Should your practice be acquired by private equity?

Dear colleagues and friends,

The Perspectives series continues! Few current issues in Gastroenterology practice are as passionately debated as those associated with private equity. In this edition, our own Dr. John Allen and Dr. Marc Sonenshine explain private equity’s evolution in the GI field, dispel misconceptions, and dissect the central question of whether it is right for your practice. Thank you for your support, and I hope you will find the discussions enlightening and relevant to your practices. As always, I welcome your comments and suggestions for future topics at [email protected].
 

Charles Kahi, MD, MS, AGAF, is a professor of medicine, Indiana University School of Medicine, Indianapolis. He is also an Associate Editor for GI & Hepatology News.

Yes

But, at a minimum, you should absolutely lean-in, listen, and learn.

The physician leadership team at Atlanta Gastroenterology Associates has been focused on developing strategies and partnerships that strengthen our ability to thrive in our marketplace while also fending off threats to our mission. The path to forming the managed services organization (MSO) United Digestive (UD) through our agreement with the private equity firm Frazier Healthcare Partners was arduous and required a significant investment of resources and time. Like at Atlanta Gastroenterology Associates, many influential leaders within our field, also supported by their physician partners, have concluded that the investment of a private equity firm to build an MSO led by professional business executives will reduce the administrative stresses looming over the traditional independent gastroenterologist business model. Now, and after almost 2 years as a member of UD, I unequivocally believe my ability to provide timely, high-quality, and affordable care to my community is currently more stable and in a stronger position for the future.

Like we did in deciding whether to establish a formal relationship with a private equity–backed platform group, here are some critical questions you should explore and answer:

-What advantages and disadvantages will being a part of a private equity–backed MSO group bring to our patients, our practice, our team, and our providers?

-What forces threaten our practice’s ability to remain viable and pertinent in both the near and long term? And, how can our group ward off these threats?

-There are many private equity firms interested in our practice as well as already established platform groups. How do we decide which is best?

-If remaining completely independent is not a sustainable long-term option, why not just become employed by a hospital, join a strategic partner, or form/join a multi-specialty group or accountable care organization (ACO)?

In the first 2 years, UD has answered many of the questions and executed on desired priorities. Our management team helped us to navigate the chaos of COVID, and UD still remains on target to meet many annual budget goals as well as end of the year financial targets. Processes and enhanced technologies like real-time dashboards provide immediate insight into all aspects of our business, allowing for more analytical decision-making. Our payor and vendor negotiations yielded stronger returns than anticipated leading to material earnings. The revamped patient services center improved clinic utilization rates, reduced patient call wait times, deployed an online patient scheduling option, and employed medical assistants for handling clinical phone matters.

Most importantly, not one change at UD has negatively affected our clinical autonomy and decision-making. The MSO and its management team has steered all medical-related issues to our chief medical officer and physician executive committee. Moreover, there was much less consternation amongst partners when the time arose for significant capital expenditures (i.e., upgrading our endoscopic equipment, instituting a new electronic health record and practice management system, or surviving the cash-flow crunch during the beginning of COVID), as our annual compensation was not affected.

A few broader points to consider that pertain to private equity activity in physician services (i.e., not specific to gastroenterology or UD):

