Dr. Michael Weinstein is the President & CEO of Capital Digestive Care the largest gastroenterology group in the Mid-Atlantic states. He’s also the past President of DHPA (Digestive Health Physicians Association) and member of the governing board at the AGA Institute
Dr. Weinstein’s interview is loaded with so many insights that I’ll be releasing it in two parts. Each part deserves to be watched in full
How Capital Digestive Care grew to be 60+ providers is a story that’s relevant to many groups looking to consolidate regionally. In 2018, they went on a strategy planning retreat to decide what they’d like to be in 2030. That led to the partnership with Physicians Endoscopy.
Dr. Weinstein outlines the benefits of their MSO to private GI practices. Is there going to be a cash payout during transaction? How does it differ from private equity?
◘ What doctors say: I want to be independent; I want to be in charge of my own life
The Transcribed Interview:
Praveen Suthrum: Dr. Michael Weinstein, you’re the President and CEO of Capital Digestive Care also the past President of DHPA (Digestive Health Physicians Association). Thank you so much for joining me today and I welcome you to our conversation.
Dr. Michael Weinstein: Praveen, it’s a pleasure. I have been looking forward to this. As we get a little older it is always nice to be able to impart a little wisdom.
Praveen Suthrum: So, I want to start by asking how are things going on with you and your practice in Maryland and DC, you’re in the thick of things. So, I’m wondering how are things there?
Dr. Michael Weinstein: Yeah. We say, it has been a very long year you know, very unusual year. February had 29 days and then March had 300! It certainly felt like that. It’s hard to believe that just four months ago, we were in a totally different world. Maryland started to peak with COVID-19 several weeks after New York and then we got very active, we were in the same boat as most of the practices in our country. Closing down our endoscopy centers, only doing emergency procedures, closing down our offices. I think in the first few weeks, we had two main goals. One was ‘How fast can we ramp up telehealth’ which I think everybody did and I think everybody did it with variable success. And the other was ‘How do we keep our inflammatory bowel disease (IBD) patients treated?’ ‘How do we keep our infusion centers open?’ because those patients are so desperately in need of regular infusions. Those were probably the two priorities. Then, the third priority was who can we partake of the Federal support dollars that were available. So, applying for SBA PPP money, making sure we got our HHS money, the first tranche the second tranche. Then making sure we had the legal counsel to advise us as to what we could qualify for.
We are a big group. So, we were having board meetings three times a week to review everything that was going on. Normally, our practice was to do board meetings once a month. We also furloughed 70/80 employees. Our endoscopy centers furloughed employees. It was scary. Now we’re in phase 3, we opened up our surgery centers a few weeks ago. And we were able to do that while we were doing COVID testing for everybody. COVID testing for patients, staff, doctors, everybody! All the staff and doctors get tested regularly. All the patients are tested two-three days before their procedure so that at least when everybody walks in the room, we can be very confident that everybody is negative. So far, we’ve done over 2000 COVID tests. We have only one asymptomatic patient that was positive, we have one staff member who turned positive. So, so far so good. And on follow-up phone calls, seven days and 14 days after the procedure, nobody who was COVID- positive. So far so good (fingers crossed).
Praveen Suthrum: Is this going to be the ‘new norm’ for the better part of this year and even leading up to next year?
Dr. Michael Weinstein: I think we are certainly going to maintain this testing, I’m sure for the next two or three months. It’s interesting, when we reopened our surgery centers, again, following examples of other regions, we opened at 30-35% of our typical volumes. Next week we will go to about 50% of our typical volumes and not until we get into August where we would be up at 75% to 80% of our normal volumes. So, the cases are stretched out a little bit, I think there’s more downtime. I think the staff needs a little bit more time to rest between cases. You know, they’re wearing full PPE so, all that masks, all that gloving, all that doffing and donning of the equipment is very tiring for the staff. If we don’t give them enough time, I’m afraid they’ll burn out. So, we’re going slowly. The day is about an hour and a half longer. And at this point, we’re obviously trying to catch up with the elective priority cases i.e. cases that we should have done two or three months ago or four months ago. We’re still not scheduling routine cases generally so the true routines cases are probably going to end up being delayed till September or later.
Praveen Suthrum: Is there any hesitation on behalf of the patients to come for the elective cases? Are there delays or cancellations? Or have they adjusted to the new norm?
Dr. Michael Weinstein: I think there is one group of patients who are just terrified of catching COVID and even though they’re due for procedure, they should have their procedure, they’re hesitating now saying well can I wait another month? Is it okay if I wait? And obviously, at this point trying to juggle as much as we are, is four weeks really going to make a difference? Probably not, then we’re letting those patients wait.
