In this episode, Griffin talks to Dr. John Storment, a successful REI practicing in Louisiana. Dr. Storment talks about the potential pitfalls of accepting an offer from a private equity group, and how that can impact the way that you practice, as well as the importance of understanding the business side of your medical practice.
Griffin Jones: My guest on the program today is Dr. John Storment. Dr. John Storment is from Louisiana, he went to medical school at LSU, he completed his residency at UT Health Science Center in Houston, and he completed his REI fellowship at the University of Vermont, up north in Burlington. Dr. Storment went back to Louisiana, opened up a private practice, where he has been in practice since 2002. We’re gonna talk about that, what that’s like, and the offers of selling equity in practice or a lab. Dr. Storment— John— welcome to the program!
John Storment: Thanks, Griffin. I’m glad to be here. I appreciate the invitation.
GJ— I want to start off with part of the reason why this conversation came about. After an earlier podcast episode, we started texting back and forth and we talked a little bit about private equity coming into the space and, though that was reserved later for the questions, I want to start off with— you’d expressed to me a bit of concern that if private equity continues to move forth in practice control– and I might be paraphrasing, if I am can you put it in your own words and share with me what that concern is?
JS— Yeah, I think overall when you talk to a hundred doctors and ask them why they went in to medicine, why they wanted to be a doctor, even though making profits is in the top ten of their reasons, most of us will say we went in to help people, to treat medicine, to engage in the science of decreasing disease. A private equity’s impetus and why they exist is solely to make money. When you mix the two, I have a serious concern as to keeping all of the reasons why we went into medicine on the forefront, not being influenced in a negative way that could ultimately impact patient care.
GJ— What’s the control that you’re worried about practitioners losing, that you’re worried about providers losing, that would be set ransom to someone’s who’s only maximizing the top line or looking to reduce the bottom line.
JS— I don’t think it’s all bad. I think we need to look at the priority. When I talk to people about whether or not private equity is good, mixing private equity and medicine, it could be a really good thing for a practice— and I’ll get into more details about how— but you want to ask yourself, before you do anything, “How can they help me and how can they help my patients?” I think if it’s more than just providing an early retirement, you need to carry that relationship further. Literally, if you can decrease your overhead because of group purchasing power, if you can have more leadership from private equity and other groups who can show you an easier and more efficient way to run your practice, that’s a huge upside. Not everyone who comes out of training and who starts their practice— very few, especially me, have any experience with that. So maybe they can provide leadership that can help your practice. However, there are lots of facets of a practice that can be negatively impacted. For instance, let’s say that— you know, how do you think a private equity group would really like to get paid? Do you think they want to contract with a bunch of Blue Crosses and third-party payers, or do you think they’d like cash? Well, what about the doctor in practice— they want to serve the community, and if it means taking a contracted rate or lower reimbursement to serve the community and help people, that’s what doctors have been doing for decades. There’s an obvious conflict there, do you say “I’m just gonna take cash and do what the private equity wants,” or am I gonna compromise and say, “It’s better for the patients if I take insurance or if I take decreased reimbursement to help?” I think that there’s got to be a give and take on both sides that you’ve got to be focused on patient care and not just about profits.
GJ— Well, to that point, one of the reasons somebody might be considering selling equity in their practice is because they’re getting beat up by insurance companies. If they’re a small practice and they’re in a market with much larger practices with better deals with United or Blue Cross or Aetna, they might view what you just mentioned as a pro. How’s that balance?
