PPM Industry Executives Present COVID-19 Strategy, Actions and Transaction Update
Thank you, Jerry, I appreciate it and thanks for the opportunity today to speak with everyone here. So, as Jerry mentioned, I’m managing director with Ernst and Young in our US healthcare practice. I spend a lot of my time in our healthcare group looking at US healthcare services businesses to the tune of about 120 projects a year. So we see a lot of different activity, and a lot of different businesses in this space, and obviously, given that physician practice management makes up, you know, the preponderance of healthcare deals, you know, this is an area that’s been a concern for us, or at least we’ve been very, very much trying to track it. Further that, I also spent some of my time, some of you’ve seen me present with McDermott previously, with looking at the macroeconomic environment. So, I do want to just kind of play back, over the next 10 minutes, try to condense some of the chaos in what we’ve seen over the last three weeks, four weeks into, into sort of our perspectives on how we’re viewing the marketplace and you will see the discussion from CEOs to follow. So, this is sort of a good mix for me from a, you know, the areas that we concentrate on as a business as well as macroeconomic, impact. So, I’m going to show you the next 5,6 slides here that’s been based on some of work we do with our chief economist, Nigel Gault, and some of the team that’s working on this from an EY-Parthenon perspective. So, let’s start at the 30,000-foot view of the economy. So, you know, there’s been a lot of noise, there’s a lot of reports and a lot of this information is changing very rapidly, but, we have here, depicted on the left hand side, is basically our base case pessimistic and optimistic case for GDP, and this is on a quarterly basis. There’s a little bit noise with that, but this is when, you know, about three weeks ago, Goldman Sachs came out and said, Hey, GDP is going to be down 24% in Q2, then revised it downwards of 34%. This is really kind of that, that quarterly-on-quarterly reporting that the we’ve been seeing. We’re actually little bit more pessimistic than those in our base case, down almost 50% for Q2. But you do see a sort of a rise there, over time, as you marched from right to left on, or left or right on this slide of those, the timing, the magnitude, that recovery coming back. So, normally when we talk about GDP, we’re arguing over the decimal places. Is it 2.4% or is it 2.3% or is it 2.5%? In this case, in this scenario, the debate is whether it’s going to be down 20 or down 40. So just order of magnitude, this is a big, and sort of unprecedented spike for us, both on the down side and on the recovery side. The right-hand side is actually probably the easier way to think about this. And this is sort of where I gravitate to, just to understand that at the macro level, this is sort of the sum of that. So, a base case scenario in 2020, about down 10%, and again, you know, contextualizing this I, I look back to the great recession in 2009, when that number was more like down 2.5%. So, again, order of magnitude, this is going to be greater than what we saw in the great recession. And also, kind of interestingly, you know, we’re expecting this to be shorter, so there’s a quicker peak. So, if you think about something like unemployment, it will peak much quicker than it did in 2009, and also the recovery we’re expecting will … different. So, you know, the takeaway here from a macro environment is, it’s not good. It’s worse than the great recession, but there are some things about it that are somewhat unique and somewhat different.
One of the things that we think is different about this, on the next page here, is how this impacts different sub-sectors of the economy. On the left-hand side here, we’ve just got the totality of US GDP here, so $21 trillion broken out by sector. The shading here are the sectors that we think are going to hit disproportionately so, and the sectors that maybe are a little bit more insulated up at the top. And that data is on the right-hand side, so that’s just how we think about the change in the sector affecting sector GDP from basically February of 2020 to April of 2020. So, this is the steepness of the decline that we’re witnessing now in this phase that we’re in, and you can see overall GDP with these is going to be down, at least in Q2, you know, about 20% across all sectors. And you’ll see that healthcare, in particular, is cycling harder than GDP. That is very, very unusual. That is not the typical pattern that we see with a lot of recessions here. So, just know that health care typically lags, GDP declines is typically muted tune of about half of a percent, you know, a 1% change in GDP leads to about a half a percent change in healthcare spending, and there’s a lag on that. We’re not seeing that at all, and that is the social distancing impact, and that is what is so unique about this, in the way that it’s going to impact our economy. So, some of the ramifications of that. When we think about, you know, that precipitous decline in GDP also corresponds with, you know, an unemployment rate increase, and we’re expecting going from 3.5% to 20%. I think the last unemployment figure would push us up in the 10% to 13% range. So, I think we are on our way there. But really one of the things interesting about that from a healthcare perspective, is how does that translate into health insurance coverage, payer mix and …, how do these people, sort of, cycle through and access the health care system? Again, left hand-side, there’s about 153 million people gainfully employed in the US. 20% of the unemployment rate is going to kick out about 22 million people into the ranks of the unemployed, and we’ve broken that out, obviously by sector. Food services, trade, airlines, those are kind of the ones that get hit the hardest. And then, what I think is more interesting, especially from a healthcare perspective, is, what happens to those 22 million people? And there’s been a lot of range on these here, so I’ll say we are more conservative in our estimate here because we do think those people coming out of food service, retail trade are actually disproportionally already uninsured. So that’s actually on the on the third graph here, the 22 million pre COVID that are uninsured. But as we march through time, and, you know, the timing here is, is hard, but think of this graph is the next 9 to 12 months after some of the COBRAs and the furloughing they lay off, we do see that there’s going to be a material shift in the payer mix. We think commercial’s going to come down about 12 million out of that 22million, the Medicaid ranks will swell by about seven million, and the uninsured will also increase about 3.5 million. And, again, that’s conservative wrote, relative to what we’ve been seeing the marketplace. But I do think, especially seeing the conversation come forward, a slight change in payer mix for a lot of businesses, especially with high commercial exposure, does have a material impact on the profitability of a lot of these PPMs. So, I don’t think many people have banked in this transitioning. I hope we’re wrong about this, and there’s more stability in sticking this into some of these programs, but I do think as we see the unemployment ranks swell, we are going to have a commensurate impact on the overall profitability, and can really base the longevity of some of these … practices.