• Private equity firms invest money in private companies with the expectation of superior financial returns. Their principals are searching for opportunities with significant upside and potential to generate the necessary earnings for such returns. In fragmented fields, there is potential to use MSO relationships to consolidate providers into a larger organization. Then, economies of scale will create benefits through sharing and saving costs, increased leverage in contract negotiations, and augmenting organic, de-novo growth through the addition of new lines of services. Make sure you understand the overall business strategy, how your addition impacts the overall MSO, and how you may personally benefit.
• It appears that many groups are overly-focused on the deal multiple, yet understanding the comprehensive value of a deal goes far beyond the multiple. A complete evaluation must also explore the principles of the compensation model, rollover equity, compounding interest, tax deferral strategies, utilization of debt, and potential earn-out terms. Experienced legal counsel can shed light on these issues.
• The timing in one’s professional career may cloud the perspective of whether partnering with a private equity group through an MSO is wise. However, I would argue the more important perspective is the judgement of the trajectory of your current practice versus adopting a new business model. If a practice can skillfully withstand the headwinds of the regulatory challenges, fierce competition for patient referrals from hospitals plus new provider entrants, and continued downward pressure from payors, then remaining independent may be reasonable. On the other hand, there is great value, security and protection of being within an organization with sizeable financial and experiential capital with like-minded colleagues.
• Many independent practices are also often approached by local and national hospitals. Relationships with hospitals are popular as they too offer professional management teams lessening administrative burdens, often secure referral networks and higher contractual rates for services rendered. Unlike with a PE deal, these partnerships may limit patient choice, almost inevitably increase patient cost, and do not include equity for the provider.

While there are many questions that need to be answered for each practice considering joining a PE backed MSO, what is clear from my experience is that there are enough benefits to such a partnership that it should be explored to understand how it might improve your ability to serve your patients and secure a long term “home” for your practice, providers, and employees.
 

Marc Sonenshine, MD, is a partner in United Digestive and the chairman of medicine at Northside Hospital, Atlanta.

 

A note of caution

Is private equity good for gastroenterology? The answer is not a definitive “yes” or “no”; it is “depends”. That said, private equity is here so you must understand the implications.

Private equity is an alternative investment strategy focused on assets not listed on a public exchange. Capital usually is derived from investors who can tolerate risk with the hope of a high return such as pension funds, university endowments, and high net-worth individuals. Capital is collected within a fund (or funds) managed by a professional team who invests in, or buys private companies using internal capital leveraged with debt (leveraged buy-out or LBO). Assets and governance both are sold to fund managers, who restructure operations, centralize or standardize workflows, acquire similar companies to achieve economies of scale, and eventually resell the new company to another entity (usually a larger private equity fund). Typically, the resale (second bite) occurs 5-7 years after initial acquisition and during that 5-7-year period, Private equity funds expect a substantial (10%-20%) annual return on investment resulting from revenue enhancement, new service lines, and overhead reduction.

Since 2016, private equity has actively courted GI practices and there now have been over 20 closed deals. Private equity fund managers have specific expertise in valuing GI practices, enhancing revenue, reducing overhead, collecting other regional (and sometimes distant) practices, centralizing operations, converting all practices to a single EMR, payer negotiations, and other practice functions, while leaving clinical care decisions to providers. Although this postacquisition scenario sounds attractive, there are downsides.

First, let’s review the upsides. As a mature partner in a highly valued practice, you could expect an acquisition payment in the range of $1 million (subject to capital gains tax). You receive a gross distribution based on a purchase multiple (9-12 times EBITA – a measure of your annual profit), minus investment in the new company, and annual payments to the Management Services Organization or MSO. Your income going forward will be reduced by annual obligations to the private equity fund, about 10%-40% of your production. Typically, a second sale occurs between 5 and 7 years after acquisition (yet to occur in GI), where the new company sells for another EBITA multiple (so it is in your financial interest to keep increasing practice value). Even with a modest EBITA multiple, you might net an amount that is double the initial acquisition payout. A senior partner could benefit financially in ways not readily available through other avenues of retirement.

Another benefit is access to capital to acquire more practices, bring new technology, improve facilities, integrate clinical and practice information, and weather reduced demand (like occurred with COVID-19). Independent practices are struggling to incorporate digital technologies that patients now expect, enhanced (and more expensive) endoscopes, new service lines, and the demand for real patient outcomes data during payer or health system negotiations.

So, what takes private equity from a clear “yes” to a “depends”? During COVID-19, physician incomes dropped substantially, since any revenue went first to pay bank debt, then fund fees, payment of overhead (leases, vendor commitments, residual staff), and finally to the doctors. A recent Medscape survey of 5,000 US physicians, revealed that 62% of MDs saw their income drop (23% by more than 50%). Physicians employed by health systems did not see nearly that income drop.