JS—Well, the bottom line is you’ve — the devil’s in the details. If you’re considering selling or if you look at the deal and you simply just look at, “I’m gonna get— pick a number— 5 million dollars for my practice, and I’m gonna be an employer of this group.” The bottom line is, when you sell your practice in its entirety, you become an employee and you lose control. It doesn’t matter how many bells and whistles they put out there, you’re an employee. You lose control of how you make decisions such as third-party payers and whatever. If you’re getting beat up so much you say, “I’m just gonna throw in the towel and I’m fine with being an employee and I’m gonna let them take over and let these decisions be theirs,” that’s an active decision. But what you’re relinquishing is control, and that might come back to bite you. We have to be really careful on what your obligations are. I have a close friend who sold his practice— it was a pediatric practice— 7 or 8 years ago. He got several million dollars for it. A year into it, he was pretty happy with the new cash he’d received. But oh, by the way, he had to start Saturday clinics, and he had to extend his hours to 6:30 pm… all of these increased requirements, and he didn’t have any say-so in it and had to continue to follow in their guidance and recommendations. He didn’t have any say over how it was done. He couldn’t give discounts to patients who he felt needed it. He didn’t have any say-so in that. It’s a matter of control, so you have to weigh the balance— balance that with getting paid for your practice.
GJ— There’s a lot to consider in pros and cons. Let’s talk about your own consideration. I’ve known you for years, and since the beginning, you’ve been having these conversations and you’ve been approached by suitors who wanted to buy equity in the practice. We’ll talk later about the decision you made and why, but what was that process like, talking to suitors— what did you have to consider, personally?
JS– In answering this question, I’m gonna try to keep it brief, but I really think it’s important for the listeners to help identify— understanding where I came from and what type of practice I have. As you said in the intro, I moved to Louisiana from Vermont, and I joined a larger group out of New Orleans, but I was basically a satellite in Lafayette, which is a couple of hours west of New Orleans. So I was the only REI in town, and after a couple of years I broke away from that group and started my own practice. It was me and I had a senior embryologist and an off-site lab director, and we did fine. We were by ourselves, we were small, we did about 100-120 cycles of IVF per year. We had a good product, but it wasn’t anything that was attractive to any large corporations wanting to buy my practice. I was sort of under the radar for a long time, and I loved it. Those were some of my favorite days in practice, in retrospect. As we grew, we ultimately reached out to a practice in Baton Rouge. The physician was retiring, and I acquired that practice mainly because there was some larger private equities looking at moving in to Baton Rouge. It was sort of a defensive move for me. I didn’t want them to move in and take over and compete in my area, so I bought the practice, we hired another physician. Now we have three physicians between these two locations. Now we became a 200-250 cycle per year practice, we’re a little higher up on the radar. Because of that, we were first approached by a company— at the time it was Vivere. Let me first state just so we’ll kind of put the asterisk by everything— I’m going to describe the offers and the specifics of the cases as I remember them. If I speak incorrectly or if I describe a deal that’s not factually correct, I apologize— I don’t want anyone to get upset over the content of what I say. I’m gonna try to state it as I remember it. Vivere— their program was not initially to buy practices, but to set up an IVF clinic in an ambulatory surgery center. So they came to me and said, “Hey, I want to offer you to build you a lab in Lafayette, Louisiana and you can also have a surgery center,” and their model was a little weird. Let’s say the lab was gonna cost a million dollars, they’d say, “We’ll pay for it all, you’re gonna own 60%, so you’re gonna pay us back $600,000 plus interest over the next five years, and then once you have it paid off, you can get 60% of everything going forward and we’ll get 40% of everything for the rest of your life.” It seemed like, with that, they weren’t really offering you anything but direction and experience in building a lab, and maybe offering as sort of a bank. That model I don’t think lasted— I think they did a couple of deals with that model, but not a lot. Then they changed their model and developed a different proposition to say, “We will buy your practice or a percentage of your practice.” So in my case, that was right after we bought the Baton Rouge practice, so we were at about 240 cycles per year. So they said, “We want to buy 40% of your practice, and we will buy you with a multiple of your EBITDA. I laugh because five years ago, only 1% of fertility doctors knew the term, EBITDA. I was one who didn’t know— for the listeners, it’s the earnings before taxes, interest depreciation, amortization— it’s how your company is performing without having to take into account some of the other things that get in the way of describing your earnings and whatnot. How profitable are you? So, in this multiple of your EBITDA, Vivere said, “We’ll pay you 5x or 6x of that,” so you say, “Great!” If my EBITDA was a million, they’re gonna pay me $400,000 times 5, and they’re gonna give me 2 million dollars, and of course after taxes you’ll have this, and you’ll have some cash in the bank, but for the remainder of your life, you’ll be giving them 40% of your earnings— even if you grow to 400 cycles. To me, they said, “What we’re gonna bring to you is we’re gonna bring you