But then there’s another group of patients, who are so anxious whether or not they have colon cancer or esophagus cancer or they are so nervous about the fact that their procedure was due in April and now it’s July. So, they’re saying ‘oh I’m very overdue!’. So, there are two groups of patients – those who want to come in right away and those who are willing to wait. So, there’s a different fear factor for different patients. At this point, we can accommodate the patient’s wishes.
Praveen Suthrum: Okay. So, I want to go back in time a little bit. I wanted you to reflect on the growth of Capital Digestive Care and what led up to the size it is right now and how you went about your decisions to build a strategic partnership with Physicians Endoscopy.
Dr. Michael Weinstein: So, now let me spin a story. Capital Digestive Care is now a 74/75 physicians’ group but it was obviously not always that way. We did not grow organically to that size. 2007 there was a Gut Club formed and it was a meeting of about nine practices and some solo physicians and we started discussing the pros and cons of mergers of whether or not being a single large practice would be beneficial to the whole group. It took us a while to work through those issues, to figure how we would govern ourselves, what things we would do centrally, what things we would do as the legacy practices within those old offices.
We did work with the legal counsel quite a bit to try and make sure we met the definition of a group practice which for us meant centralizing certain things that define whether or not you’re a group practice. So, centralized billing and collection, finances, HR, policies and procedures, and every aspect that could be centralized and physicians were willing to give up we centralized. And that let us delve into the opportunities for providing ancillary services, particularly laboratory services.
We went live in 2009 as a single group. Everybody who was in the Gut Club did not stay in the single group. The solo doctors didn’t like the idea of not having complete control. They thought it’d be fair if they had a veto power and obviously that doesn’t work when a group of (at that time) 52/53 physicians. So, we did form a governed structure that everybody was in and formed a new group on January 1st 2009. That is so that the old entities could continue to collect their accounts receivable, they continue to own their assets, they leased any assets to the new corporation, and started as a new company on January 1st 2009. Probably one of the most interesting things we did is we went to all insurance companies before we went live and told the insurance companies what we were going to do. That on January 1st all these groups are going to be one new Tax ID number and how were they going to handle the billing and collection under the one Tax ID number for all these physicians who used to have contracts but had 8 different contracts. So, we settled that up with the insurance companies even before we went live.
Over the course of the next 10 years, did a lot of things as one company. We implemented a new EMR, converted three or four practices that had paper charts and converted those to electronic medical records in 2012, built an infrastructure network so that all the offices were connected, all the marketing was centralized and sort of started building a culture as Capital Digestive Care, different from the individual cultures that the separate practices had in their legacy years. That takes time. You know, you get married, but you have to sort of understand your spouse. And all your partners are now your partners while they used to be your competitors. So, it took us a while to work through those issues. Each of the original practices gradually grew.
We looked back in 2018 and we looked at the goals we had when we started, by the time we were in 2018, we had realized that we had pretty much achieved all those goals except the part about continuing to grow. And we were getting all the private equity phone calls, calls from the bankers and the brokers, I know Jim Leavitt very well, I know Jim Weber very well, we were sort of seeing some of the other things that were happening in the country and it was time for a change. We took a weekend, we listened to an Economics consultant from Carnegie Mellon and her main question to us was (it was 2018 at that time) she said, ‘What do you want to be in 2030?’ ‘What does your practice want to look like in 2030 or 10 to 12 years from now?’ ‘What do you want to be?’. What you have to consider is what’s going to happen to healthcare economics over the next few years that you will have to deal with in order to get to 2030. It was a good exercise. I don’t know if you have ever done any strategic planning or participating in any other strategic planning like that.
Praveen Suthrum: I have actually. And it is very interesting because a lot of times you don’t want to extrapolate the present but you want to do away with the present and come up with a different future. For Scope Forward actually, I tried doing that on behalf of the industry. So instead of taking the past to the future, re-imagined the future like you want it to be. So, I’m curious to know what was the outcome of the strategic planning exercise? What did you want to be by 2030?
Dr. Michael Weinstein: You know, if you ask most of the partners, independent and autonomous were probably the two main words that everybody used. ‘I want to be independent; I want to be in charge of my own life’. When they say they are in charge of their own life, they want to be able to manage the surroundings that they see with their own two eyes. How their staff works in their offices, what kind of scheduling they want to do. I have some partners who want to see at least four patients an hour and there are other partners who go ‘No, I only want to see a patient every 30 minutes.’ We wanted to be flexible enough to allow each doctor to kind of choose their own career. If they want to work four days, if they want to work five days a week, or they want to take off 10 or 12 weeks a year or whether they want to work 48 weeks a year. We wanted to maintain that flexibility, that independence, and that autonomy at the same time as being successful.
