why no interest?, page-14

Hi, I did not see your question. Since I am not an expert, I will try to answer the Q.

A medical management company is not a new thing. The idea is simple. Put practices run by individuals together and gain economics of scale. Because management costs are largely fixed, the more patients come in, the more profitable a company will be. However, a good idea does not mean a good outcome.

The most common abuse of this idea works as following. A large amount of capital is raised. Competing for good practices, the price gets more expensive over time. Since profitability is largely confined by the ability of the doctor, usually in a transaction, a doctor is obliged to stay, let's say, 5 years, in exchange for the hefty price paid for his practice. And at the height of a bubble, equity normally is offered to sweeten the deal. Since the practice's profitability will stay for a while, those companies normally has a very impressive earnings growth in the early.

Encouraged by early success, more money is raised by the consolidators. When good practices are largely acquired, it is almost inevitable for those acquirers to pursue bad deals because they have to put investors' money to work. Valuation inflated and doctors' expectations become unrealistic. Put it simply, when the bubble cannot sustain itself at some point, people will realize they overpaid for those practices. The dream to get rich by obtaining equity busts, and doctors are disappointed. So after 5 years, many doctors choose to leave and left the company behind. When the valuation of practices drop to a very low level, the circle will start all over again.

This business is very tricky because the management has to handle the doctors well. If you give too little, doctors will not work for you; if you give too much, the company will not be profitable. Doctors are not like cleaners who you can replace easily. If they do not like you, it is kind of hard to retain them. So there is a delicate balance. Although the idea is simple, the business is not as simple as it looks.