experience, and marketing, and group purchasing power. We’re gonna give you so much stuff that your practice is gonna thrive with us, because of our expertise.” So when they approached me like that, I said, “Where have you done this before?” “Well, we’ve done it here.” “So let me go talk to those people.” “Wellll, they’re not quite ready yet, and we’ve done it here.” Well, that’s quite difference than this purchase. So they hadn't quite proven to me that they were bringing me anything. That goes back to the point I made earlier. How could they help me? These guys were very nice, and I thoroughly enjoyed working with them in our discussions, but I just couldn’t see how they could do anything a whole lot better than what we were already doing. And giving away 40% of our revenue for the rest of our life— FYI, I’m 53 years old, and at the time I was 49 years old. I’ve got a few years left. I just didn’t feel like— I didn’t feel comfortable giving that much away and not getting that much in return. That was the first two introductions to this private equity being involved in practices, and I think I’ve had fewer offers than many practices, just because our practice size is so small. But I kept with the advice that somebody had given me, which was, “Make sure that what they’re bringing to you is worth giving away.” To me, that just didn’t fly, so that’s why I declined those two opportunities.
GJ— There are people listening who have not seen this influx of capital yet, have not been approached, typically in smaller markets, typically in the interior of the country. I’d like you to explain in operational terms, what’s the difference between selling the lab and selling the practice? Selling part of the lab or selling part of the practice.
JS— Let’s take a step back. One of the ways in which I’ve always looked at my practice— for a long time, especially in a small company or a small practice, we have lab people, we have practice people, and they all mingle and we’re all friends. We don’t have this divider up that says, “You’re different than us.” In our small medical practice, we all work together. However, on paper, in a reality, the practice is your identity. The practice is your personality. Practices can vary from one to the other. Practices should vary, depending on the nature of how the doctors behave and how they treat patients and what your priorities are. Do you spend money on a very expensive decor or not? Those are just kind of small decisions. The lab, on the other hand, needs to be very consistent. They don't need to vary too much. They need to produce a product which is a good embryo every time possible. We divided up our lab and our practice into separate corporations, not necessarily for sale, but just because they probably needed to be insulated from one another anyway. Legally it helps. But from a standpoint of selling just the lab or the practice, that was never a consideration for my until I was approached by Ovation Fertility, in which their model was quite different than the others. So to the listeners who have never considered separating them, especially the small clinics, it’s not necessary that you have to do that, but it does seem to make it easier to follow your cost and your expenses, and how much does it cost to actually do an IVF cycle, what’s your overhead for the lab part, what’s your overhead for the practice. That allows you to set your prices and identify your price point for specific IVF cycles. That’s how it helped us. When Ovation approached me, I’m close friends with one of the original founders of Ovation, Kaylen Silverberg, and he and I have known each other for 20 years. He said, “Even though you are a smaller practice compared to some of the other Ovation clinics, we would like to have some discussions about buying the lab.” That was another reason why it was helpful for me to be able to then have talks about selling the lab portion. I didn’t have any desire to lose my autonomy of my practice to anybody— maybe that’s ego driven, maybe it’s just because we’ve worked really hard to get where we are— I didn't see a need to lose that. On the flip side, I have a lab director, and at the time when we were talking to Ovation, I was having some instability. My lab director had moved out of town, so I was having to hire a new person. Hiring to Louisiana is different than hiring to a bigger city— New York Boston, or wherever— is hard to recruit. I needed a really good quality lab director, and I wanted to be affiliated with continued good quality embryology. That’s not as easy as it sounds. I was quite vulnerable if I didn’t have a good quality lab. This offered me some stability and some decreased vulnerability to affiliate with six or seven other Ovation clinics that have good outcomes and good pregnancy rates and good lab people who could offer us not only capital to increase and to improve our lab equipment, but to also offer some camaraderie and collaboration both with the clinicians and lab teams to make sure we’re putting out the best product possible. That seemed very attractive to me, for a single, very small group in a rural area of the country, that I could now kind of automatically be affiliated with some groups that have good rates. So our rates have always been very good, and I’m proud of that, but it’s a very vulnerable feeling— one move, one person leaves and it could dramatically affect the care your patients receive. That was another impetus for me. My practice, again, was my identity, and losing control of that was more than I wanted at this stage of my career. When you sell the practice, you’re gonna work for someone else, and I didn’t want to work for another company. I still remain our lab’s medical director, and I have final say in how the lab’s run from a clinical perspective, and I’m still a shareholder in Ovation, so I still have a vested interest. They don’t have total control over my lab– it’s very much a collaborative effort.