So, translating in that macro now, and specifically into health care, I’ve spent the last seven years with our economists, really tracking how health care expenditures track with GDP and there is a predictable relationship between these two. You can see dip a in the last recession in 2009. There was a big dip it went down 2%, 2.5%. Our national health care centers, I said earlier, moderated. They went down. They were not recession proof, but it’s somewhat recession resistant, and there was a lag on that. You can see in 2014, 2015, that’s the impact of the ACA and … in January, when we were presenting a J. P. Morgan this was our optimistic case for both GDP and for health care expenditures. And interestingly, health affairs in CMS released their optimistic case or pre COVID case two weeks ago, it was almost exactly in line, you know, kind of a 5%, 5.5% growth rate for overall health care expenditures. This is off kind of the $4 trillion basis spending. Now, this is what’s going to happen now, and this is sort of the bad news here. So, this is our April ‘20 GDP base case. So that’s, again, you think about that 10% cycle that I talked about on the prior slide. This is what that looks like relative to what we’ve seen in GDP, and I think it’s interesting, again, that comparison relative where we were in 2009. So, this cycle is much greater in magnitude on the downside. It is also much greater magnitude on the upside, and again, and that is compressed relative to what we’ve seen in other recessions. So, the resulting impact, are these two lines here. I know there’s a lot going on here. Let’s just look at that, the first dotted line here. This is what the impact of that big recession would have been, if everything held constant, everything held together and … it would have been a moderate recession. Healthcare expenditures would have come down greater than 2000, but it’s not nearly what we’re showing here. That’s, that is a non- social distancing recession. What we have, though, is this greater volatility, the greater amplitude on this, and this is really where we were going to say that our healthcare expenditures are going to cycle slightly harder than GDP, and they will come back slightly higher than GDP. But again, this is an order of magnitude, you know, this will be the first time in, potentially ever, that is recorded, that our health care expenditures are actually going to go negative on a real basis. Now again, there’s a whole lot going on here, but the key takeaway from this, what, what I gather is the difference between our normal recession cycle for health expenditures and the social distancing is about $400 billion, and that’s hard to contextualize, but I think it’s important for you to have in the back your head. As you think about the stimulus money coming in, relatively about $100 billion now from the CARES Act going into hospitals, you know, there’s about $45 to $50 billion coming in through FMAP matches, through state Medicaid, matches there. But again, that’s only 150 relative to what I think is going to happen of we’re going to be down about $400 billion total in our health care expenditure. So, the message, if you’re going to take anything away from this is the impact of social distancing, and so the broader economy are going to drive down our health care expenditures in a way that we haven’t seen previously. Those relationships that we have historically seen are not going to hold.
So, you know, thinking about the discussion to ensue, what is happening right now in the marketplace? Our economists have a very good quote, the plural of anecdote isn’t data, but we’ve been trying to collect any bits of information we can on the marketplace about what is going on right now. Recently, we’ve seen telemedicine usage go off the charts. We have seen a lot of physician practices, urgent care, really struggling with volume in the short term. We’ve seen revenue declines between 10% and 40%. We’ve seen employees being furloughed. The anecdotes here are all in red, so, I don’t want to extrapolate too much on point estimates here, but what we’re looking at here is sharp, acute, being well, pretty much across the board what we’re seeing. As you think about how that impacts physicians’ specialties, you know, this is basically, this, sort of, that 850,000 practicing physicians in the US broken down by study of care. A lot of the office-based primary care and office-based hospitals and surgical specialties. The red versus green is really, kind of, our interpretation of the short-term to medium-term impact on these specialties. So, a lot of the practices that you would think, something like emergency medicine, you would think there would be more people going into the ERs, that would be up. We’ve heard just the opposite. In the hot spots, yes, but everywhere else in the country we’ll wait for this. A lot of those volumes are neutral to down … some going to be down as much as 20%-30%. So, we do think there’s going to be an impact, a disproportionate impact based on specialties.
And final slide, and this is one that I have no answers. I’m just going to articulate how we think the recovery will happen, you know, if volumes for physicians or providers were up 100 as we march through time, and we’re in this phase one here, where we’ve seen volumes drop precipitously. Certain practices, certain providers getting hit even harder. Over the summer, we hope that we get some relief some help with just the overall, the whether and how the virus responds. And then I think the big question is what happens in the fall season, and how does that trend over time? And I think this could either be a straight line up or this could be, the dip that we’re showing here. And then finally, you know, hopefully we get a vaccine, hopefully we get rapid testing and we’re back. And I think there is still a fundamental question, of do we get back to 100% for a lot of these specialties? You know, I think the demand is probably going to go away, but, you know, there’s some discretionary aspects of health care that might and can really also, just, you know, as we’re recovering here, we may see basically a surge of demand that maybe we’re not suited to, structurally to, to deal with, especially on the outside if these swings are as high as they can be. So, thank you for listening. With that, I will turn it back over to Chris and the rest of the panel here.
Great. Thanks so much, Jeff. You know, certainly some sobering data. But, you know, I think you ended on a positive note with your note that, we’re going to see a lot of pent up demand for these important healthcare services. And, I really think that physician practices are going to come out at the end of this on top. So, I’m very grateful that we have a panel of chief executive officers that are supporting physician practices and dental practices around the country through this challenging time. As you saw from Jeff’s data, the trends and impact of this have been very acute and very quick. And, we have watched as several of these chief executive officers have taken their platforms through, into the eye of this storm and are helping to continue to provide vital services and keep their physician and dental teams together during this challenging time. So, I want to start by letting them all introduce themselves. Steve, we’re not seeing you on the video yet. There you go. So, why don’t we start with you, Doug? Say a little word about yourself and NSPC and we’ll go down from there.
Thanks, Chris. My name’s Dr. Doug Wisor, and I am the CEO of the National Spine and Pain Centers, primarily focused on interventional pain management but also chronic pain management relative to the opiate crisis as well. So, kind of dual hats in this crisis.
Great. Thanks, Doug. Steve. We’ve got you on mute, Steve. There you go. Why don’t we close over to Chad it looks like we’re having a little bit of audio difficulty with you, Steve. Chad, can you introduce yourself and Pinnacle?
Absolutely. I’m Chad Eckes I’m the CEO of Pinnacle Dermatology. We are a 51-clinic dermatology practice over five state, specializing mostly in medical and surgical dermatology.
Great. And, Steve, do we have you back on audio now? It’s kind of muting and unmuting, but your headphone isn’t working. So, we’ll get I’m sure we’ll get Steve on quickly. I wanted to talk first about patients. You know, this industry is all about serving patients and ensuring that they get the critical medical services that they need. Doug, could you kind of kick us off in talking a little bit about what you’re seeing from patient demand during this time. How are you seeing patients and addressing their pain management needs during this unique time?
