In this episode, hosts Brad and Michael explore how joint ventures can serve as a powerful tool for growing your medical practice. They discuss the benefits of accessing new resources and patient bases while addressing challenges like aligning different organizational cultures. Discover how identifying operational, financial, and compliance issues early on can support a smooth transition into a partnership. Tune in for tips on how to grow your practice through a joint venture.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Well, welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, my co-host, Michael Byrd.
Michael: As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. This season we’re talking about businesses who decide to double down. They’re going to scale their business. Our theme this season is Growing A Business.
Brad: Now, Michael, we’re near the end, but for those who don’t know, growing a business, it’s just one of the several seasons of a business.
Michael: We have four seasons. We have the building season, which is starting a business. The operating season, which is growing a business, or excuse me, running a business. They’re all running together now, Brad. They are the scaling season, which is growing a business. And then the buying and selling season. Perfect.
Brad: [00:01:00] Well done. And for those watching us on TV land, as you can see before we really get going in, our series regular, Jay Reyero, our partner is here with us.
Jay: Yes. Love to be here. Always a fun time.
Brad: Yeah. Well, gentlemen, I was reading an interesting article on our solar system recently.
Michael: I’m extremely suspicious and I kind of want to go back in time. So last time y’all tricked me. I objected to movie talk, and now you’re going into science talk. Can I just go back to movie talk?
Brad: Well, I mean, if I knew that was an option, the answer would’ve been yes.
Michael: Well, and I’m also suspicious you know, if this is about Star Wars, you know it’s not real, right?
Brad: You know what? I don’t have time right now, but I’ll fact check you later on that statement. But back to the article, our sun, the only star in our solo system, is about 4.6 billion years old and makes up 99.8% of the total mass of our solar system.
Michael: [00:02:00] Are you saying we live in a giant ball of gas.
Jay: Michael, I like that. I think you’re factually correct, but I also like how you brought that back in line with our 13-year-old humor. Well done, sir.
Brad: Cut that, Kennedy. The sun is a mid-size star, believe it or not, it’s classified as a G-Dwarf star. For those who want to know the scientific geeky stuff, it provides necessary energy for life here on Earth. It’s about 109 times wider than the Earth. It contains 1.3 million earths inside of it and is primarily composed of hydrogen, about 74%, and helium, about 24%.
Michael: I’m allergic to science, so all I heard is that you confirmed that we in fact are a big ball of gas.
Brad: Potentially, yes. I mean, maybe it’s influencing us here. But what I found interesting, and this is again, a scientist and geeky guy here, that there are hydrogen atoms that are fused together to form the helium releasing a tremendous amount of energy in this process. The energy is what makes up [00:03:00] the sunlight that obviously heats our planet. Furthermore, because of the size of the sun, it is a center of the solar system really controlling the gravitational pull of all the planets that orbit around it with the magnet field and solar winds that shape our space environment.
Michael: So, Brad, does this article resonate with you because you kind of think of yourself as the center of ByrdAdatto?
Jay: Michael, you know better than that. Brad thinks he’s the center of everything.
Brad: Well as the alpha chart extrovert in the room, I do like it when I’m the center of anything and when people are looking at me, so, yes.
Michael: But I can do a little logic train here. So basically if you’re the center of everything that makes you a big ball of gas.
Brad: Gosh, I stepped in that one.
Michael: Where are you going with all this solar system?
Brad: Well, yeah, I wanted to let everyone know that they just probably should start kind of getting their life organized, start packing their bags, and they need to find a new solar system.
Jay: I’ll bite, why?
Brad: Eventually the sun will run out of fuel.
Michael: [00:04:00] Okay. This is new news to me. I didn’t remember seeing any headlines on this. Are you sure this is not from one of your little “Star Wars” fantasies or something?
Brad: Mostly sure at this point. The sun, in about 5 billion years, will exhaust all the hydrogen fuel and expand to a giant red giant. And then basically become a giant planetary nebula. And the core will eventually be cold and shrink and it’ll be a white dwarf.
