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Why so many physicians are partnering with private equity


Primary care continues to be a target for investors

Over the past eight years, strategic transactions by physician groups have increased an average of over 20% per year. The following chart reflects data on publicly reported transactions, and is a good indicator of trends, even though many other physician consolidation deals go un-reported.

Private equity trends: ©Epstein Becker Green

Private equity trends: ©Epstein Becker Green

Dana Jacoby: ©Dana Jacoby

Dana Jacoby: ©Dana Jacoby

The last two years have witnessed even more dramatic average growth. Physician specialties that have received significant investor attention include:

(a) Some “mainstays”, such as primary care, pediatrics, eyecare, retina, dermatology, urology, OBGYN, fertility, gastroenterology and pain, and

(b) Some “newer” targeted areas, such as orthopedics, neurosurgery, cardiology, plastic surgery, med spa, and neurology.

Why are so many physicians partnering with private equity platforms?

To understand the reason for the trend, it is important to explore the increasing challenges on physician groups in private practice:

Reimbursements from both Medicare and commercial payors have been decreasing over the past several years. This results in physicians having to do more service for less money and ultimately decreased personal income.

Physicians are encouraged to institute value-based reimbursement programs, bundled payment initiatives, risk-based reimbursement, population health, and direct-to-employer programs. These are new, somewhat undefined initiatives that are based in preventive care and management of the overall care for patients requiring treatment. Successful implementation also requires a substantial investment in advanced EHR systems, cutting-edge data analytic capabilities, and experienced care management staff.

Gary Herschman: ©Epstein Becker Green

Gary Herschman: ©Epstein Becker Green

Private medical practice is facing tremendous competition from previously unknown rivals such as mega specialty and multispecialty practices in multiple cities, hospital systems that directly employ physicians in primary care and specialties, and a host of many new and growing national players. Some of the new competitors are medical based such as Optum, VillageMD, and Summit Health. Others have emerged from the retail sector such as Walmart, Walgreens, CVS and Amazon. The impact on private practice physicians is a decreased patient count and lower revenue.

These three factors have conspired to make it much harder for physiciansto maintain a successful private (independent) medical practice. As a result, the independent primary care physician has largely disappeared. Most have been subsumed into the large organizations described above, which also are now employing most specialists. This impacts independent specialists, as primary care physicians are encouraged to only refer their patients to specialists within their organization.

Faced with the perfect storm, physicians have turned largely to private equity platforms, which provide a lifeline to financial capital to meet the requirements of the value-based care model, and therefore better commercial payor arrangements, and the ability to compete with the other mega-groups, hospital systems, and corporate players in their market. The alternative for many of these physicians is to join their current competitors or leave practice entirely.

The primary advantages of private equity to the physicians are:

  • becoming part of a larger organization,
  • accessing substantial capital to invest in growth,
  • better succeeding in value-based care, and
  • the ability to compete with growing competition from mega-organizations.

Private equity investments provide additional benefits as well, such as sophisticated executive infrastructure that is typically unavailable to private practice physician groups. This includes professionally trained managers many of whom have advanced degrees such as MBAs and are experienced in the health care industry. The physicians can rely on a team including: a CEO, CFO, COO, CIO (IT executive), CMO (marketing), and managed care executives to negotiate with payors, HR executives (including for recruitment, benefits, etc.), imaging, therapy, lab, and other ancillary service managers, as well as high-performing billing, collection, and legal compliance teams.

To boot, private equity platforms benefit from economies of scale, which spreads fixed costs across multiple practices. For example, the expense of an electronic health records system required to succeed in value-based care models is spread out over dozens of physician groups rather than a small private practice. In addition, being included in these consolidated platforms provides substantial cost savings through group purchasing power for critical elements, such as medical malpractice insurance, employee benefits, supplies required to treat patients, expensive medical equipment (C-Arms, MRIs, CTs, and physical therapy equipment), and building ambulatory surgical centers.

What changes occur for physicians entering a private equity partnership?

The critical element of patient decisions and clinical control does not change after a private equity transaction. Understandably, this is the first question most physicians will ask when considering a private equity option. Private equity executives cannot mandate to physicians how to practice medicine generally, or how to treat a particular patient. This is explicitly spelled out in legally binding partnership agreements between the private equity group and the practicing physicians.

Most private equity platforms have a clinical advisory or governance board that consists solely of physicians licensed in the same state. This board is charged with the responsibility to make decisions regarding clinical policies and procedures of the platform, quality assurance and patient safety, credentialing of new physicians and clinicians, clinic and on-call scheduling, and also (subject to budgets) electronic health records, and medical equipment and devices.

In our experience, we have not seen quality of care decreasing following a medical group’s partnership with a private equity platform. Physicians remain in control of their patients, and now have access to significant financial capital to assist in improving and expanding their clinical services.

An independent physician will likely experience some changes in administrative control over the day-to-day operations of the practice. The new, larger organization will handle non-clinical staffing, marketing and communications, and direct the platform’s strategic/growth initiatives. The physician practice group will be administered through a more sophisticated corporate infrastructure managed by experienced executives. This generally comes as good news since most physicians would rather practice medicine with the freedom to focus on patient care as opposed to spending valuable time in partner meetings discussing administrative issues.

Current and future trends in physician-private equity partnerships

Prior to the COVID pandemic, approximately 50% of physicians were employed by a hospital, corporation or private equity platform. Today, that statistic is approximately 75%. Five years ago, many physicians would not even consider a partnership with a private equity platform.

Today, the leadership of nearly all physician groups view the consideration of a private equity alternative as an ethical obligation as fiduciaries of their practice. As a result, it is more common now for boards and executives of independent practices to conduct due diligence to evaluate all potential strategic options for their groups, including private equity, hospitals, or other large organizations. After considering the options, the board and executives will then make an informed decision regarding whether a partnership transaction is the preferred course of action.

The current fast-growing trend of consolidation of physician groups will continue well into the future. Many of these groups will transact to join or become private equity platforms. Generally, the transactions will be very successful for a multitude of reasons, including:

(a) successfully confronting the increasing challenges of private practice;

(b) relying on a seasoned executive team to strategically position the group to compete and prosper in the future; and

(c) a vast array of both short-term and long-term financial benefits.

Dana Jacoby is president and CEO of Vector Medical Group. Gary Herschman is a member of Epstein Becker Green in the Health Care & Life Sciences Practice and sits on the firm’s board of directors.

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