Wall Street has been moving into healthcare for several years and it has been making its mark in the fertility field. Some practices have taken advantage of the influx of money in the field, but several haven’t. But several docs have some concerns, specifically when it comes to decision making.
Do private equity firms or people who invest in fertility clinics and businesses really have the best patient care in mind?
On this episode of Inside Reproductive Health, Griffin talks to Dr. Francisco Arredondo, founder of RMA of Texas and author of his upcoming book, MedikalPreneur. Together, we dive into the pros and cons of money entering our field in the form of private equity.
Mentioned in this episode:
Episode 74 - Dr. Francisco Arredondo
Harvard Business Review Article
Bloomberg Businessweek Article
To get started on a marketing plan for your company, complete the Goal and Competitive Diagnostic at FertilityBridge.com.
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Welcome to Inside Reproductive Health, the shoptalk of the fertility field. Here, you'll hear authentic and unscripted conversations about practice management, patient relations, and business development from the most forward-thinking experts in our field.
Wall Street and Silicon Valley both want your patients, but there is a plan if you're willing to take action. Visit fertilitybridge.com to learn about the first piece of building a Fertility Marketing System--The Goal and Competitive Diagnostic. Now, here's the founder of Fertility Bridge and the host of Inside Reproductive Health, Griffin Jones.
GRIFFIN JONES 0:56
This episode of Inside Reproductive Health, I'm back with Dr. Francisco Arredondo. You may have heard my original podcast episode with Dr. Arredondo earlier in 2020, where we talked about how doctors are entrepreneurs and his philosophy that is expressed in his book, MedikalPreneur, that will be coming out in the future. But I ended up getting into a second conversation with Paco and I wanted to explore this more. So I made it into two different podcast episodes. You don't need to listen to Part One in order to be able to listen to this one, but in this episode, we talk about private equity coming into the field with Dr. Arredondo’s experience with that, what he sees are pros and cons, and what he would issue in terms of reflection for the rest of the field regarding private equity, venture capital and a lot of this money coming into the fertility field. So, Dr. Arredondo, let's talk about the money that's coming into the fertility field. I've sat with people who are the most consummate of professionals, but when we start talking about what other people are doing and what other people are making, it's amazing how people start to shift their focus to, I want that and I want to have that, too. And I for myself, I just I always try to remind myself that if you are lower middle class in the United States of America in 2020, if you're lower middle class in the United States of America in 2020, by the standards of the world today, and by the standards of virtually all of human history, you are exorbitantly wealthy. And there's something to be said for maintaining that for a while while you build your nest egg.
DR. FRANCISCO ARREDONDO 2:40
That is correct.
JONES 2:41
But I think now, especially, there has been a lot of money that has entered the field that the fear of missing out comes into play. And so, what do you think of the entry of different capital into our field, whether it's public markets or private equity or venture capital? What's your initial impression? And then we'll start to unpack.
ARREDONDO 3:04
Well, I think that, again, physicians will benefit by learning from other spaces and learning about efficiency and all this. And I don't agree with the narrative that sometimes certain private equity and certain management firms come in with saying that, Oh, you know, you're such a bad physician that we're going to help you to be more efficient in this. And let me tell you in the stump right there, why it's a little bit tricky. If you graph any business in the US, that is hundred businesses that are open today, by one year, 30% have closed, by three years, 50% have closed, by five years, 70% have closed. Okay? If you graph any physician office the great majority, 90% would be open in 10 years. So after all physicians are not bad business people. What has happened is that our profits are so generous that we give ourselves a little bit of relax on not being that efficient. And yes, we can certainly learn from these companies and thes companies also should know that they should learn from us, physicians. So it has to be a true team effort from the private equity, the management firms and the physician and it has to have those elements of the five Hs that I told you (Part One), that everybody should be humble and should be hungry and should be happy and not be in a position of I am your boss, because physicians will never let themselves be managed, period. Physicians are independent, they went 15 years of school after high school, these kind of physicians, and a person that is 40 years of age that has very little experience in the field, and perhaps in life, is not going to tell you how to do things. The great majority of physicians will say that. However, there's a lot of things that you can learn from that 40 year young, but that person or that group of persons need to understand that they also have a lot to learn from physicians. So it's, like usual, a team effort. That's one point. The second point is that when the money comes in, and especially private equity, they need to make the money every seven years, or five to eight years, or whatever, that they have to get their money. So the focus is obviously to become much more efficient, to gain market, and to basically be able to sell it in five to seven years, so they can make a margin. Well, then the physicians in some of these groups are not part of the leadership or making decisions. And that is a problem. And I do see it as a big problem because somebody was, somebody was telling me, Oh, no, but, you know, this group of people, they have been the best in healthcare, in laboratories, in this, in the radiology, and this, and you know, and now they wanna apply the exercise into your field. And I always put the example of I think I mentioned this to you of Phil Jackson the coach of theChicago Bulls in the 80s. And he had four group of coaches, all of them NBA players. And those five, their winning rate with the Chicago Bulls with Michael Jordan there was approximately 80%. There has been no other coaching team in the history as good and as efficient as that. They know they are so smart. Well, let's grab them and put them to train the Yankees or the Dallas Cowboys. It's just another sport. They're not going to be champions in the first year. I'll tell you that. Not in the second year or third year, because even though they are the best at basketball, the guy that sells the peanuts on the baseball is different. The