Michael: 5 billion years is what we’re worrying about here? I can’t tell if that makes you an extreme doomsday prepper or an extreme environmentalist. Where are you going with all this?
Brad: Well, it was mostly like a public service announcement to our audience to let them know about it.
Michael: Yeah. Well, I guess noted for everybody who is planning to live that long. I think we need to stop. Jay, can you help us out and get us into today’s story?
Jay: I don’t know. I’m still processing this news, but I’ll try. [00:05:00] All right. So let’s jump into our client. Today’s story is going to be about a rising plastic surgeon up in Illinois. Let’s call him Dr. Rising Star. He’d been operating a successful medical practice for several years, but still out of only one location. And at this point in our story, he now had an eye towards growth, and he was looking for that accelerant to take his practice to the next level.
Michael: Well, we know the last time you were on that you kind of trumped Brad when he tried to challenge whether you listen to our episodes and you do listen. Well, did Dr. Rising Star consider any of the strategies we’ve talked about this season? I know just off the top of my head, we went through a bunch of them when we had Dr. Sacha Obaid on, and then Annie Hockey, when she was a guest, went through a bunch of them.
Jay: Yeah. So while that’s normal to kind of go through different options in this case, he actually didn’t because the opportunity that we’ll talk about today kind of presented [00:06:00] itself out of the blue right at the very beginning of this story. And so this is where our next character is going to come into play. So Dr. Rising Star introduced us to Dr. Bright Star, who was a well-established, renowned plastic surgeon in Illinois, but he was in a different area of the state not too far away.
Brad: Jay, first off, good use of the opening banter. I’m glad you were able to tie in the public of service announcement into this podcast, and so I do approve of all these names. I hope this story is though is about – not these stars are all burning out on us.
Jay: Brad, too soon. So Dr. Bright Star was in high demand from his patients, and as a result, he was scheduled for months out at any given time. And Dr. Rising Star, although he himself was very busy, he still had that capacity in his practice to take on additional patients. And more importantly, Dr. Rising Star didn’t have any presence or market in Dr. Bright Star’s area. [00:07:00]
Michael: I think everyone can see where this is headed. What were they thinking?
Jay: Well, I would say that that was their idea, but let’s be honest, by the time they came to us with the kind of their deal, they both had ironed out the financial arrangement, and they were basically just looking for a blessing more so than a strategy.
Brad: You know, audience members, “illegal blessing” is much harder to provide when there’s fires impacting the actual strategy. We’ve seen this happen way too often when there are financial arrangements already set, but it won’t work from a compliance matter. So what were some of the parameters of the arrangement?
Jay: Yeah. So essentially, Dr. Rising Star saw two opportunities here. He saw more patients and he saw expansion into Dr. Bright Star’s area. So the framework that they had worked out was centered around Dr. Bright Star directing the overflow patients over to Dr. Rising Star.
Michael: So Jay, that’s not an unusual [00:08:00] arrangement in of itself. Sending patients you can’t service to others in the industry is pretty common. I’m sure there’s more. What was the benefit to Dr. Bright Star here?
Jay: Yeah, of course there’s always more to the story, and that’s where we started to kind of get tripped up in diving into these details. So, one of the underlying tenets of this entire arrangement was that Dr. Bright Star wasn’t just going to give away the patients. To him there was an economical upside that he really wanted to capture. Yeah.
Brad: And for audience members that may have listened to our red flag season they may be wondering, wait, this feels like there could be some medical kickbacks here. And for those not really following what that means is that means is, they’re referring for some type of monetary or some type of health care provider in exchange for these patients, that obviously this will present ethical and legal challenges both from a state and federal perspective. These laws could include the federal anti-kickback law, the Stark Law. [00:09:00] Many states have their own version of these that you have to be mindful of. So from a legality perspective and regulatory perspective, this adds a lot of complication to it, and especially for our docs involved.