Yeah, sure. You know, look, we are impacted like every industry as Jeff outlined, but to a certain degree, not nearly as much. From our perspective, from interventional pain management, you know, not only acute and sub-acute, but chronic management, you know, last year, nearly 70,000people died of the opiate crisis. And then post CDC guidelines, we saw a spike in suicide when people stopped having access to care. So, from our perspective, our providers have decided that, you know, look, first and foremost, let’s reduce exposure that’s unnecessary. Let’s prevent spread if it does indeed occur, but let’s preserve access to care. And so, we’ve seen about near 70% preservation of … with the rapid deployment of telemedicine especially on the chronic management side of our patients, with a sole goal of, you know, let’s keep these patients out of the ER and out of hospital utilization of services that otherwise could be managed by us.
Great, and Chad, you know, I know that medical dermatology continues to have a critical part to play in keeping patients alive during this COVID pandemic, you know, what are strategies for you to help your supported practices kind of retain patients through this time?
Thanks, Chris. Well, we have four different things that we’ve been focused on. One is to make sure that we have a safe environment for our patients actually coming to the offices, so we’re exceeding all of the CDC guidelines, including using, you know, technology to allow patients to wait in their vehicles and ensure social distancing in our facilities. You know, more aggressive cleaning activities. We’ve also integrated telemedicine with over 1500 appointments in the last month. We’ve integrated senior hours so that we can offer a more expanded set of circumstances for the seniors to come in, even safer than what we do otherwise. And then finally, we’ve been partnering with the local health system so that we can keep folks in need of laceration, closures and the like, from having to go to EDs and urgent cares and come into our safer settings.
Great. Steve, do we have you back?
Let’s see if you have me back, do you?
There we go. Great.
I don’t know all the testing before. And so, dentistry, as you may have seen in the news, has been hit exceptionally hard. Most, most dental practices, well, we’ve been mandated by law in almost every state to only provide emergency care, which has caused roughly a 90% decrease in the revenue of most practices in America that are open. We did a survey earlier in the week randomly calling 10,000 different dental practices. Only 5% were open for business. Only 5% on just a random call. So, dentistry is in, right now, in dire straits. Most groups have had to lay off or furlough most of their people, as we have, and we’re on skeleton crews. But we are doing our art share to try to help in this crisis. Keeping people out of emergency rooms by providing the emergency care they need. Most emergency rooms and hospitals aren’t equipped to take care of dental procedures and dental emergencies. So, when they do show up in those urgent cares or emergency rooms, they actually exacerbate the problem by causing double use of PPE and other issues, when they can go to the ER first to give any…
And not to mention the exposure.
And not to mention the exposure, the potential exposure. So, we’re doing all the same things with checking people in in cars and doing all the pretests, and we’re doing all that. We have about 600 docs working that are serving the public out there, but our business has been hit very, very hard. But in the last two weeks, with our pivot, what we’ve had to do is pivot the organization to serve those in need. And there are lots of people in need. In just two weeks, we’ve had a 45% increase in emergency visits. Just in the last two weeks. So, we’re serving a desperate need out there in America, but, there’s no sugar coating. It is really tough. And dentistry is in, dentistry, essentially is in solvent right now as an industry.
Doug, you mentioned telemedicine. I think as many of the folks on the line know, Medicare, you know, broadly loosened restrictions to open up the spigot for telemedicine for almost every type of practice. Could you talk to us a little bit how, you know, what’s working on the telemedicine side?
Yeah. I mean, I think we were—we had a distinct advantage in that we were using telemedicine a little bit in our platform for psychology services to meet demand. And we were pretty proactive in recognizing that this problem was coming probably 7 to 10 days, kind of before our competitors, or before other, maybe, platforms and similar spaces. So, we rolled out telemedicine in about a week and half across 80 centers. The level of adoption was fairly rapid. We are now seeing a spike in activity such that, you know, 78% of our followed visits are now telemedicine. But now, as our providers are getting more comfortable, doing new patient evaluations by telemedicine is feasible. So, you know, there’s certain components of this crisis that for, you know, forever more health care is going to be changed. Telemedicine is one of them. We see that, you know, commercial payers right now, in many cases, are following Medicare’s lead and paying it in full. Some are still drifting in at about an 18% reduction for the same visit that would have been done live. But I think that, overall, this is one of the technologies that’s just not going to go away. That as our doctors and our patients who are, you know, stable, managed patients are more comfortable with the technology, and it’s easier to use, it’s going to be something that’s going to be a big part of, at least the chronic care management of stable patients. And that’s here to stay.
Now, Chris you’re on mute.
Sorry, Steve. I was going to throw you the question. Many folks have not heard of the concept of teledentistry before, but it actually exists. Could you maybe start by describing what types of things could be achieved through teledentistry?
Right. So, I think we were the first large major platform out there to introduce teledentistry when we started our crisis management team on March 10th when we saw this coming, and we started feeling the effects of it by March 15th. And we quickly pivoted the IT team to create our teledentistry platform. And it has been, it’s been great. It’s been used by many, many people that will—they’re either nervous to go into the dental office, or they just want something checked, and we are getting some reimbursement for it. It’s not great, but as you know in dentistry, you can’t really take out a tooth or do a root canal through the through the video. So, but we can prescreen, which has been very, very helpful. And, I don’t want to underestimate the impact we’re having on people that are scared to come in, and we can—the dentist can do a visual exam via video, calm them down, and then we can get them scheduled at the appropriate time. So, it’s been a big, big hit for us.
That’s great. Great. Chad, any positive stories coming out of telemedicine and the availability you have for patients at your supported Pinnacle practices?
We’re very similar to dentistry, and obviously there’s a subset of conditions that you can handle. But, one of the things that we’ve tried the integrate is both the telemedicine world as well as the bricks and mortar world. So, if we’re looking at a lesion and it looks suspicious and we need to have a biopsy, we can then bring that patient in in a very isolated manner. Come in, get the biopsy, and leave. So, blending those two worlds seems to be very successful and it lessens to stress on the patients.
Yeah, I think that’s critical and just demonstrates the importance of enabling these practices to stay open on a limited basis during this unique time. So, I wanted to talk a little bit of about clinicians, and, you know, this must be throwing a wrench in the typical way that you and your team members communicate with your supported clinicians across the country. Throw it back to Doug first. You know, what are some ways that you’re communicating with the NSPC team across the country?