Once a practice is sold, physicians lose autonomy. When you are acquired by a private equity fund, the primary goal of the fund is a financial target. Long-term staff may be downsized, you may be asked to use equipment or supplies that are not to your standard, relationships with regional payers or health systems may become adversarial, productivity targets may alter your patient care decisions (more procedures, less external referrals), and relations with your partners may be strained (younger versus older).

A young physician who enters a private equity–acquired practice may work for decades at an income level discounted from preacquisition levels. They face a substantial buy-in if they hope to benefit from the second sale. Of course, one might argue that future salaries for all gastroenterologists will be reduced by increasing technology costs (endoscope companies are adding AI – can’t wait to see their pricing), reduced reimbursements, and increasing labor and supply costs. Serious threats to colonoscopy-based cancer screening are here, a development that makes future values of GI practices more tenuous. Finally, our payer mix will be worse than before COVID-19 because of long-term financial strains on the US economy.

We have to reflect on a similar practice acquisition trend that occurred in the 1990s, where practice management companies bought independent practices. While times are different now (for many reasons), all but one of those companies went bankrupt and the acquired practices had to rebuild from the ground up. Private equity funds that are heavily leveraged are especially vulnerable, as can be seen by current bankruptcies of large established companies (Hertz, Neiman-Marcus, and others).

Finally, we have to ask ourselves how patients will view your practice as more of us become acquired by financially driven partners. No matter how we paint private equity acquisitions, people understand that these funds are financially driven and practice sales are an income enhancement play for physicians. In 1986, Arnold Relman (Editor of the New England Journal of Medicine) gave two Tanner Lectures on human values at the University of Utah. He asked the following question:

“Is medical care a consumer good like any other, a commercial service provided by skilled vendors for consumers willing to pay the market price, or is there something fundamentally different about the relation between doctor and patient?”

I am not a Luddite, nor am I Don Quixote jousting at windmills. I do, however, want you to consider carefully before giving up on the traditional practice models that made our specialty what it is.
 

John I. Allen, MD, MBA, AGAF, is clinical professor of medicine, department of internal medicine, division of gastroenterology and hepatology, Institute for Healthcare Policy and Innovation, University School of Medicine, Chief Clinical Officer, University of Michigan Medical Group, Ann Arbor. He has no disclosures and takes full responsibility for the content.

Dear colleagues and friends,

The Perspectives series continues! Few current issues in Gastroenterology practice are as passionately debated as those associated with private equity. In this edition, our own Dr. John Allen and Dr. Marc Sonenshine explain private equity’s evolution in the GI field, dispel misconceptions, and dissect the central question of whether it is right for your practice. Thank you for your support, and I hope you will find the discussions enlightening and relevant to your practices. As always, I welcome your comments and suggestions for future topics at [email protected].
 

Charles Kahi, MD, MS, AGAF, is a professor of medicine, Indiana University School of Medicine, Indianapolis. He is also an Associate Editor for GI & Hepatology News.

Yes

But, at a minimum, you should absolutely lean-in, listen, and learn.

The physician leadership team at Atlanta Gastroenterology Associates has been focused on developing strategies and partnerships that strengthen our ability to thrive in our marketplace while also fending off threats to our mission. The path to forming the managed services organization (MSO) United Digestive (UD) through our agreement with the private equity firm Frazier Healthcare Partners was arduous and required a significant investment of resources and time. Like at Atlanta Gastroenterology Associates, many influential leaders within our field, also supported by their physician partners, have concluded that the investment of a private equity firm to build an MSO led by professional business executives will reduce the administrative stresses looming over the traditional independent gastroenterologist business model. Now, and after almost 2 years as a member of UD, I unequivocally believe my ability to provide timely, high-quality, and affordable care to my community is currently more stable and in a stronger position for the future.

Like we did in deciding whether to establish a formal relationship with a private equity–backed platform group, here are some critical questions you should explore and answer:

-What advantages and disadvantages will being a part of a private equity–backed MSO group bring to our patients, our practice, our team, and our providers?