Michael: You could have just said, ding.
Brad: Oh, ding. There you go.
Jay: I mean, you’re, you’re exactly right. And especially if you have Medicare, Tricare, for federally funded programs, it gets complex really quickly. And so, fortunately here in our story, we didn’t have federal involved. But you know, as everyone knows that they’ve been listening to us where whenever they have talked to us, just as Lee Corso says, not so fast my friend, we still have the state laws that we have to deal with.
Michael: We’ve discussed this in prior episodes, but health care arrangements are counterintuitive to a normal business deal. So, where’d you go from here?
Jay: Yeah. So we needed to start working through the details. And so we started with the discussion with Dr. Rising Star to essentially figure out exactly what his goal was with his scaling strategy, and also what he was willing [00:10:00] to give up, to kind of figure out what his vision was. We knew that since Dr. Bright Star had the patience and kind of any proposed structure, any arrangement really needed to take into that very important account, the patient flow, what was going to happen to the patients. This would then help us kind of navigate that regulatory environment, the implications and figure out how to do so in a compliant way.
Brad: And so far I’m approving this messaging because I like where you’re going as compliance should be the main focus when you’re doing a deal like this. What did you learn?
Jay: Yeah. So we learned a very critical piece of information from that conversation with Dr. Rising Star. So both doctors thought about this arrangement in purely economic terms. They had an idea of what the economics would look like but they never considered the operational issues with making it happen. And so, what we needed to do was to get Dr. Rising Star to start thinking about this and what he and [00:11:00] his practice were willing to do, what they had the capability of doing and what he wanted to do. And so, to begin to think about those operational requirements, really had to kind of get to a point of having all the information at his disposal to make that informed decision of is this the right path to go with a scaling strategy, but also be compliant?
Michael: Yeah. We’ve talked about this in a few episodes, that an approach to dealing with anytime you want to scale, whatever the scaling activity you’re considering is to kind of run it through three filters. You have the compliance filter, the financial filter, and the operational filter, but there’s more to it. I mean, on the compliance side it, this already has a little red flag to it, so it has a heightened level of making sure that everything’s okay. And of course, we’ll talk more about that. But even in any deal, in a health care deal, compliance will make Brad feel good…
Brad: It is really important! [00:12:00] Thank you.
Michael: On the financial side, yes, they had the economics covered, but there’s more. There’s accounting, there’s tax and so you want those advisors involved to make sure that scaling activity isn’t going to create some problems. And then, as you just mentioned on the operational side, any scaling activity is going to have an impact on actually doing the activity. And do you have the people and the processes in place to make it happen?
Jay: Yeah. And as we started talking about this story today, and as we were getting into it, it really became apparent that what we’re talking about from a scaling strategy was the idea of some kind of joint venture, right? Two existing practices wanting to come together in some way. And the federal government’s, office of Inspector General, or the OIG really summarized it best in one of their alerts when they talked about a joint venture can take a bunch of different forms, but essentially, it can be a contractual arrangement between two or more parties that [00:13:00] kind of cooperate to provide services, or it can involve the creation of a new legal entity by these parties that can then provide services.
Brad: Yeah. And taking a step back you know, Jay did say the OIG, the OIG is focused on compliant joint ventures, but joint ventures are very common in different types of business structures, so it’s not something unique to health care practices. Basically as Jay was kind of alluding to, it’s a strategy that you’re bringing alliance together, where two or more parties are coming together, they’re going to find a way to collaborate on a particular project or business strategy, and each participant’s going to contribute something. They get resources or capital or technology or wherever these assets they have. And that way, in this joint venture, there’ll be some shared risk and obviously, hopefully some reward for this particular joint venture. But it’s, again, very common in most business structures.
Jay: Exactly. So what we did is we decided, let’s go to our trustee whiteboard meeting and start mapping out [00:14:00] what these two options actually look like with option one being, hey, let’s look at the contractual joint venture and what that could look like and how that works. Option two, being a new legal entity. And our goal is not only just to visually show the differences, but really to start diving deeper into the different considerations that Michael talked about; the operational and the regulatory differences mainly.