Sure. You know, I’ve been a practicing interventional pain physician for almost 20 years, so I had an advantage of being able to communicate, you know, with them, which at times is, you know, anyone in the PPM space knows, but I would say that the message to our physicians, first and foremost is that, look, we’re an MSO. You have to decide, but you have to decide as a uniform fashion as a region. So, for us, a region is a state, typically. Meaning, like these doctors can’t be at home doing telemedicine while these doctors are in the office doing procedures because we’re providing the staffing, you know, the back office for that and that creates chaos. So, the first thing we asked them to do is decide what you believe in your definition of emergent, urgent and elective, how you want to treat these patients, but, tell us what you want, and we’ll work with you. We’ll give you feedback on state guidelines, national guidelines, CDC guidelines and even various professional societies’ recommendations. But at the end of the day, we’re going follow your lead, but we’re going to staff it accordingly. If you take a draconian view, and you don’t believe that keep these people out of the ER is the right thing and you fall on the side of this is more elective. That’s great. Then we’re going to be more aggressive on rightsizing staffing accordingly. Almost to a to doc. Our docs have chosen the side of we believe that we’re mission critical to this crisis, and, you know, we see firsthand on the tail—CDC guidelines, the things that happened when patients lose access to care with chronic pain. And that ERs and hospitals would be flooded with patients who were abandoned, and so overwhelmingly they’ve chosen, look, we’re going to be there. We’re going to do this. We’ve obviously used the traditional webinars podcast, every form of communication ad nauseum, you know, over communicating to a fault, if you will, to make sure that they’re part of the decision making A, clinically, but B, understanding the economic reality behind the choices we make. You know, we choose to bury our head in the sand and bunker down, you know, we’re more fortunate that it’s not mandated on us nearly to degrees others, but if we take that approach, then this business is going to take on some even harder times, and there’s going to be loss of a headcount to go with it.
Steve, thoughts on communication with your clinicians?
Right. So, ours is, ours has been a bit more mandated state-by-state, but very similar approach. We’re there to serve the dentists in the way they want to be served, and they are choosing how they want to operate their practice state-by-state. Some states have been very stringent, and some states have allowed more urgent and necessary care, not just emergency procedures. And it is interesting to see the reactions of the various clinicians. We support about 3500 clinicians before this on March—before March 15th, and big group of them, about half of them were mandated out of, essentially out of business. Hygienists couldn’t practice. Orthodontists couldn’t practice, and many other elective, elective type procedures couldn’t be done by law or they risk losing their license. So, we’ve had to, had to get with that. But we’ve also seen those that have really stepped up in incredible ways to serve their communities, get out to the hospital systems, their urgent cares, and those in places where, where, access to care is limited. And those practices are actually thriving in this environment. But we’ve done the same thing. It’s doctor choice. And there’s a group of them that don’t want to be in there right now.
Yeah, yeah. I want to move onto, you know, preparing for the future here. So, we all know that this week and next are continuing, are going to continue be rough to manage through, but I think as we saw in Jeff’s introductory slides, we’re going to see some pent up demand and, that demand is going to start to come through, possibly as early as May. You know, Chad, how is Pinnacle preparing for, kind of, moving patients from April over into May and June and getting ready to meet that demand that that we’ll inevitably see?
You know, we have seen a lot of reschedules for the month of May already. And I think the first thing that we’re all focused on is watching what’s happening on the COVID front, making sure that the curve is actually flattened and that the environment, you know, gets back to normal in terms of patient safety. Once we get, once we see that, we’re going to be bringing back our services, from just the essential services that we’re currently doing, and then integrating other things. But, right now we’re not seeing the signs to be able to engage that yet for the month of May. I think it’s, quite honestly, it’s going to be much of the same through May and we’ll see that ramping. And then hopefully in the June time frame we can start adding back, you know, services that patients value but are non-essential.
Yeah. Doug, I know at National Spine and Pain Care, you are in a variety of different regions. Do you think this will be a region by-region-uptake or how are you thinking about it and planning for it?
You know, that’s a great question. We’re up and down the East Coast in 10 states from New York to Florida. So, yes, it has been seemingly less impactful, at least in North Carolina and Georgia than it has been obviously in our Connecticut, New York New Jersey locations. I’m not sure. Look, I’m a clinician. I’m not enough of a genealogist or infectious disease expert, but I would say that I’m having trouble following the logic behind the flattening of the curve 100%. Meaning, we have people out going to grocery stores. That’s certainly, you know, not taboo, and yet they’re not going for routine healthcare that would prevent potentially stroke, heart pain of a heart attack or otherwise. I think, there’s just so much uncertainty. The analogy I use all the time is, hey, I’m a golfer. When there’s a lightning strike, you know, everyone’s off the course. Everyone knows that for 15 minutes and 10 miles that there’s not a strike you’re back on the course. I think that there’s really a real, a tremendous amount of uncertainty. What would be getting out there too soon? What would cause the flattening of the curve and all the hard work we’ve done to be dissipated? What will represent the all clear side? What will represent enough people have herd immunity for us to feel comfortable? I think Jeff’s analysis is interesting, right? I mean, we’re being as optimistic as the next guy, but tempered that with, if I can’t follow as a clinician, the logic behind some of this, I think there’s going to be some economic uncertainty to follow. And, you know, we’re going to watch that closely. And every plan we have is, you know, we have long term sensitivity analysis, but at the end of the day we’re smart enough to know that this is a fluid situation at best, and today’s plans might be obsolete tomorrow.
Yeah. I want to talk a little bit, again, about looking ahead. And, you know, many of you have been looking at the various options available through the CARES Act and, depending on sizes of practice and affiliation rules and things like that, may be eligible for paycheck protection loans. I know many practices are taking advantage of the Medicare advances that are available. You know, but I think we all acknowledge that the CARES Act wasn’t enough for healthcare. And there’s, you know, seeing those dips, those dramatic dips that Jeff showed us, there’s more need for support to keep health care, you know, providing the high level of services that you provide during a normal time, you know. I’ll throw it over to you first, Steve. You’re probably working with the platform that’s been hit the hardest. What would you tell your legislators that they should include in the, in the next piece of COVID bailout legislation to help, to help your supported dentists through this?