-What forces threaten our practice’s ability to remain viable and pertinent in both the near and long term? And, how can our group ward off these threats?

-There are many private equity firms interested in our practice as well as already established platform groups. How do we decide which is best?

-If remaining completely independent is not a sustainable long-term option, why not just become employed by a hospital, join a strategic partner, or form/join a multi-specialty group or accountable care organization (ACO)?

In the first 2 years, UD has answered many of the questions and executed on desired priorities. Our management team helped us to navigate the chaos of COVID, and UD still remains on target to meet many annual budget goals as well as end of the year financial targets. Processes and enhanced technologies like real-time dashboards provide immediate insight into all aspects of our business, allowing for more analytical decision-making. Our payor and vendor negotiations yielded stronger returns than anticipated leading to material earnings. The revamped patient services center improved clinic utilization rates, reduced patient call wait times, deployed an online patient scheduling option, and employed medical assistants for handling clinical phone matters.

Most importantly, not one change at UD has negatively affected our clinical autonomy and decision-making. The MSO and its management team has steered all medical-related issues to our chief medical officer and physician executive committee. Moreover, there was much less consternation amongst partners when the time arose for significant capital expenditures (i.e., upgrading our endoscopic equipment, instituting a new electronic health record and practice management system, or surviving the cash-flow crunch during the beginning of COVID), as our annual compensation was not affected.

A few broader points to consider that pertain to private equity activity in physician services (i.e., not specific to gastroenterology or UD):

• Private equity firms invest money in private companies with the expectation of superior financial returns. Their principals are searching for opportunities with significant upside and potential to generate the necessary earnings for such returns. In fragmented fields, there is potential to use MSO relationships to consolidate providers into a larger organization. Then, economies of scale will create benefits through sharing and saving costs, increased leverage in contract negotiations, and augmenting organic, de-novo growth through the addition of new lines of services. Make sure you understand the overall business strategy, how your addition impacts the overall MSO, and how you may personally benefit.
• It appears that many groups are overly-focused on the deal multiple, yet understanding the comprehensive value of a deal goes far beyond the multiple. A complete evaluation must also explore the principles of the compensation model, rollover equity, compounding interest, tax deferral strategies, utilization of debt, and potential earn-out terms. Experienced legal counsel can shed light on these issues.
• The timing in one’s professional career may cloud the perspective of whether partnering with a private equity group through an MSO is wise. However, I would argue the more important perspective is the judgement of the trajectory of your current practice versus adopting a new business model. If a practice can skillfully withstand the headwinds of the regulatory challenges, fierce competition for patient referrals from hospitals plus new provider entrants, and continued downward pressure from payors, then remaining independent may be reasonable. On the other hand, there is great value, security and protection of being within an organization with sizeable financial and experiential capital with like-minded colleagues.
• Many independent practices are also often approached by local and national hospitals. Relationships with hospitals are popular as they too offer professional management teams lessening administrative burdens, often secure referral networks and higher contractual rates for services rendered. Unlike with a PE deal, these partnerships may limit patient choice, almost inevitably increase patient cost, and do not include equity for the provider.

While there are many questions that need to be answered for each practice considering joining a PE backed MSO, what is clear from my experience is that there are enough benefits to such a partnership that it should be explored to understand how it might improve your ability to serve your patients and secure a long term “home” for your practice, providers, and employees.
 

Marc Sonenshine, MD, is a partner in United Digestive and the chairman of medicine at Northside Hospital, Atlanta.

 

A note of caution

Is private equity good for gastroenterology? The answer is not a definitive “yes” or “no”; it is “depends”. That said, private equity is here so you must understand the implications.