In our region, we looked at labor markets, what is going to happen in labor markets, how are we going to compete for our employees, how are we going to compete for associates, how are we going to find the next generation of partners. We looked at technology disruption, I know you’re obviously quite an expert on that. What’s going to happen in technology, artificial intelligence, maybe standard endoscopy may not exist. What could happen technologically that could change? We looked at service lines, what things are coming along that we might want to get involved with as far as clinical research, NASH and NAFLD, chronic disease management, imaging, and other things that are coming along that we should add to our care delivery. And we decided that the one common factor amongst all of these things, to be successful was that we needed growth. We needed size, in order to have an employee benefit plan and opportunities for employees that would be attractive. We needed size to be involved in other service lines that require much larger patient volumes to become cost-effective. We needed size to be able to compete against the big hospital systems and the payors which were obviously continuing to consolidate.
So, if size was the common denominator, the next question that she said was, ‘Now that you know what you want to be in 2030, we have to work backward.’ How do we achieve that growth, what are the ways that we can grow as a practice so that we can accomplish the things that we have as our new strategic goals. You know, we had options. We said we don’t need any help we can do this by ourselves. We can just go borrow money from the bank in order to grow our infrastructure, to attract other practices, we’ll just go borrow money. That was not particularly anything that most of the partners wanted to do because as you probably know doctors are generally a little bit risk-averse and the idea of borrowing money did not appeal to too many people. We said, well we could sell ourselves to the hospital. That was the group of doctors who basically wanted to throw their hands up and say ‘I give up’ ‘Let’s just go to the hospital system.’ if you’re familiar with the Mid-Atlantic area Hopkins is very powerful here. I think they have seven or eight hospitals now in the Mid-Atlantic area. MedStar is the other major hospital system in Maryland, they have 10 hospitals. And Innova Health systems in Northern Virginia have five or six hospitals as well. So, some people just thought the hospitals are going to win the game, we should just sell ourselves to the hospital. That seemed to be, you know, the ‘throw in the white towel.’
We looked at the option of private equity and what the typical private equity looks like. It looked a lot like selling yourself to the hospital. it looked a lot like taking a job not with the hospital but taking a job with the private equity company where you definitely lose a lot of control and you give up a lot of your future income for a payday. It seemed to us to be more of an exit strategy. Private equity didn’t sit very well with us, there were too many negatives and the last option was to find a strategic partner. Somebody who had similar goals for 2030. Somebody who was also looking to be successful for a decade or more.
And you know, everything in life is timing. Barry Tanner and I happened to be in a meeting together. We started chatting, he started talking about Physicians Endoscopy, we were talking about Capital Digestive Care. Physicians Endoscopy was trying to figure out how they could help all of their smaller practices. You know it is interesting, when we look at the private equity companies, they have resources but their definition of resources is money. That’s what they bring to the table, they bring money. They bring cash. They’re like a bank but it’s easier to get the money from a private equity company than it is to get it from a bank. Physicians Endoscopy had money but they were an ASC management company. So, they have a substantial team of personnel with 600 employees, with expertise in all of the same areas that we had, practice management expertise. So, we basically merged two teams of people and formed a new MSO.
Now we think we have had conversations with groups in the and the region that people are understanding of the goal, which is to take away the aggregation of the back office, run that as efficiently as possible, develop new service lines, new sources of revenue, and let the physicians do what they do the best which is to take care of patients and set their own schedules and have their autonomy and independence. That’s more or less it. It was interesting. In 2018 we were doing very well. In 2018 everybody was happy, everyone’s income was good, endoscopy centers were busy, we had a very busy anatomy laboratory pathology option, we had eight surgery centers, anesthesia ventures which most big groups in the country have. But the question is what are we going to need in 2030 because those four main areas are not going to be sufficient in 2030, we need to find other avenues.
Praveen Suthrum: From the point of view of the private practice GI group, how does the model look? Like if someone wants to come on-board, and they want to weigh this option versus a private equity option and versus doing it on their own. What are the pros and cons that they would look at?
Dr. Michael Weinstein: The main things that I heard, when I talked to the private equity bankers and brokers was, you can get a big payday upfront, in multiple of 30 or 35% of your income, you know which means you are going to give up 30 to 35% of your income forever but we are going to give you a big multiple upfront. So, it’s basically taking most of your money off the table and agreeing to work for some number of years in exchange for a payday and the way we are going to make things better in the future is that we are going to have “the second bite of the apple”. There’s going to be a flip. Three years, four years, five years, we’re going to get really big and we are going to flip it and then there’s going to be another big payday.