Right, so we’re relatively uniquely structured, where we support individual dentists and PCs around the country in 22 states. We’re in about 45 MSAs, so most of those of professional corporations we’re eligible, and the employees of those eligible, under the PPP, I think it’s called, payment protection program paycheck. So, we’re hoping for the best there. We’ll, obviously, we haven’t seen the money come in yet, but that’s a big part of it. And the next step is what they’re talking about in this next round, is some support for larger employees, employers, excuse me. We employ more than 10,000 people and so we’ve had to, we’ve had to furlough a lot of people and right side the organization based on demand. But we would love to start bringing them back and get them and employed, so some—something to help us there and get that engine going again. But again, we’re, we’re stuck until the states and the dental boards and the state governors allow access back to dentistry. So, some of that money would be a nice to have, but it doesn’t really help us rebuild the business until we can get some of these bans lifted in the profession.
Yeah, makes sense.
That’s what we need first.
Yeah. Chad, what would your legislator wish list look like for, for the support of the dermatology space?
I would follow on with Steve’s comments. I mean, as a midsize organization, we don’t qualify for many of the payroll protection programs. And as a result of that, you know, we have hundreds of families that are being impacted by furloughed, furloughed employees. We need to get those folks back and employed and getting regular paychecks in. So, you know, that would be the biggest assistance that we would look for as we go through this. And, you know, we’re in a specialty, kind of, that’s unique, with rate shortages right now. And, you know, a week doesn’t go by that I don’t get a contact from some other practice that’s going, we’re not big enough to weather the storm. Can you guys come in and help us? So, something that can keep these, you know, even the smaller players going because there’s, what’s there is not enough.
Yeah, yeah. You know, Doug, I want to go to you with another question. You know, what are you thinking about what’s going to be different now? Besides, clearly, we need to have some more masks in the stockpiles going forward. Aside from that, what do you think will be different post COVID?
I think it’s going to be an interesting time in healthcare. I think this will do more to reform health care than Clinton, Obama, Mitt Romney combined. I think there’s clearly going to be some winners and there’s going to be some losers. My perspective is that National is on the right side of the cost equation of providing the most aggressive style of care to keep people off of opiates in the least expensive setting, whether it be the office or the ASC relative to a hospital patient center. I mean, we were seeing massive consolidation of hospital systems. What I think will be interesting is, all right, well, we saw what it looks like when the hospitals aren’t available to the demand on the ventilator side. And does that result in preservation of hospitals, or does it really foster the migration of, let’s make these centers for mass casualties, intensive cares, for the people who need to be hospitalized, and let’s even go further towards the lower cost setting of ASCs in offices. I think, as we were marching towards 20% of GDP and spend. I think it’s inevitable that this is going to really favor groups like ours that can provide care in the lowest cost setting. And, you know, I am very bullish on where this takes us. But I think it’s going to be interesting because there’s going to be lot of people, like the 2008 bailout with their hand in line. And two trillion probably is just scratching the surface of the damages, right? So, I’m curious to see how it plays out, but I’m banking on that we’re on the right side of the cost equation, with the only set of tools really available to treat these patients who, for years, have become opiate addicted with chronic pain, so, I’m excited about where it takes us.
Steve, what are you thinking about the changes going forward for dentistry?
Yeah, I think, I think dentistry will be forever changed, too. Simple things. How is, how is the reception area set up? And how far apart do chairs, do people sit now when they come into a reception, or do they not sit in a reception? We all go to dental offices and you sit there, and you wait to see the dentist. Do you wait in your car? Are you escorted directly to your, to the what we call an operatory, or to the exam room? Different things like that. I think people are already asking questions about how we’re sterilizing and how we’re cleaning rooms, and the types of products used in the facilities. And I think things like that will be developed, probably using technology to help patients understand what’s happening. When, when was that room cleaned last? When was it cleaned? By, by whom? And those type of things. So, we’re starting to think about how the changes are, what changes will come already, and plan for the future when we do get to get back to business, so to speak. And I think those are just some, some of our random thoughts that we’re thinking about.
Yeah. I kind of want to end on a little more of a personal note. Chad, throw it to you first. How, how are you holding up? This has been a very stressful couple weeks. What are some strategies that, you know, senior clinicians and senior managers like yourself should be thinking about to get through, through the demands and stresses that we’re under right now?
Well, you know something that we’re doing every day, I mean, we’re, the executive team meets every single night at 6:30 and is meeting for multiple hours, but we’re trying to integrate jokes, just joking around, blowing off some stress. Personally, we’re recommending constantly that, you know, take your supplements, you know, get the workouts in. Now is more, it’s more important than ever to make sure that we have some of that healthy lifestyle integrated into this. And, and then we also promote an extra glass of wine every once in a while.
That’s key. Doug, how about you, how are you … to hang in through this?
Yeah. Look, I would say, you know, for many of my team, this has galvanized us. You know, I think we’re functioning at a higher level than we ever have. You know, we put aside the day-to-day hand, hand-to-hand combat with physicians wanting this this luxury or that luxury, and we’re dealing with really important issues and everyone’s pitching in. You know, we’re kind of this Jim Collins, I don’t care what your job title is right now. There’s jobs to be done. Who wants to take this on?
I think, did we lose him?
Got a freeze there. Yeah, well, great, well, thanks, guys, we’re just about out of time here, So I want to thank Chad, Steve, Doug.
Go above and beyond. So, you know, just things like that.
Yeah. Great. Thanks, Doug. Doug, thank you. Chad, Steve, thanks so much for joining us.
Throw it over to Jerry Sokol for our next panel.
Thanks for having us.
Thank you so much, Chris. That was a great panel, really good to hear from three really experienced PPM executives. Really practical information on what’s going on with the companies. I’m really excited about this next program because so many of us are focused on transactions, PPM transactions. And, we all know, we had talked about the fact that in the 90’s the PPM transactions came to an abrupt stop. It wasn’t so abrupt, but it was relatively abrupt, but that was related to, really, the collapse of the PPM industry, other than dental and hospital based. Well, now, this was even a quicker a cessation of transactions, but we all know that it was caused by COVID 19 and not due to fundamental issues with the PPM industry. So, we want to jump into questions for our panel. Really excited to have two Chief Development Officers and two active investment bankers. We have Chris Fusco. Chris is with Orthopedic and Neurosurgery Specialists as the Chief Growth Officer. And we have Mike Holland, who was the Chief Development Officer at US Anesthesia. And then on the banking side, we have Bill Lautman, who is a very active investment banker on the physician practice side, the founder of Nexus. And we also have Jay Barnes, who is a Managing Director with Greenhill and Company. And so, I’d like to jump right into it with the first question, which is not withstanding this serious slowdown, were there any transactions that were midstream in the process when COVID 19 really hit, that you’ve been able to get closed, notwithstanding the fact that there’s been this cessation? Jay, you want to pick it up? I’m not sure, I think Bill, Bill I think is not on yet.