Private equity is an alternative investment strategy focused on assets not listed on a public exchange. Capital usually is derived from investors who can tolerate risk with the hope of a high return such as pension funds, university endowments, and high net-worth individuals. Capital is collected within a fund (or funds) managed by a professional team who invests in, or buys private companies using internal capital leveraged with debt (leveraged buy-out or LBO). Assets and governance both are sold to fund managers, who restructure operations, centralize or standardize workflows, acquire similar companies to achieve economies of scale, and eventually resell the new company to another entity (usually a larger private equity fund). Typically, the resale (second bite) occurs 5-7 years after initial acquisition and during that 5-7-year period, Private equity funds expect a substantial (10%-20%) annual return on investment resulting from revenue enhancement, new service lines, and overhead reduction.

Since 2016, private equity has actively courted GI practices and there now have been over 20 closed deals. Private equity fund managers have specific expertise in valuing GI practices, enhancing revenue, reducing overhead, collecting other regional (and sometimes distant) practices, centralizing operations, converting all practices to a single EMR, payer negotiations, and other practice functions, while leaving clinical care decisions to providers. Although this postacquisition scenario sounds attractive, there are downsides.

First, let’s review the upsides. As a mature partner in a highly valued practice, you could expect an acquisition payment in the range of $1 million (subject to capital gains tax). You receive a gross distribution based on a purchase multiple (9-12 times EBITA – a measure of your annual profit), minus investment in the new company, and annual payments to the Management Services Organization or MSO. Your income going forward will be reduced by annual obligations to the private equity fund, about 10%-40% of your production. Typically, a second sale occurs between 5 and 7 years after acquisition (yet to occur in GI), where the new company sells for another EBITA multiple (so it is in your financial interest to keep increasing practice value). Even with a modest EBITA multiple, you might net an amount that is double the initial acquisition payout. A senior partner could benefit financially in ways not readily available through other avenues of retirement.

Another benefit is access to capital to acquire more practices, bring new technology, improve facilities, integrate clinical and practice information, and weather reduced demand (like occurred with COVID-19). Independent practices are struggling to incorporate digital technologies that patients now expect, enhanced (and more expensive) endoscopes, new service lines, and the demand for real patient outcomes data during payer or health system negotiations.

So, what takes private equity from a clear “yes” to a “depends”? During COVID-19, physician incomes dropped substantially, since any revenue went first to pay bank debt, then fund fees, payment of overhead (leases, vendor commitments, residual staff), and finally to the doctors. A recent Medscape survey of 5,000 US physicians, revealed that 62% of MDs saw their income drop (23% by more than 50%). Physicians employed by health systems did not see nearly that income drop.

Once a practice is sold, physicians lose autonomy. When you are acquired by a private equity fund, the primary goal of the fund is a financial target. Long-term staff may be downsized, you may be asked to use equipment or supplies that are not to your standard, relationships with regional payers or health systems may become adversarial, productivity targets may alter your patient care decisions (more procedures, less external referrals), and relations with your partners may be strained (younger versus older).

A young physician who enters a private equity–acquired practice may work for decades at an income level discounted from preacquisition levels. They face a substantial buy-in if they hope to benefit from the second sale. Of course, one might argue that future salaries for all gastroenterologists will be reduced by increasing technology costs (endoscope companies are adding AI – can’t wait to see their pricing), reduced reimbursements, and increasing labor and supply costs. Serious threats to colonoscopy-based cancer screening are here, a development that makes future values of GI practices more tenuous. Finally, our payer mix will be worse than before COVID-19 because of long-term financial strains on the US economy.

We have to reflect on a similar practice acquisition trend that occurred in the 1990s, where practice management companies bought independent practices. While times are different now (for many reasons), all but one of those companies went bankrupt and the acquired practices had to rebuild from the ground up. Private equity funds that are heavily leveraged are especially vulnerable, as can be seen by current bankruptcies of large established companies (Hertz, Neiman-Marcus, and others).

Finally, we have to ask ourselves how patients will view your practice as more of us become acquired by financially driven partners. No matter how we paint private equity acquisitions, people understand that these funds are financially driven and practice sales are an income enhancement play for physicians. In 1986, Arnold Relman (Editor of the New England Journal of Medicine) gave two Tanner Lectures on human values at the University of Utah. He asked the following question:

“Is medical care a consumer good like any other, a commercial service provided by skilled vendors for consumers willing to pay the market price, or is there something fundamentally different about the relation between doctor and patient?”