GJ— You tend to be a little bit more participative in the business side of your practice than a lot of independent doctors, especially independent docs in small markets, in my opinion. You had a nice website before a lot of people had nice websites, you read business books, you’re interested in business development, sort of big-picture self and culture improvement. I don’t see a lot of independent practices— owners— in smaller markets doing the same thing. Talk a little bit about that— At what point does it make for people who aren’t into that versus why it’s important to you, and how it intersects with delivering to the standard of care.
JS— Good question. I think from my perspective, I didn’t have a business background. I majored in microbiology, I’m a science nerd, I’m a runner— in my running group, I’ve got a bunch of business people. When they start talking about business, I would just put my iPod on and run, not even listening to them. I didn’t understand it. At one point, I got aggravated because I didn’t understand it. I started doing a lot more reading, and understanding, and digging into it. It’s not as difficult as it seems. The more I understood it, the better I could identify with how to make the practice more efficient and better. I have a great team– my director, she’s just amazing and she helps point out for me not to spend so much time working on little bitty things, but things that make a difference in our practice process. To the people who don’t like it or understand it, it’s worth the time to get into it a little bit and read some books that help you focus on the processes. The old Jim Collins book, “Good to Great,” was written in the 90’s but it’s so applicable to REI practices. It’s wonderful to look at that and say, “How do you deliver a product?” And it’s really touchy-feely, just like REI, these patients get the benefit of the doctors putting a lot of effort into making them feel good and producing a good product. From a standpoint of how that impacts my decision-making, I think the more i understood it, the more that this particular offer from Ovation fit our group. I absolutely do not think it fits everybody’s group. I would argue that the influx of private equity in medicine is going to be a pendulum, and we’re going to see, I think, a negative impact, because people are going to be worried about EBITDA, not your patient’s outcome. When a patient’s really upset, and you think giving her half off of her next IVF cycle will make her less upset and hopefully get a good result from that, that’s just not going to be able to get done when they’re run by big companies that are not interested in the personal touch of that. I’m concerned that a lot of older docs who are closer to retirement are just gonna give away or sell all of these big practices and these new docs who are coming in to the market out of fellowship, and they’re in their 30s and early 40s, they’re gonna become employees. I don’t like that for our specialty. I like the idea of people earning their practice. I think they put more effort into it, to improve pregnancy rates and to improve patient care, but we’ll have to wait and see.
GJ— Let’s talk a little bit about that, hiring a new doctor. What partnership tracks are like, or what they should be like. You’ve brought on a few docs. Honestly, John, my hypothesis is that no small part of why private equity is able to move in so quickly is because there’s a lot of docs your age and older who are, some are within 10 years of retirement, some are within 5 years of retirement, and they’re having a hard time recruiting young associate docs or new specialists right out of fellowship. I think it’s because they’re not reading, “Good to Great,” they’re not investing in their practices of business. These docs are coming out and they’re thinking, ‘Ok, I’m six figures in debt from medical school, from not making a lot of money in residency and fellowship training, from undergrad, and now I’m gonna go to this smaller practice that doesn’t even have online scheduling, has no social media presence, is still writing everything by paper check, and that doc isn’t going to let me make any changes for 5 years and they’re gonna saddle me with everything when they leave.” Let’s talk about what partnership should be like from your experience. Because my opinion, I think part of the reason private equity is moving in so quickly is because these docs have no other option, because why the hell would a 34-year-old want to take over some of these practices?