Yeah, sure. Thanks. Jerry. Can you hear me?
Yeah, I can hear you fine.
Yeah, so I think we have a couple deals that are in, or, you know, around the final stages. Without the COVID 19 it is unlikely they would necessarily be closed at this point anyway, but this certainly slows things down and extends the timeline, I’d say. In a normal market, what would we be doing would probably be hammering out some final terms and looking at documents more aggressively. But, it’s tough to do that when you know, buyer and seller are totally focused on triaging their own businesses and dealing with liquidity issues. So, negotiations are still a priority, but it’s tough to make them the very top priority at all times. So, I’d just say in the most part, there’s a recognition that the timelines are extending, but also an expectation that, you know, you do the work that you can get done, if you can get it done. So, at the end of most deals, it’s all telephonic anyway, so, so this shouldn’t hold up the very end of deals.
How about, you know, one of the questions I wanted to ask is, have you been able to—has anyone actually on the sell side of banking been able to get a deal closed? And Bill, do we have you now?
Yes, can you hear me?
Right. Can you see me?
We can hear you and see you, if you could turn your volume up, that would be great. But we can hear you.
Okay. Great. Yeah. So, Nexus Health Capital, and thanks, McDermott Will & Emery for having me on. Nexus Health Capital just executed two days ago definitive documentation for a major regional, gastroenterology recap that is actually going close over the next 24 hours and was executed with Webster Capital in Boston. We had the good fortune of working with a group that was able to recognize the longer-term value here, and all of this COVID 19 material will soon end. And so, we indeed kept our original pre COVID valuation, and indeed have two additional executed LOIs for follow on acquisitions that are now with the completion of this deal underway. So, it does you know, not all private equity firms re going to be out there looking at a longer-term perspective as Webster did. In the end, they will be the, the grand leader of all this because they have an opportunity here to really be the key player in their region, which is the mid-South region, with just a ton of physician groups clamoring to get on board. And among other things, we’re saying, hey, this may end—this may not end for a while, and we need a capital partner. Jerry.
Thank you, Bill. Now, that’s interesting, because when we talk about what kind of deals are, are getting done now, that’s interesting that you’re saying you signed up a platform GI deal that’s going to be closed within 24 hours. That’s phenomenal. You know, what I am wondering and interested from the CDO side or the banking side, are there any type of deals that are getting done during this period? In other words, are there buyers who are still perceiving on the development front, both in terms of moving deals forward and also willing to close deals and able to close deals right now? Chris?
Thanks, Jerry. I think you’ll see a few deals get done. Probably not many. I think high quality, market leading, and premium assets will trade, assuming a buyer is pretty far down the road with diligence. I think these businesses will bounce back quickly and buyers probably won’t want to pass up an opportunity if they believe this impact, you know, from the crisis will be short lived. I could tell you that, you know, we at ONS are very much open for business on the M&A front. We continue to advance diligence on transactions under a letter of intent. But I would say on a case-by-case basis, we’ll want to get closer to the other side of this before closing so we can get some visibility into how quickly these targets will get back from a blind perspective.
Thank you. Jay, let me ask you a question as it relates to deals that were in progress but that aren’t proceeding. Is there anything in particular, you touched on this a little bit, but is there anything in particular that you’ve seen happening to keep deals on track, etcetera, etcetera?
Yeah, yeah. I think, you know, buyer and seller asking themselves what is going to happen to my underlying business, is it going to be the same, is going to be drastically different when the world returns. So, you know, if the demand will still be there, and I think, for most of these physician services it will be, then it’s certainly easier to keep things on track. There may be some difference in who the buyer actually is. So, you know, we may be in a time when strategics can actually move a little bit faster because they’re on the ground seeing everything, whereas private equity firm is a little bit removed and doesn’t have that day-to-day knowledge of what’s going on. So, you know the strategic fire. It’s easier for them to assess what is truly going on with the with the target. So, you know, we’re keeping deals alive by just continuing the open conversation, making sure that, hey, this is what we’re seeing at our locations. This what we’re seeing with volumes. This is, you know, we’re only open one day a week, but all the providers are still there, you know, they’re all waiting for the world to return to normal. So, you know, at this point, it just keeping an open mind and open lines of communications so that, you know, when the world returns, we know what’s happened over the ensuing couple months of this crisis.
Speaking about this interim period, focused on, it’s on the sell side, I’m wondering, I want to ask Mike Holland, from a development perspective, what are, for those who are not necessarily actively looking at deals, what are the development folks doing right now?
Yeah. First, I would start off by saying that, you know, if you have a strategy as a company that’s meant to last through tough times and good times, you’re continuing to do the M&A work. Now, I think folks would be a little reticent, actually close a transaction in this environment, but bringing it right up to the finish line and believing that we’re going to get through this at some point, I think that’s what all folks want to do. Maybe be a little bit more cautious on spending third party fees with—on attorneys or outside accountants. But I think we’re all believers that healthcare will return. Our strategy is good. If it was a good deal, we should keep going on it. So, for the most part, are internal teams are very busy proceeding on those fronts and actually taking some of the legwork we’ve typically hired outside advisers for. Nevertheless, I would say, even if that wasn’t the case, we get daily calls from our operations folks on, can you guys help us with some new boiling situation that we have on the operations side? We’ve got tons of communication with our clinicians, tons of communication with our hospital partners. And we also have, just, unusual things popping up in a crisis like this. We’ve gotten contacted by hospitals from around the country within the hot spots, and they’re asking us to loan clinicians to them, and we’re helping on that. And we’ve seen a great surge of folks interested in being good humanitarian folks and reaching out, and so we’ve got involved in some of those kind of activities.
Great, thanks, Mike. Moving back from the development side over to the banking side, because obviously, the development side is, you know, they’re singularly focused on certain specialties, whereas the bankers a little bit more practice agnostic. I’m wondering two things. Number one, are there any specialties that you think are more likely to have activity now that other specialties, notwithstanding what we’re going through? And the second part to the question, I’m wondering where there— what has been your strategy with practices that you had been talking with and that you were going to bring to market, what are you doing with them right now, in light of what’s going on?