I am not a Luddite, nor am I Don Quixote jousting at windmills. I do, however, want you to consider carefully before giving up on the traditional practice models that made our specialty what it is.
 

John I. Allen, MD, MBA, AGAF, is clinical professor of medicine, department of internal medicine, division of gastroenterology and hepatology, Institute for Healthcare Policy and Innovation, University School of Medicine, Chief Clinical Officer, University of Michigan Medical Group, Ann Arbor. He has no disclosures and takes full responsibility for the content.

Dear colleagues and friends,

The Perspectives series continues! Few current issues in Gastroenterology practice are as passionately debated as those associated with private equity. In this edition, our own Dr. John Allen and Dr. Marc Sonenshine explain private equity’s evolution in the GI field, dispel misconceptions, and dissect the central question of whether it is right for your practice. Thank you for your support, and I hope you will find the discussions enlightening and relevant to your practices. As always, I welcome your comments and suggestions for future topics at [email protected].
 

Charles Kahi, MD, MS, AGAF, is a professor of medicine, Indiana University School of Medicine, Indianapolis. He is also an Associate Editor for GI & Hepatology News.

Yes

But, at a minimum, you should absolutely lean-in, listen, and learn.

The physician leadership team at Atlanta Gastroenterology Associates has been focused on developing strategies and partnerships that strengthen our ability to thrive in our marketplace while also fending off threats to our mission. The path to forming the managed services organization (MSO) United Digestive (UD) through our agreement with the private equity firm Frazier Healthcare Partners was arduous and required a significant investment of resources and time. Like at Atlanta Gastroenterology Associates, many influential leaders within our field, also supported by their physician partners, have concluded that the investment of a private equity firm to build an MSO led by professional business executives will reduce the administrative stresses looming over the traditional independent gastroenterologist business model. Now, and after almost 2 years as a member of UD, I unequivocally believe my ability to provide timely, high-quality, and affordable care to my community is currently more stable and in a stronger position for the future.

Like we did in deciding whether to establish a formal relationship with a private equity–backed platform group, here are some critical questions you should explore and answer:

-What advantages and disadvantages will being a part of a private equity–backed MSO group bring to our patients, our practice, our team, and our providers?

-What forces threaten our practice’s ability to remain viable and pertinent in both the near and long term? And, how can our group ward off these threats?

-There are many private equity firms interested in our practice as well as already established platform groups. How do we decide which is best?

-If remaining completely independent is not a sustainable long-term option, why not just become employed by a hospital, join a strategic partner, or form/join a multi-specialty group or accountable care organization (ACO)?

In the first 2 years, UD has answered many of the questions and executed on desired priorities. Our management team helped us to navigate the chaos of COVID, and UD still remains on target to meet many annual budget goals as well as end of the year financial targets. Processes and enhanced technologies like real-time dashboards provide immediate insight into all aspects of our business, allowing for more analytical decision-making. Our payor and vendor negotiations yielded stronger returns than anticipated leading to material earnings. The revamped patient services center improved clinic utilization rates, reduced patient call wait times, deployed an online patient scheduling option, and employed medical assistants for handling clinical phone matters.

Most importantly, not one change at UD has negatively affected our clinical autonomy and decision-making. The MSO and its management team has steered all medical-related issues to our chief medical officer and physician executive committee. Moreover, there was much less consternation amongst partners when the time arose for significant capital expenditures (i.e., upgrading our endoscopic equipment, instituting a new electronic health record and practice management system, or surviving the cash-flow crunch during the beginning of COVID), as our annual compensation was not affected.

