Private equity funding is offering independent physicians opportunities to monetize their medical practices in numbers both startling and enticing.
In light of healthcare reform, reimbursement reductions, the ongoing political debate regarding healthcare and how to pay for it, medical practices are being offered opportunities to monetize their medical practices in numbers both startling and enticing. Whereas healthcare systems were the primary buyer just a few years ago, private equity has changed the acquisition landscape over the last several years. Significant recent acquisitions have occurred in the specialties of orthopedics, gastroenterology, and ophthalmology.
Almost all transactions are based upon a multiple of the practice’s “EBITDA.” EBITDA is a measure of a company’s operating performance and is defined as earnings before interest, tax, depreciation, and amortization. The higher the multiple, the less the post-transaction compensation for the provision of professional medical services will be. So, depending upon the relative ages of the physicians in the practice, even though the payment at closing may be deemed “high,” the practice must assess how the future compensation and loss of autonomy and independence may, in fact, make the deal less attractive. For example, younger physicians with more years left to practice may find these deals less attractive.
Private equity firms purchase practices with the goal of merging numerous small specialty practices into one large practice that can expand the range of patient services and leverage greater purchasing and negotiating power to spread the cost of IT upgrades or management investments over a larger revenue base. To grow efficiently, these firms will approach and negotiate with dozens or even hundreds of target physician practices at one time, with only 1 to 5 percent of targets actually being acquired.
To assure that best terms are achieved or, if necessary, negotiations are terminated appropriately and efficiently, it is imperative that physicians owners understand their motivations for selling and those of the potential purchaser for buying.
Is the transaction right for the practice?
There are many reasons why practice owners may want to sell. Healthcare economics are uncertain; competition with large multi-specialty groups and hospitals is increasing; IT and other infrastructure investments are large, and financing often requires personal guarantees by the partners; and payers are increasingly reducing reimbursement. A merger or acquisition could result in cash to the owners, professional management of their practice, superior infrastructure, and greater negotiating power with third-party payers.
Before entering negotiations, the owners must be on the same page. Smart, analytical, and seasoned physicians may feel that it is best to simply invite a potential purchaser to their office to negotiate a transaction. Such an approach may not be prudent. The issues involved, including valuation, operational issues, governance, and legal and regulatory issues, are complex and outside the normal range of activity and experience of many physicians. Merger and acquisition (M&A) specialists should be hired or contracted to run the acquisition program, providing an expertise that most physician do not have and limiting the distractionfrom running the practice and caring for patients.
Physician owners must also understand that as employees in the new model, they will no longer be compensated as partners of the practice, but instead will be retained as fixed-salaried employees for a certain period of time or based on "relative value units." But while they may not be able to generate the same level of compensation that they had earned in their own private practice, they also no longer need to worry about slow years and fluctuating revenue. This stability and security is often welcomed by risk-averse and risk-seeking physicians alike, particularly in an economic climate where reimbursement rates are continually reduced by private and government payors.Another benefit is that employed physicians are not responsible for the overhead associated with running a private practice. Their only concern is maintaining their patient relationships and providing high-quality, cost-effective care.