You want me to jump in, Jerry?
Yeah, go ahead.
Okay, so let me hit the one-day sectors that, notwithstanding, historical activity that we’re really dead in the water with, and that is the emergency medicine field. So, it turns out, in all, or almost all, of the emergency departments around the country, there’s been an increasing fear of patients to go in, notwithstanding triage in the COVID units. So, although we had multiple emergency medicine transactions, they’re all on hold due to massive declines in volume. Hopefully, that will change. On the sectors that we believe are going to either remain active or become much more active when things get a little more under control are those clinic-based type operations. We’re certain gastroenterology, urology, a number of other areas. And indeed, to go back to an earlier point, Jerry, we have two clients right now active. One leader, regional leader in the gastroenterology, the other urology, where Nexus Health Capital suggested let us go on hold because of the decline in patient volume until we garner some visibility, and then come back but not withstanding that there have been, in each respect, two strategics, in these cases hospital systems, that have said we don’t want to wait. We know the patients will come back, were flush with cash. Let’s go now. We’re not going to go now because we want to make sure that we can get back onto a normal footing. But there still are players out there. The cash flesh hospital systems who are saying we can do meaningful income repair and let’s keep going forward. So, that’s my two cents, Jay?
Yeah. Thanks, Bill. Yeah, so I mean, I think, you know, what, what are you doing in the interim? I think you’re just doing as much as you can get done without bothering the management team that obviously has their own priorities in a situation like this. You know, when can you go back out to the market? I think you need to see a couple things. One. It’s volumes obviously starting to return, or at least scheduled volumes for some of these other office-based procedures. As you get visibility on that, it becomes a lot, you know, easier to have confidence in the business. And secondly, I’d probably say, having the providers around as well, and knowing that the cost of providing these services haven’t changed. If there is a real big pent up demand, like some people are talking about that, you know, is going to be an avalanche when the world returns to normal, you know, you’ve got to wonder if there’s some businesses out there that are largely independent contractor focused. If those ICs are going to demand higher pay for some period of time, well…. I think when you see the volumes and the provider sides stabilizing, I think that’s when, you know, it’s safe to go back out.
Jerry, if I could just add one more point.
Yeah, go ahead.
If indeed, there are other private equity firms out there who find themselves capable of seeing around the corner like Webster did, that the volume shall too return, it became clear to Nexus that although the debt markets had dried up in our lender, in the case of Gastro One in Memphis went away about three weeks ago, so we turned to the creation and structuring of a somewhat complex, but very effective seller note, physicians seller note that, after educating the physicians on, realized that they’re probably the best source of debt financing as a complement to the equity. Couple reasons. Number one. If it had been an all equity deal, which the title of the private equity suggested, which it was not, you would have probably too much delusion to get a deal done. Secondly, if the physicians had the chance to take some money off the table, notwithstanding the seller note. Thirdly, to the extent on an after tax basis, the physicians didn’t yet cash to invest rather than a seller note, it would be a fraction, and I mean a fraction of what they’re able to invest with the turn, the rate on the note that they have. So, creative approach that we worked on closely with Webster. That is the very basis on which this deal backs up.
Listen, there’s a couple really important questions that I know our audience wants to hear, you know, forecasts about and so let’s turn it over on the development side, Chris, you know, from your perspective, we talk about when we come out on the other side of this, you know, what, from your perspective, what do you think will happen on the physician practice acquisition environment when we emerge from this? Because everyone knows it’s not going to be like it’s off, and then it’s back on. You know, there’s been talk about what’s the new normal? Does it take time to figure out what normalized even is? We all know that the multiples were, you know, double digits. I mean, you know, the multiples were all time highs. So, I’m just curious of your perspective, is what will be the real impact on practice deals that are done post shutdown in addressing a number of the things that I just raised?
Yeah. So, a couple things there. I mean, I think first thing is we’re leasing for meaningful deal volume following this. You know, we’ve seen a ton of inbound interest in engaging with us, you know, at some point following this crisis. Not surprisingly, this includes groups with which we have our discussions, but they were uninterested at the time, for those that have declined to terms we previously presented. So, think we’re encouraged by that. You know, and I think on top of that, you just, you know, physicians aren’t making money right now. And I think, you know, you’re seeing a fair amount of physician wealth destruction, and I think these physician practice management deals are, you know, through transaction proceeds there can be some repair there. So, you know, we’re looking forward to being highly transactional on the other side of this. From a multiple perspective, you know, as a buyer, I’d like to think that multiples will come down. I think that buyers will be taking no more risk here, especially if they transact in the near term, versus wait for these businesses to demonstrate that they could bounce back to where they were, you know, pre COVID 19. I’m sure we’re going to see a ton of, you know… normalizing adjustments. I think as a buyer, you know, one of the things I’m starting to think about is, how will we see through that? And really, what are we going to be able to get comfortable with? And frankly, what are our lenders and our private equity partners going to be comfortable with? But, you know, I think the main theme being, you know, I think we’re planning on being highly transactional on the other side of this.
And from a timing perspective, any thoughts on whether things would be delayed because of a need to kind of figure out what, what new normalized even is in light of, in light of how business operates with social distancing, etcetera, etcetera?
I think. Yeah, I think absolutely, we need to, you know, we need to probably pace these things, such that we can really feel comfortable that these businesses are going to get back to, you know, where they were pre COVID 19. And so, you know, I certainly would say we’re not rushing into anything. So, but, you know, again we’re open for business on the M&A side of things. I’m curious what the bankers have to say on the valuation side, how they’re guiding their clients.
The bankers say, we’re going to come out of this COVID 19 and there’s going to be a multiple pop.
It’s called the COVID multiple pop.
Chris, on our transaction with Gastro One, as the rags pointed out, we were actually able to maintain our valuation, pre COVID valuation, and so I, just cutting through it, I think it’s going to require private equity firm who knows the landscape, knows the business, and says this too shall return and has the appropriate alignment with the partners. In this case, not only as equity partners, but with seller note we did on the deal. So, I do think there’s a chance to maintain the valuations. But those private equity firms who get it are few and far between.
I think the devil’s in the details there.
What’s that Jay? The devil’s in the details?