JS— Great question. So I’m gonna— I have two physicians working with me. I never liked the term distinguishing between partners and employee physicians and calling them that. We have three docs working for the sake of this conversation, it’s important to distinguish their roles and their different stages in training. So one of the docs is a little bit older than I am, and she and I trained together. We’ve been friends for many, many years. She joined me about five years ago, and she said, “John, at this point, I’ll be an employed physician.” So we have a different structure. I’ve always felt, this is just me talking, I always felt that everybody should have a production, sort of bonus structure— If you work harder and do well, you should be paid for it. That’s sort of given. A younger doc I just hired in July, he just came out of training, and he’s also unique. I listened to your other podcast from your second-year fellow that you interviewed, and she had some good insight as well— either she made the comment or somebody made the comment along the way that maybe 10% of the fellows getting out now really want to one day be an owner in charge of their practice. When I got out, we were all doing that. We all wanted to join a practice that we thought we’d be there for the rest of our lives and one day own it, or at least be an equal partner. That was just the way. I look back, and I started it from scratch, I guess it was kind of crazy at the time, but we did it. And it worked. And it’s hard to do that now. My new partner that I hired out of training, that’s what he wants. He’s from Louisiana, and I hope he’s here until he’s 80. He’s really got it. If I put a barrier in front of him and said, “You can’t be partner for 5 years, and when you do, it’s gonna cost you $4 million to buy in and you’ll only gonna be a 20% partner,” and put all these barriers, there’s no way he’s gonna do that. That’s just idiotic. If I’m smart, I want him to be a full partner, equal to me, as soon as possible. That means he’s equally invested in our success. I have to give up the idea of maybe making all that profit, but now I’ve got a guy working with me and we’re equally invested into the same thing, rather than there being a pyramid or a hierarchy, so he’s gonna pay me for a number of years so I can “make my money back.” There are a lot of people in their early to mid-60s who are now looking at their retirement, saying, “I didn’t save as much as I could, is there any way I can garner a sale and help fund my retirement, because I just didn’t do as good a job about that.” Those people are justified in selling, but all of their younger partners or younger employed physicians are kind of getting screwed. I think that in recruiting— and I did this with the young doctor I just hired— I said, “I’m considering this deal with Ovation, and I want you to understand that if you say no,”— and we didn’t really have a contract—”If you say no, and you’re completely opposed to that, I’m done. I’m not doing that.” And we didn’t have a contract and I gave him that much respect to say, “I need you more than I need Ovation. I need you to help build this practice, and I want you to take over this practice someday.” I think it makes more sense to offer partnership, equal partnership, early rather than trying to pay yourself and have them work for you. I get disgusted when I hear about young people coming in, and they say, “I’m gonna make you a partner in four years,” and the four years come up and they say, “Oh, no… it’s not gonna work right now. It’s gonna be five years.” And the five years come up and they dangle that cherry and never make them a partner. It’s cruel, and I think it’s not right and not fair to do.
GJ— It’s happening a lot, John. I can think of at least six different cases off the top of my head that have happened in the last six months.
JS— Let me tell you why it doesn’t make sense. Let’s say that, for the sake of argument, I have a $400,000 overhead every month. Let’s say that’s what my overhead is. If I pay these guys a salary, then all of the revenue I use to pay that overhead. But ultimately, after it’s all said and done, I’ve got to pay that $400,000 overhead. If I have an equal partner, I only have to pay $200,000—they have to pay the other $200,000. That’s the way you pay yourself— by lowering your overhead by sharing in that overhead with them. It’s completely equal and completely fair. You might not make as much money on the revenue side, but you’re lowering your overhead. That makes a whole lot more sense, and it’s so much more fun to be equally invested rather than the new hire feel like they’re enslaving to you, like, “Please can I have 20% of the practice if I pay you this?” And I just think you need to be more fair to these guys, it makes for a happier work day.