Brad: Okay. So during this whiteboard what were the differences you started focusing on?
Jay: Yeah, so remember Dr. Bright Star was the one that had the patients. And we knew this, this was a very important component that there was not this desire to let these patients go, and there was an economic upside that was trying to be captured. And so we started our discussion with Dr. Rising Star about this and patient flow and why? Well, patient flow brings money, patient flow and money go hand in hand. And so, these two are really important and play a really important role in navigating compliance. [00:15:00]
Michael: Clients are often surprised in a whiteboard how we go to the money to figure out compliance because that’s the truth serum to what’s actually happened. At least that’s how the government’s going to look at it as well. But I want to come back to some of the differences in these two options after the break, and maybe skip to the end of the book. Tell me what happened, what ended up happening.
Jay: Yeah, pretty common scenario. So again, I mentioned Dr. Rising Star and Dr. Bright Star had already come up with the economics. We’re looking for that blessing without the details. We actually, surprisingly, came up with two reasonable options that very closely got to those economic terms and threaded the needle for compliance. But it was these operational issues that they had never thought about that were required for compliance. And the overall arrangement just kind of needed a little bit more than they had anticipated, or that made sense at the time for both their practices. [00:16:00] Both were so busy with their own practices that they ultimately kind of chose not to do anything and left these options on the table.
Brad: Yeah. And we talked about this last week. It’s a commitment to really bringing two or more organizations together, and especially when we’re dealing with two extremely busy physicians. And this also obviously adds a lot more stress to the arrangement. I mean, first off, Jay comes along and flags it and lets them know they can’t do it the way they want, and then he starts pointing out issues as it relates to operational and other compliance stuff. And then finally, as you were just alluding to though, they need to find time to make all this happen. All of a sudden, I think it dawned on them, this is going to be a lot of work.
Michael: Yep. So, great point. So let’s go to commercial and on the other side, we can start exploring this scaling strategy a little deeper.
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Brad: Well, welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd. We’re still here with series regular, Jay Reyero. Now Michael, this season, if you don’t remember, it’s growing a business, and when we’re talking about growing a business, we’re talking about scaling, we’re talking about all these interesting stories. Jay came in here and he told us a great story about our solar system and big balls of gas brought in Dr. Rising Star and scaling strategies on our joint venture with Dr. Bright Star.
Michael: Yeah. And we of course, concluded that you also are big ball of gas. [00:18:00] But you know, that’s, I guess not part of the story itself. We have two main characters in our story, and Brad’s not one of them. We have, as you mentioned, Dr. Rising Star, who is a young plastic surgeon in Illinois, and he’s looking to jumpstart his practice. He’s got one location and he wants to just kind of kickstart his growth, enter Dr. Bright Star into the story. And Dr. Bright Star is also in the state, but in a little bit of a, a different area, not too far away, and he has more patients than he can treat. He’s booked really far out. And so it feels like a Reese’s and peanut butter moment where they’re going to – or a chocolate and peanut butter moment, excuse me, to make Reese’s. And so they start talking, how can we blend these things together? You have extra patients. You want to jumpstart and you’re in a different location. And then Mr. Dream Killer enters the equation and… [00:19:00]
Brad: AKA, Jay Reyero.
Michael: Yes. And so we’ve been talking about what financially, economically looks good, there’s so much more to consider, and so we’ve been kind of walking through that. Jay, I want to go back to the joint venture options that you talked about before the break. Talk about each in a little more detail and their differences so we can kind of connect it to Dr. Rising Star’s story.
