive equity plan or bonus. So, you know, you could put that into the equation, I think, for smaller practices, you know, they provide some, you know, transaction bonus to folks that are important in helping get the deal done. But it’s, it’s, it’s at a different level, depending on their their level of experience and size of the group. Great. Well,

Zak Eisenberg  53:14  

Gary, I think that concludes our discussion for today. But I did want to just ask you, as a last, last question for the audience, anything you wanted to let them know about FC, bank or green or about you in particular, any conferences or books you’re particularly interested that you think would be helpful, really, any last comment? Sure?

Gary Herschman  53:39  

So there is a white paper I mentioned before regarding extracting groups from hospitals, which I will send over to you. And also we are having we and Merritt and various other sponsors are putting together our eighth annual physician transactions conferences this year, for the first time, we’ve been doing one a year for seven years. This year we’re doing one that’s cardiac focused, cardiology focused and vascular which is going to overlap with the American College of Cardiology annual meeting in Chicago on March 29 it’s a Saturday evening, and before that, we have orthopedic and spine physician transaction Conference, which is overlapping with the American Academy of Orthopedic Surgeons annual meeting in San Diego. And that one will be on Thursday, March 13. And maybe you could put links on your website for the podcast about that, I’d appreciate that

Zak Eisenberg  54:41  

absolutely. Well, I appreciate you joining me today, Gary,

Outro 54:45

and that wraps up another episode of Transaction Healthcare. Hit the subscribe button to get notified when we release new conversations. And if you are someone interested in learning more about these topics, visit us at merrittadvisory.com or send us an email. Now at contactus@Merrittadvisory.com.