guy that creates the incentives on the football team for the players is totally different. There's going to be a learning curve. Yes, Phil Jackson is super smart. And in five years or seven years, he might become, you know, in the Super Bowl, the coach, but it's gonna take time and in order to get there, he probably listen to a lot of the players in the team. If he is smart, he will listen and will be humbled to know that he could learn from those players. So the same is happening here that they are jumping from one specialty to the other one. And they think that just because they were good in one specialty, they can apply the same techniques to this other specialty. If you are the CEO of a wine company, and now you become the CEO of a soda company, even though both are beverages, they're totally different. The markets, the structures, the incentives--totally different. Our industries in the United States, some industries are so large, that each one requires certain specific knowledge that we'll talk about. Yes, you could have the general understanding, but you need a little bit of the specific knowledge.
JONES 8:55
So I think their argument would be Okay, Paco, we're bringing the general knowledge and then we're hiring people with the specific knowledge to be our Chief Medical Officer. And I'm not talking about any one group because the narrative is similar in that they say, we're not influencing operations. Thet concern from clinicians is they're going to influence clinical operations and the response is We are not influencing clinical operations. We're influencing business operations. But even as someone who's myself as a consultant, as we start to advance, just beyond marketing consultant, the more we consult there is an overlap, where we're starting to consult people, it's like, Well, we're consulting people on business, but it does affect what they do clinically. And I can't tell a physician what to do. I can’t. But a private equity person could if they own a piece of their company, and so talk a little bit about that.
ARREDONDO 9:56
Yeah, there's actually a couple of articles that will respond to that. One of them is a Harvard Business Review article from a couple of years ago that it says why the best hospitals in the world are managed by doctors. And if you think about it, Mayo Clinic, Cleveland Clinic, John Hopkins, that consistently are on the three tiers of best organizations in the world, from inception, are managed by doctors. And why? Because you're required credibility. Remember what I told you about--
JONES 10:40
You’re thinking of credibility?
ARREDONDO 10:42
Yeah, so correct. I will tell you about trust. You know, physicians only trust physicians in a lot of ways. So, if a physician comes--a physician that has walked the walk--it has more credibility, not only for the physicians, but also for outside stakeholders, patients, the suppliers, you actually have a lot of credibility to external stakeholders, future employees, the pharmaceutical industry donors, a lot of other people. you will have credibility, because what happens is that if the other article is something that he was talking about private equity in healthcare during the COVID era, it was in Bloomberg Businessweek, I think it was in May of this year. And basically what it says is that, yes, in theory, it sounds nice that obviously private equity should not interfere with the data decisions, but when their only focus is to make money and the physician’s duty is to provide care, then it happens that physicians are serving two masters: the patient and the money holders. So it's actually very hard to do that balance. And as you well mentioned, there are certain examples where they are putting the incentives of your service, of your salaries. Remember those physicians that we've said that $300,000 of debt, and they're putting them a carrot that if you do more of these procedures, you're going to get more. So, the way you actually incentivize, it may be against the patient’s first interest. I have to emphasize that not everybody, every company does this and not every private equity thinks that way. It must be clarified, but you can see that there is an inherent conflict of interest by you as a physician having the patient as your first master, and then we have another master. So that's why I say unless the physicians play a role in the boards, in the management, embryologists in our field, embryologists, nurses, play a role in the management team, because in the other article that I mentioned about in Harvard, of the hospitals, there is good evidence that when you separate the clinical and the administrative in like two silos, actually the quality of the markers in the hospital goes down. Those two silos need to be in constant talk, and even more in constant interaction and sometimes they ought to be the same. So there is good evidence in companies that when you silo administration and clinical, the communication doesn't occur. That's one thing. The third thing on the private equity, which is, you know, intentions are good. And that's what I would say that the intentions are very good, which is to become more efficient. The topic for the future is going to be that as we went to an era of globalization, and we're going back to the middle, where everybody is the same, and we're going to centralize accounting and centralized medical records, because that makes sense. It's more efficient. It makes perfect sense. The challenge of the company to the future is that more and more companies and more and more consumers want something local, want something much more local. So private equity management firms and physicians need to ask the question, yes, we're going to become more efficient and more centralized, in what? Perhaps electronic medical records, perhaps in accounting, but what it is working at the local level, keep it up to date. And, you know, I was talking to another industry, I was talking about one of the difference between private equity firms in Sweden and in the United States. I was talking to a friend that has a big company, not in medicine, but it was acquired by a Swedish company, that it is in the stock market in Sweden, and they have companies throughout the world. And they said, the only thing we want you to centralize is the accounting. I want you to do this accounting with this system, you're going to have these people, but the reason I'm buying you is because you’ve been doing so well, otherwise, I wouldn't buy you. And so we want you to continue doing exactly the same thing you're doing. The only thing we're going to do is we're going to make it efficient at this level. And we're going to help you with connections and this and that. But what is happening sometimes, especially in the--because there's two groups in our field of medicine, the ones that are working by acquisitions, and the one that are growing organically--the ones that are working by acquisitions have the challenge that they have to merge cultures. And that is very difficult to do.