Jay: Yeah. So if you remember the quote from the OIG joint ventures, they take different forms, but the two general ways are going to be the contractual joint venture and a new entity. So with the contractual joint venture, think of it as dating, right? It’s made up of a series of contracts, so your relationship is governed by contracts. This creates an easy way to exit. There’s not really a merger there. [00:20:00] They’re independent entities and their operations still exist. You’re functioning and related as essentially independent contractors. But because of this, when you’re dealing with the economics, it becomes really important to identify what services are being provided by each of the corresponding entities, and then making sure that the compensation for those services are going to be set at fair market value. And so, what we find a lot of times is that when clients come in with the economics kind of preset, this makes matching that predetermined financial arrangement kind of difficult, especially when they’re kind of being thought of as profit splits, because that’s not generally how you think about compensation for services. And so, compliance becomes a little bit more difficult because we have patient flow that’s starting to create these, what Brad talked about earlier, the kickback situations. And so you’re trying to thread this needle while [00:21:00] really matching a predetermined economic arrangement.
Brad: So going back to your reference of this as kind of the dating mode, this is different than like when Michael Byrd’s girlfriend was in Canada that he was dating. We actually want more substance than like form.
Jay: Yes. Yes.
Michael: And I would add to it, other than she was real. The joint venture by contract can be big business. I mean, you see publicly – I think Dow Corning is a joint venture and for the lawyers out there, you hear of a general partnership, think of it like a general partner, like they’re coming to partner, but for a very specific purpose as defined in this contract that you’re talking about.
Brad: And then to Jay’s point though, then it’s not just a piece of paper that you’re relying on. There’s a lot of substance that goes into that piece of paper that here are the things that each party is going to be doing, each party is going to be doing that. They then figured out that the value that they’re doing and bringing to it has – some third party appraisers come along and said, yes, [00:22:00] this has value and this is the value that it would be. So again, going back to, we’ve talked about this in other episodes, just having a piece of paper does not make you compliant, but it is something that the OIG has given us at least, hey, here’s one way to do it,
Michael: But you need a piece of paper, not a handshake.
Brad: Correct. And a piece of paper, that’s form and substance. But that’s one. Jay, what’s the other one then?
Jay: Yeah, so the second one, the new entity one, this is more, think about it as the marriage, right? Two people or businesses coming together to co-own some type of entity. And so, a lot of times this ends up being easier from a compliance perspective because everything’s running through this single entity. But now you have all the issues that we’ve talked about in past episodes with the four Cs, right? The cost, the compensation, control, contingencies, because you’re joint owning an entity and you have to start dealing with these rules. And more importantly, this is probably the biggest, the parties have to be aligned in wanting to co-own and run a business [00:23:00] together because it’s a marriage, and so the entities no longer are independent, they’re all connected through a single entity. And this independence being given up can sometimes be a real roadblock, especially for two established businesses that are looking to come together, but not really merge their practices.
Brad: Yeah. I’m going to add in, the failure to conduct those four C’s in one of these types of joint ventures is essential. Because again, going back, these guys showed up and they had an idea of what they wanted, but there’s a lot of details that have to go into, even when you’re co-owning an entity, what does the ownership look like? What is the decision making going to be? Like, how does this thing break apart? And when it breaks apart what happens to the revenue? Those are harder conversations than this sounds like a fun idea, go form an LLC and we’ll figure it out later.
Michael: I’ll add you really, even on the contractual joint venture, you have to have these same conversations. I mean, it is easier to break up in the contractual joint venture than in the ownership version. [00:24:00] But you mentioned Brad, the substance and the contract version. Well, it’s the same thing. In fact, it’s probably better to kind of use, if we’re using the marriage analogy to think of the contract as you’re engaged, like you’re very serious.
Brad: Very serious. Unlike that girl in high school you dated.
Michael: We were very serious, Brad.