Yeah. I mean, there are certain ways you can structure this to de-risk it, you could, you could have you know, escrows put in place until cash flows return to a normal state. I mean, there’s other ways to, you know, keep valuations where they are, but de-risk it for the buyers. So, I think we’ll see some creative structures come out of this or the next few months.
Look, we come up with creative stuff, but, but you don’t want to get the healthcare attorneys to nervous when you start talking about earn outs and stuff like that in a physician practice context. But, you know, there’s creative ways to accomplish different things. You know, let’s flip it around from the buy side to the sell side. I’m curious, and I’ll ask this to Mike Holland, you know, from your perspective do you think the PPM MSO model will have greater appeal or less appeal to physicians after coming out of a black swan event like COVID 19?
Yeah, so for Anesthesia, we’re actually the old kid on the block, being around seven years, you know, some of the orthopedic and dermatology roll ups, those are sort of just getting their wind right now. And what I can say from having been through the last seven years is that, not all physician aggregation models are created equally. I could very well see folks that are close and see an organization like USAP that’s made a lot of the right investments on the clinical side and on the business side in terms of performance, they’ll say we need some of that. Whereas folks that were just making a short-term or capital play and highly leverage as part of their strategy, I think we’ll see a lot of failures out of those PPMs. So, it will take guidance of bankers, attorneys, I think to say, you know, PPM, this could make a lot of sense for you, but make sure you’re with the right partner. You know, I know our clinicians have had contact from other anesthesia groups from around the country, and they’re asking about all the protocols were building, about all of the business support we’re getting and saying, yeah, we need some of that. Then you look at somebody in the news like Envision, very clearly making tough decisions about their employees, and I think there’s some doctors out there that are saying, boy, I’m glad I didn’t go down that route. I’m suffering financially, but I didn’t, at least I’m doing it on my own terms. Having said that, I’ll go back and swing the other way. We have heard of a few smaller independent groups that had to fire every single non-owner in business. So, I think you got to do it right and you’ve got to explain the message right. But for sure, I think we’ll get a lot more activity over the next year for the winners here.
You know, it’s interesting here, because, you know, there’s no secret it’s all over the news about what Envision did with the physicians, and it’s interesting, I was talking to one recently who, you know, even though the cop maybe cut across the board, actually saying the other thing, I’m glad I did my deal, because if I didn’t do my deal, I wouldn’t even be getting, you know, 70% or 80% of my base, you know, there would be no revenue coming in right now. But in any event, anyone else have any comments? I’m curious whether anyone else has any thoughts about, kind of, physicians’ attraction to PPM MSOs a result of this, you know what we’re going through?
Hey, Jerry, it’s Ira here. Just a question for the panel on, are, do you think future potential practices that are looking to be acquired are going to look at how they handled their own physician practice, how they partnered with them through this crisis as a barometer of, you know, I would have … with them. Do you think that’s going to have any blowback?
Yeah, I’ll jump in there. I think that’s very important, and when we have our executive team meetings, it’s not even just about M&A transactions, but treating are clinicians right through these times is really what’s going to enable us to recruit the best physicians and nurses going forward. So very important for us to do the right thing as a company. You know, we sort of take it on ourselves as a leader in the industry, to sort of lead by example by doing those sorts of things.
I agree with that. You know, I think here at ONS we try as hard as we can to do the right thing by our staff and by our physicians. And I think our reaction to the COVID 19 crisis has been largely collaborative with our physician leadership, who really wanted to see us, as the management company, take care of the people that have served these communities for a long time. So, relative to our peers and our market, you know, we were slower to make some of the tough decisions and others tried to make very quickly, you know, fortunately, we were able to do so as a result of our capital structure, as a result of the support of our private equity partners. And so, you know, again, our view was that we should really take care of these folks, because you know, those that we partner with in the future will want to know how we handled this.
Listen, we’ve got one minute left, and I want to make sure we finish on time, but this has been an interesting panel, because so many folks are interested in transactions and it sounds like what we’re hearing from this panel, and obviously, transactions are what the folks on this panel on a lot of people listening here do, but is it accurate to kind of summarize on both the sell and the buy side, that there is an anticipation of transactional activity picking back up without any material impact on transactions post COVID 19. Does it, please comment, each one of you, of whether you agree or disagree with that. Just curious, and keep it brief, please. We’ll start with Mike.
Sure. So, I think it will have an impact. I think what that is, remains to be seen. If by May, surgical volume start ticking up again, and we’ve got enough PPE where hospitals can open up, you know, we’re probably in that phase where people from a qualitative perspective, just say, hey, I need a big brother to help me out. If this goes on a little bit longer and they’re actually feeling disproportionate pain as independent groups, I think you’re going to see things like multiples drop and buyers really having an advantage in these transaction discussions. And then if it goes on too long, you’re going to start to have a capital crisis where the M&A transactions there just shut down. You know, I’m a believer, you know, sort of A or B happened, but too soon to tell right now.
I’ve got to give only 20 seconds to go to the others, so, Chris.
I generally agree that we’re going to get back to, you know, high velocity M&A across most of these physician specialties. I think you might see things like deal structure change a little bit, maybe physicians start taking a little bit more risk by a roll over, but generally think we’re going to get back to where we thought we were.
Yeah, I think you’ll get back to where you were in terms of deal volume. I think groups will switch to being far more focused on the right partner and the right culture rather than getting the last dollar.
That makes sense. Bill?
Yeah, we’re going to take our chances on a couple situations where the doctors are willing to leave significant cash in which they usually take out, and working capital so that they can cover expected Coronavirus shortages, and if so, there seems to be enough alignment that some of these deals may actually get done.
Well, listen, this has been a great program. I want to really, first of all, I want to thank our faculty. The first panel with CEOs, obviously those guys are on the front lines dealing with a lot of issues, really appreciate you giving us your time. Jeff Woods, that was a great way to kick it off with some really valuable information. And I really appreciate this, the development panel, so thank you all for putting in your time. I want to thank all the attendees we had over 500 attendees stay, even through the end. And so, really appreciative of that. Stay tuned for future McDermott webinars that we’re going to be doing covering important topics during this period. We’re, as we mentioned, we’re not having our conference in Nashville, and so we will continue to have various virtual conferences to keep everyone apprised of what’s going on. So, thank you all. Have a nice day. Stay safety—stay safe and healthy. Thank you. Bye now. Thanks, Jerry.