JONES 16:16
Yep.
ARREDONDO 16:17
It is, if not impossible to do, it is very difficult to do.
JONES 16:21
Why is it? Let's stop on this for a second. Why is it so hard to merge cultures?
ARREDONDO 16:26
Yes, I gave a talk about this! It is because the set of values are different. And it's actually the number one reason why mergers or acquisitions do not work, is because of different cultures. It has nothing to do with the finances. And what happens in a lot of these mergers, that people start focusing immediately into the finances and all this and they don't talk about, Hey, how do you do decisions? Oh, we do decisions this way. Or you know, in this particular company, the lower level person has a lot of input and this one does not and if I'm the acquire, I'm going to make the other one like that. Move. That's a recipe for disaster. So in our field of medicine in the acquisition groups, what happens is that they want to impose sometimes, not always, but sometimes and make efficient everything--everything, everything to be efficient. But there are certain things that needs to be built at the local level. And even though it makes sense financially to centralize it, but in practicality it does not work because more and more of the consumers, they want answers now, right here. They don't want to be in a phone with a one 800 number. They want to see a face more and more. The local mentality is changing the way we do business. And culture, it's a big part of that because let me give you an example. But whenever we generated companies here in Texas, we generated a company in Austin, San Antonio, and then McAllen. What I learned from that was that even those centers, the three cities, the three cultures are totally different. And I learned the hard way because my mentality was to standardize everything and all that, but I actually learned that from here to Austin, which is 72 miles, you might as well ask for a passport in New Braunfels. Because it's a total different culture. Not that one is better than the other one, it's just different, just like cultures. There's no one better than another. It's just different. And you have to cater to those needs. Even how I was dressed, you know, when I went to Austin to give consultation, I had to have a different attire than if I did a consultation in San Antonio, different culture.
JONES 18:49
So what about the response that I think private equity would have of saying, Yeah, we're just gonna worry about the accounting and where we're going--you can make whatever local decisions you want. Why doesn't that end up playing out in real life?
ARREDONDO 19:07
I think that because that will not give you the level of efficiency that you're looking for in order to have your good margins. Think about this, in healthcare in the United States, the marker that we use to see the efficiency of the company is the EBITDA--the earnings before interest, taxes, depreciation, appreciation. And in healthcare overall is 10 to 15%. The biggest industries that have like, you know, much more EBITDA is real estate and oil companies and other things, but healthcare is 10 to 15. So, in our industry, infertility, is a little bit more generous than that, and that's why more and more private equity want to enter into our field because the EBITDAs are a little bit bigger than that. And what happens is that if you focus on you make it efficient at two or three layers, your ability to turn around the company is going to be less. And the people--what I have read lately and what I've learned lately is that a lot of the private equity that have entered into healthcare, were very successful in the first flip of the company, because there was a big chunk of efficiencies that I mentioned, physicians will benefit from that, there's no question that we could be more efficient. And there's no question that certain management companies and private equity companies have done it before. But after they do that, when they go to the second, they are having trouble getting the second acquisition--the shrinking of the fat, if you may. And then when they start growing because that's the only way to really position in the market, then they enter into the challenge of the cultural differences. If you grow organically, obviously, is going to be much more slow, the growth, but you have much more control because you infuse the culture that you want. And again, you have to adapt. Think about this. Even if you go in a company that is totally efficient, McDonald's, Starbucks, any of that. You're going to McDonald's here in San Antonio and you can find a burger with chorizo and you go another place and you don't find that they even adapt to the local market. You'll find in this area, things in the menu that are spicy, and you go in the north or northeast and you don’t find that.