Jay: And so in Dr. Rising Star’s story, kind of when we look at these two options, and as we talked about the story, the situation of two successful and established practices coming together, really as you could probably tell, skewed more towards the contractual joint venture model. And this was especially true because they both desire to maintain that independence, so that tends to skew the contractual joint venture. But when you think about, well, when would you use the new entity? We’ve seen this a lot lately where a client wants to expand and wants to partner with someone for that expansion, but only that expansion, [00:25:00] nothing that came before. So, they found someone with capital or with knowhow or something of value to kind of take that next step. And they’re interested in partnering with them, but not sharing anything that came before them, and so that’s kind of the difference in strategy when you’re looking at option one versus option two.
Michael: Yeah. And to kind of add onto that, especially in scaling businesses, it’s really common to have the MSO model in place. And so, we’ve talked a lot in prior episodes about the MSO. We won’t go into a ton of detail about the MSO, but it is a corporate structure you’ll see in these deals. And the way that this kind of entity joint venture concept can be implemented, and we do it pretty frequently, is we call it the MSO JV model. And you have this MSO that, to your point, Jay has all the history of everything that’s happened, and then they want to do something new with somebody. [00:26:00] And so, they create kind of a sub MSO that is partly owned by the MSO and partly owned by the new players.
Brad: And going with that sub-MSO as Michael said, we have talked about this in other episodes, but it does allow some consolidation of services and it’s generally focused on a particular location, allows these certain key individuals, whether or not they be physicians or other non-physicians to be really helping participate in the revenue of a location legally. Generally these people that you’re bringing in, they’re great for a particular location, but you don’t want them to be part of all the other enterprises that you’re building up. So this is a way in which you can exclude these individuals from participating in your overall larger process, so they’re just managing a particular location. The sub MSO, probably some of the issues that we’ve seen with it, is if they’re managing it from the day-to-day management and there starts being some misalignment with the grander scheme of things, meaning that this one [00:27:00] location is doing things a lot differently from a social media perspective, from a policies and process perspective. That’s something that the larger enterprise needs to be aware of and may have to object to and make sure that as they’re growing this particular location, they’re still meeting the same guidelines that is really made the first, in this case practice so well respected that they don’t lose that when they’re managing it from the sub-MSO perspective.
Jay: Yeah. And I think one of the most important pieces that a client can think about at the very beginning is who they’re choosing to partner with. Because there’s so much to it that it’s not just, oh, I met someone and they said that they could help grow this business, and so I’m going to go ahead and partner with them because there’s so much more to it, so many more considerations. So really choosing wisely on who to joint venture with is, is critical.
Brad: Yeah. And I don’t know if you have any other final thoughts on that. If not, I’ll jump in.
Jay: My only final thought, I think to Michael’s point, all of this is things that you have to iron out at [00:28:00] the very beginning. If you have predetermined economics, if you have predetermined ideas on the arrangement, there’s a lot more to it. And so, there’s going to be some investment no matter which path or option you end up taking.
Brad: Yeah. And we talked about this earlier in the episode, but scaling a medical practice via joint ventures, great option. There’s several advantages to it from additional resources or expertise or new or locations and all those things that help increase the revenue. Obviously that’s the whole reason why you’re doing it. But the downside, of course, is that there, it’s complicated and there’s needs to be alignment issues that y’all were just discussing from an organizational perspective, from a compliance perspective, from an accounting perspective, all those are important. So ensuring that if we do it either contractually you have clear agreements or inside of your governing document, all that has to be maintained and obviously great communications between all the parties is really critical. Michael, final thoughts?
Michael: Well, I don’t think the audience needs to be as extreme as Brad and plan for something 4 billion years away. [00:29:00] No, it’d be really hard to document that, like what could happen that far out. But your points are well taken in the sense that there is so much more to it than the chocolate and peanut butter idea of like I want to grow and you have patience and so let’s do this. And so, the going through the exercise of running through these filters, and of course in health care, really emphasizing the compliance side of it.
Brad: Absolutely. Well, audience members, believe it or not, that is a wrap for season 17. Woo! Woo! Woo! But don’t worry, we will be back next week with a sneak peek about what we have in store for season 18.
Brad: Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com. [00:30:00]
Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.