There is not a lot of discussion about how you re-acquire the income that you have given up, how do you repair the 30 or 35% of your income that you sold. Is there any opportunity to repair your income? I don’t think I have ever heard very good arguments about how a private equity company was going to do that. So, with a typical private equity deal, the pro is that you get a lot of money at the beginning and there is a tax advantage because you get that money as a capital gain…If you get that money as a regular income over the next several years, you are paying regular income taxes today is a tax arbitrage on the transaction. But it’s the exit strategy for everybody who is currently there. And it basically brings all the new associates into your practice at roughly 60% or 70% of what the old partners used to earn. Now the new partners will only earn 60 or 70% of what the old partners used to make. So, see that is the attraction for private equity. If you’re thinking you’re going to work only for five years or seven years, it makes perfectly good sense.
Our model is different. There is a transaction upfront, but not giving up 30 or 35%. We have created a management fee of 15%. A very small amount of your income which is placed into the MSO company to help the MSO growth. So, it’s an investment in a new ancillary. The new ancillary company is practice management services, you are investing in that company, you get to own a part of that company, and that becomes a new ancillary source of revenue. Particularly, again part of the alignment with Physicians Endoscopy, is that there are many small practices outside the region, that need practice management services that can just buy practice management services. They don’t need to join the platform group; they don’t need to join Capital Digestive Care. But within the region, the idea is to grow Capital Digestive Care into a much larger practice, into a more relevant practice when it comes to negotiating with hospitals, with payors, with employers, with value-based purchasing, is to become a relevant player for digestive disease management.
Praveen Suthrum: Well, one question that I have on this is, that you said there is a small transaction in the beginning and that’s 15%. Does that mean they are getting money upfront? Or there is no money upfront?
Dr. Michael Weinstein: Oh no, there is money at the beginning. You know in a typical private equity deal you are selling a 30 to 35% at a multiple and the way we have modeled our MSO is that you’re selling 15% but you’re selling it at a similar multiple. So, there is a cash and equity transaction and asset purchase in our model as well. It just leaves you with 85% or more of your typical income. So, you’re not taking that huge drop in the annual income but there is only a small drop in the annual income and there is much more likelihood that, that income can be repaired just by negotiating and having everybody up to the best contract, having everybody be able to participate in a very functional profitable laboratory. It is very easy for most groups to recapture the 15% that they are getting a transaction for. We have already had one group that gave up 15% of its pre-transaction income and after the transaction based on new contracts and pathology and other services, they’re actually going to make more money than they were in their practice. So, no decrease in income and they got a transaction.
Praveen Suthrum: So, let’s take the number 100. So, the value is 100, they get to retain the 85% and you have the 15% left and that, part of it they get cash, and part of it gets converted into equity into the new MSO. Is my understanding correct?
Dr. Michael Weinstein: Correct. So, it’s up to the group. They have an option. If they want to take it all as cash, depending upon the size they could take it all as cash. Or they could roll some of the cash into equity in the MSO as an investment. There is a tax arbitrage on that as well. The cash part of all these private equity transactions is capital gains. So, depending upon where you live you are paying 21 to 27% federal and state capital gains as opposed to regular income taxes which are probably 42 to 47% depending upon where you live, you’re paying regular income taxes. If you roll some of the transaction proceeds into equity, you further delay the tax. So, it almost becomes like another pension plan. You are taking some of your income and you’re putting it into this MSO, which you own a piece of. So, with the money you’re putting in, you’re basically improving the wealth of the value of the MSO. So, when the day comes when you want to sell your equity, in the model that we have it is much easier to move the equity around between partners at market value and when you sell the equity that’s when the tax is realized. So, you basically get taxed to further growth as well.
These are just the financial aspects. One of the things that we say in all of the groups that we talk to as far as joining Capital Digestive Care is that there are certainly some transactional benefits. There’s cash upfront, there’s an equity component, there is a tax arbitrage that sounds very interesting in the first year but after the first month, most physicians want to know how they’re going to recapture the income that they’re giving up. And for us, it was not about the transaction. We tell everybody that this is not about the transaction, this is about the strategy. This is about what do you want to be in 2030. And if you are 50 years old or 45 years old and you’re thinking you’re going to work 10 or 15 years or more then, a typical private equity deal is kind of risky. You’re giving up a lot of income forever and there’s not a lot of ways you’re going to repair that income and I’m not sure how they will recruit in the future.
I don’t think that they have had any trouble yet although COVID certainly pulled back the blankets on a few of the private equity deals. I think that there is an ophthalmology private equity deal that went bankrupt probably because of COVID but also probably because they were already overleveraged. They had already overleveraged the business. The largest private equity platforms were not able to partake in Small Business Administration loans. I think that there may be some other opportunities for federal support for healthcare companies that will hopefully get them through this terrible gully. It is interesting, most of my partners when COVID hit, said, “Mike, you did the most amazing thing, the timing was incredible”. The timing to do this with Physicians Endoscopy. And I’m going “I don’t think we did this because of COVID!” we had no idea that this pandemic was coming and now we feel that we’re actually probably a good position and that we did what we did!