July 22, 2024

Flex Tech

Innovation in Every Curve

The Rise of Employee Stock Ownership Plans in Healthcare

  • author['full_name']

    N. Adam Brown is a practicing emergency physician, entrepreneur, and healthcare executive. He is the founder of ABIG Health, a healthcare growth strategy firm, and a professor at the University of North Carolina’s Kenan-Flagler Business School. Follow

The healthcare industry is undergoing a seismic shift, with massive consolidation reshaping the industry. As I have written before, I am skeptical of this trend since research shows provider consolidation reduces competition — and therefore leads to higher prices — and limits patient choice and access to care. Hospital-owned practices, and certainly those owned by private equity companies, do not improve care in the community.

As a doctor myself, I understand how difficult it is to operate a practice. The regulatory and compliance burdens, tax and payroll headaches, and down and dirty fights with insurers are enough to make anyone shout “Yes!” when a buyer comes calling, even if it means losing autonomy and ownership.

But what if physicians could preserve the independence that comes with practice ownership while reducing the most significant burdens? Enter employee stock ownership plans, or ESOPs.

Addressing the Root Causes of Practice Owners’ Distress

Between 2012 and 2022 the share of physicians working in private practices fell from just over 60% to about 47%, and as of 2024, nearly 60% of medical practices are owned by corporations and over 77% of U.S. physicians are employed by hospitals, payers, and other corporations. In the last 5 years, hospitals and corporate entities acquired more than 44,000 medical practices. Of those, private equity ownership has eclipsed hospital and health system ownership.

These trends are driven by several factors, including practice owner burnout. Rising operational costs, proliferating regulatory burdens, and the need to continually invest in new technologies have made it challenging for independent practices to stay afloat, much less thrive.

In contrast, lucrative buyouts from private equity firms or hospital systems offer substantial financial incentives, operational efficiencies, and patient resources that small practices struggle to match.

Once sales go through, however, doctors cannot run their practices how they want or determine who might be the next buyer of “their” practice. Also, studies indicate that consolidation has led to lower physician pay. For perhaps the first time in years, they must answer to a higher power that dictates the terms of care, salaries for support staff, and much more. Sales also come with lack of stability. According to a study published earlier this year by Health Affairs Scholar, more than half of private equity-acquired physician practices are sold within 3 years of acquisition, most of them to other private equity firms.

In contrast, ESOPs allow physicians to retain ownership and control of their practices while reaping significant financial and operational benefits.

What Is an ESOP and What Are the Benefits?

Generally, an ESOP is a retirement plan that gives employees an ownership interest in a company. In a physician practice, this arrangement usually means that instead of selling out to external entities, a physician sells their practice to their employees, turning those employees into stakeholders invested in the success and sustainability of the practice.

ESOPs function by creating a trust that acquires shares in the practice on behalf of the employees. The practice funds this trust, and over time, employees earn shares through their service to the company. This structure aligns the interests of the employees with the success of the practice, fostering a culture of ownership and accountability.

Unlike private equity or hospital systems, ESOPs are managed by independent trustees. This governance structure ensures decisions are made with the long-term success of the practice in mind, rather than short-term financial gains. Independent trustees bring a level of oversight and fiduciary responsibility that aligns with the values of the physician-owners and employees.

Many physicians who choose to own their own practice have deep relationships in their communities. Their patients are not just a collection of symptoms and diagnoses. They are neighbors or fellow PTA members. Selling a practice to a hospital conglomerate or private equity firm means wrestling with the fact that members of the community would receive less personalized care. This is not so with ESOPs. Physicians who sell to an ESOP continue to run their practice according to their values and standards, without the interference of external investors focused solely on the bottom line. This autonomy allows physicians to prioritize patient care and maintain the practice’s unique culture and identity.

ESOPs also come with important tax benefits. For instance, contributions to the ESOP are tax-deductible, and in certain cases, the sale of stock to an ESOP can be tax-deferred or even tax-free. These benefits can significantly enhance financial stability, providing resources for growth or investing in new technology.

ESOPs: A Path Toward a Stable Future

There is one other benefit to ESOPs: continuity. As physicians approach retirement, an ESOP offers a way to gradually transfer ownership to the next generation of practitioners while ensuring the practice remains in capable hands. This option preserves the legacy of the practice and provides assurance to patients that their care will not be disrupted as ownership changes.

Of course, ESOPs are not suitable for every practice. They require careful planning, legal counsel, ongoing administration, and a commitment to the principles of employee ownership. Practices must have a stable financial foundation and a willingness to invest in the necessary infrastructure to support an ESOP. Additionally, the culture of the practice must be conducive to employee ownership, with a focus on collaboration and shared responsibility.

For practices that meet these criteria, ESOPs offer a powerful alternative for burdened physician owners, providing both financial security and the type of professional autonomy that keeps the focus where it should: on patients.

Disclosures

Brown is the Chief Medical Officer for Meroka, a company partnering with practices using an ESOP model.


link