JONES 21:51
I was in Nova Scotia, Canada and they had the McLobster or something.
ARREDONDO 21:58
There you go! We don’t have that in Texas, my friend. So even those companies have learned to make it local. Little by little, make it local. And this is the big disadvantage that Budweiser and Anheuser/Busch will have with a local boutique draft beer that is done in your market. They'll always be--you know, they can't compete with that. Because that is such a flavor. Such a local perception that to the people that they like those flavors, you put a Budweiser in front of them, it's not going to work. Now, the challenge that those craft beers have is when they start growing, that they lose their power, because now they're big. They cannot--let me give an example. You know, the best advertising in TV in the whole history is going to be the 1984 Superbowl commercial of Apple, where that woman throws everything to the screen where they're putting the 1984 movie. And because Apple is the underdog against IBM, the big thing. I think that Apple cannot do that ad today because now they are IBM.
JONES 23:25
Right.
ARREDONDO 23:27
So when you--that is a technique that has to be adapted as you grow, you know. And what is happening a lot of these companies that were small and boutique in this and now they're part of a McDonald's. So the appealing--
JONES 23:40
They even have a harder brand challenge than a McDonald's I think because instead of instead of it being McDonald's in Cincinnati, McDonald's in Chicago, McDonald's in Los Angeles, it depends on which network it is, but very often it is this restaurant in small print, brought to you by McDonald's. You know, it depends on which fertility network we're talking about, but if they're going for the benefit of scale, then they're losing the local advantage. If they're trying to keep the local advantage, then they don't get any marketing at scale. And so I can see that being a challenge.
ARREDONDO 24:13
They ended up--what is that saying in English that you ended up without neither the goat nor the rope?
JONES 24:21
The worst of both worlds would often be the expression one might use for that.
ARREDONDO 24:27
So, a branding expert will tell you that is a recipe for disaster because we're not here nor there. You're giving mixed messages. Who are you? This one or that one? And obviously you are into that, my friend, you're the expert on this. They will tell you that when you're sending mixed messages, it's confusing for the consumer.
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JONES 26:54
So we've mostly talked about private equity which is money held either by firms or sometimes high net worth individuals. We're also starting to see in the field groups being listed on public markets, I'm starting to see a pattern of larger groups that merge with an international group in some other country, and then they list on an international market. Do you have any opinions on--is there a difference in that between these operational consequences that you've talked about where, where it happens with private equity versus listing on a public stock market? Do you have any opinions or insights on that?
ARREDONDO 27:34
Well, what I can tell you is we've seen it with one company in the United States that was private and went public, then went private, it fell apart. So what I can tell you from some of the examples that are from the International that have come to acquire things here nationally--I think that one of those companies really learned their way because I'm familiar with people that bought some of that in South America and other places where they began this journey of fertility and they learn a lot there. So actually, they have had 10 years of experience in fertility now, and they came to the US now to acquire. So yes, they will have to learn the US market, but I think that they actually learn a lot in other markets. So I think that they are going to be doing a little bit better. But, you know, it's going to be very interesting to see what happens with COVID because a lot of the cash flow has stopped and a lot of these companies distribute basically the money right away, which is different than when it's a small business company where people tend to keep cash for the operating expenses for several months as reserve. And here it was not because everything was distributed right away. So I think this is going to impact, I would say, my prediction is going to impact morale, because a lot of people that were working for 20, 30 years, were put in furlough and were fired because, obviously, they have no cash flow coming in, unfortunately. And what happens is that a lot of the nursing staff--which it's very hard for us to find nursing in our fertility industry--and what happens is that they left and those nurses got jobs right away in healthcare because there's a shortage of nursing. But now that you are remounting, again, the industry and you want them to bring them back, most likely they're going to tell you no, my friend You didn't support me when I was in really dire straits here. And I don't want to go back to that. So we already had a shortage of human capital in the fertility industry, beginning with doctors, which are probably the only ones that are going to be a little bit easier to obtain. Because we have a limited sample of physicians, 35 to 40 physicians a year for 850 million people. But nursing, which basically, you know this, the heart of our operations are the nurses. They are really the heart of the operation [inaudible] but the heart, the big work is done by nurses and some of these nurses were put in furlough or were actually fired. So it takes a good nurse that has zero knowledge of fertility, a good six months to a year to become proficient. It's a long investment.