GJ— This is a rabbit hole I could go down for several episodes. In fact, we have two of these subtopics that are going to be episodes within the next few weeks. I’d love to have you back on the show to talk more about it. Let’s conclude with where we started from, which is private equity coming into the field and taking over, That’s the perception a lot of people have. A lot of people believe in the next 5, 10, 15 years, it will all be corporate-owned practice groups. I have my own opinion about that. Do you believe, in the end, that almost everyone is going to have to sell part of their practice to a larger company— either part of their practice or part of their lab? Why or why not do you feel the field will go in that direction?
JS— Part of me wants to say that there are going to be some holdouts. And if we could get 30% of all the practices in America to hold out and not do it, then I think we’ll remain fairly stable. One of the negatives, if a large percentage of practices do that, there’s no going back. To untie yourself to these big corporations is really tough legally. The only way that it doesn’t work, and I think this is a reasonable outcome, you have a whole lot of private equity and they end up screwing over doctors in the end. Doctors are gonna quit and start over again. It might take a generation to do that, but I don’t think we’re gonna lay down and play dead if we’re treated unfairly. So I think we’re a good enough group, and I tend to think that most REIs and OB-GYNs in particular, are good-hearted and they’re not just in this for money. Private equity is all about profits. I worry that private equity is going to limit access to care, I worry that this is not going to be a great thing for patients and it’s gonna lose some of the personality of the practice. I do see that the good part about that is if we can get more capital infused, maybe that results in better pregnancy rates for our patients, better lab equipment, better consolidation, better collaboration with other clinics. I would love to see if a bigger company, y’know, started doing more research and started doing things we can’t do individually— that’s exciting. It’s almost like the old academic affiliations. You’re in a large academic institution with money, and so great research and great outcomes can come from that. If we can use that to our advantage, and to our patients’ advantage, it might be a nice mix. We’ll have to wait and see.
GJ— I agree with your point that if people start to feel treated unfairly, they’ll go off and start their own thing anyway. And that’s why I liken what’s happening in our field to the same thing that’s happening among breweries and regional banks. You’ve got small-town bank that’s gobbled up by the regional bank, which is gobbled up by the semi-national bank, which is gobbled up by the international bank, and then it starts all over again. A new credit union grows, expands, merges with the next one. With breweries, we had Miller, Coors, Anheuser-Busch, for the longest time. SAB bought Miller and Coors, and Inbev came in and bought Anheuser-Busch, now we just have two companies. But for every small town in America, we have ten microbreweries, and in big cities we have hundreds. And some of them are getting bigger and becoming middle-sized, and that cycle is happening in REI as well, I believe. I can think of three different practices that, even though it’s a compliment I won’t mention them by name, they’re all independently owned and they’re all growing very rapidly against much larger private equity-funded competitors because they’re doing it their own way. John, on this topic, is there anything you want to conclude for our audience before we let you go?
JS— I’m gonna reiterate the advice given to me, and it rings true. Before you sell, before you look at these opportunities, #1— make sure you have good legal representation who understands the dynamics and the potential of how it can negatively affect you. Strongly consider how they can help you. Do they bring something to the table that you otherwise can’t do on your own or don’t want to do on your own? Don’t just do it for money, even though money is important— I understand that. I think if you make a decision, especially with a practice you’ve identified with for 20 years, just doing it for a retirement kick, I think that would be a bad move. But it might be the only move for you. Make sure that you’re doing it as it helps you, helps your patients, and helps your staff.
GJ— Dr. John Storment, thanks for coming on Inside Reproductive Health.
JS— Thanks, man, I appreciate it.