JONES 31:03
So what are some of the benefits then? Or do you think there can be a benefit in terms of some physicians getting what in other industries is sometimes called “FU money.” And I've been in a meeting where there was a seven doctor group and we were talking with and I could see them kicking this idea over. And the deal was good, and they were interested. And they were also conflicted for many of the reasons you said, and ultimately, they ended up going with it, because they decided, you know what? We'll do this for our five year earnout and if we want, we can come back and do whatever we want, essentially, because they would have the capital to do that. And someone that you and I both like and had mentioned that you had--at meeting that you and I were at earlier this year had mentioned--you know, there are potential downsides for the younger partners, but there could be upsides for the younger partners and that they could get a big upside now and they could get more later. So what do you think are the upsides of physicians being able to cash out?
ARREDONDO 32:20
Well, I think it's always important to align the interests of everyone. If you don't align the interests of everyone, and we just give lip service that yes, everybody's going to benefit and this, but if you truly do not align the interests of investors, physicians, team members and patients and sacrifice some of your profits in one of those in those levels and share it proportionally, I think that is going to be successful. Now is that easy to do? Absolutely not. It is not easy to do to design a system like that, especially if you are acquiring organizations that already have certain patterns of behavior. You may be much more successful on aligning all those interests in de novos because then you are going to get the right team members from the beginning. So that's one point. The second point that I would, I will say on that is that to align them there's a lot of intangibles. It's not only the money, it’s the decision making. So physicians enter into these to make decisions, and to the great majority of physicians, enter into this to help the patient to make decisions. And when this get disaligned, the morale is very low. So for the young physicians, I think if they start to request, and not on the request for demand, but that they actually include themselves by preparing themselves in the business set and participate and be willing and wanting to participate more in the decision making, I think that that is what will benefit the physicians, to private equity, to employees, and to patients. Because whether we like it or not, this plane of medical office or a hospital cannot fly without pilots and the pilots of the doctors. It's something that you can't.
JONES 34:57
As you were talking about aligning interests, I've thought about other things. Things that you talked about because you've talked about implementing personality tests when you ran your practice. And I wonder if you ever combined those two? When you were doing negotiations with buyers, did you ever have them do personality tests because I could see that as being--if someone is thinking about this, they might be interested in doing that.
ARREDONDO 35:22
We did actually with new employees and there was a time that we simplified the questions and we put in them with the patients because they were dealing with two types of personalities in the in a couple--they have different personalities. So the way you express this patient might capture 100% of what you said, but this one only 50. And so you have to be able to care for both. And so we use it to identify personalities and how the wording was going to be done from the physician to the patient from the nurse to the physician, and from the financial advisory to the patient.
JONES 36:11
Yeah, I think it could be a good idea for doctors considering selling equity of their practice to do personality tests with the prospective buyer. And one thing I might look for is agreeableness. And if someone is--if you do the Big Five personality test--, it's called Big Five, that's one. I remember, you all use Myers Briggs, but Big Five, for example, I might look for someone who--I might look at their agreeability index.
ARREDONDO 36:38
Yeah!
JONES 36:39
Because if they’re too low on agreeableness, it might not be a good fit. It's why I think I'm such a good guy to do business with because I'm just on the agreeable side of the spectrum. I'm agreeable 54% of the time, which means that I want to make sure that the person I'm doing business with gets theirs, but I'm also not gonna be shy in advocating for mine, which is why I think I'm such a great business guy, in my not so humble opinion. But I've had such a good time talking with you. Let's conclude with your thoughts on private equity, public markets, venture capital entering the field, the implications of that and what physicians and practice owners should consider.
ARREDONDO 37:21
So on the relationship between external money coming into medicine and external knowledge--it's not only the money but the knowledge coming into medicine--I think the fundamental thing should be that because the money that comes in, put the physician in a difficult position of serving the patient and the stakeholders. The only way to solve this problem is by in every single decision, aligning all the interests of the investors, physicians, the team members, and the patients and that is not easily done without the major input and major decision making of each of those four elements. And it cannot be a vertical implementation, it has to be a horizontal with all these elements have some say in how you design the company, the patients, the team members, the doctors, and the private equity.
JONES 38:33
Dr. Francisco Arredondo, Paco, thank you so much for coming on Inside Reproductive Health.
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You’ve been listening to the Inside Reproductive Health Podcast with Griffin Jones. If you're ready to take action to make sure that your practice drives beyond the revolutionary changes that are happening in our field and in society, visit fertiltybridge.com to begin the first piece of the Fertility Marketing System, the Goal and Competitive Diagnostic. Thank you for listening to Inside Reproductive Health.