A few broader points to consider that pertain to private equity activity in physician services (i.e., not specific to gastroenterology or UD):

• Private equity firms invest money in private companies with the expectation of superior financial returns. Their principals are searching for opportunities with significant upside and potential to generate the necessary earnings for such returns. In fragmented fields, there is potential to use MSO relationships to consolidate providers into a larger organization. Then, economies of scale will create benefits through sharing and saving costs, increased leverage in contract negotiations, and augmenting organic, de-novo growth through the addition of new lines of services. Make sure you understand the overall business strategy, how your addition impacts the overall MSO, and how you may personally benefit.
• It appears that many groups are overly-focused on the deal multiple, yet understanding the comprehensive value of a deal goes far beyond the multiple. A complete evaluation must also explore the principles of the compensation model, rollover equity, compounding interest, tax deferral strategies, utilization of debt, and potential earn-out terms. Experienced legal counsel can shed light on these issues.
• The timing in one’s professional career may cloud the perspective of whether partnering with a private equity group through an MSO is wise. However, I would argue the more important perspective is the judgement of the trajectory of your current practice versus adopting a new business model. If a practice can skillfully withstand the headwinds of the regulatory challenges, fierce competition for patient referrals from hospitals plus new provider entrants, and continued downward pressure from payors, then remaining independent may be reasonable. On the other hand, there is great value, security and protection of being within an organization with sizeable financial and experiential capital with like-minded colleagues.
• Many independent practices are also often approached by local and national hospitals. Relationships with hospitals are popular as they too offer professional management teams lessening administrative burdens, often secure referral networks and higher contractual rates for services rendered. Unlike with a PE deal, these partnerships may limit patient choice, almost inevitably increase patient cost, and do not include equity for the provider.

While there are many questions that need to be answered for each practice considering joining a PE backed MSO, what is clear from my experience is that there are enough benefits to such a partnership that it should be explored to understand how it might improve your ability to serve your patients and secure a long term “home” for your practice, providers, and employees.
 

Marc Sonenshine, MD, is a partner in United Digestive and the chairman of medicine at Northside Hospital, Atlanta.

 

A note of caution

Is private equity good for gastroenterology? The answer is not a definitive “yes” or “no”; it is “depends”. That said, private equity is here so you must understand the implications.

Private equity is an alternative investment strategy focused on assets not listed on a public exchange. Capital usually is derived from investors who can tolerate risk with the hope of a high return such as pension funds, university endowments, and high net-worth individuals. Capital is collected within a fund (or funds) managed by a professional team who invests in, or buys private companies using internal capital leveraged with debt (leveraged buy-out or LBO). Assets and governance both are sold to fund managers, who restructure operations, centralize or standardize workflows, acquire similar companies to achieve economies of scale, and eventually resell the new company to another entity (usually a larger private equity fund). Typically, the resale (second bite) occurs 5-7 years after initial acquisition and during that 5-7-year period, Private equity funds expect a substantial (10%-20%) annual return on investment resulting from revenue enhancement, new service lines, and overhead reduction.

Since 2016, private equity has actively courted GI practices and there now have been over 20 closed deals. Private equity fund managers have specific expertise in valuing GI practices, enhancing revenue, reducing overhead, collecting other regional (and sometimes distant) practices, centralizing operations, converting all practices to a single EMR, payer negotiations, and other practice functions, while leaving clinical care decisions to providers. Although this postacquisition scenario sounds attractive, there are downsides.

First, let’s review the upsides. As a mature partner in a highly valued practice, you could expect an acquisition payment in the range of $1 million (subject to capital gains tax). You receive a gross distribution based on a purchase multiple (9-12 times EBITA – a measure of your annual profit), minus investment in the new company, and annual payments to the Management Services Organization or MSO. Your income going forward will be reduced by annual obligations to the private equity fund, about 10%-40% of your production. Typically, a second sale occurs between 5 and 7 years after acquisition (yet to occur in GI), where the new company sells for another EBITA multiple (so it is in your financial interest to keep increasing practice value). Even with a modest EBITA multiple, you might net an amount that is double the initial acquisition payout. A senior partner could benefit financially in ways not readily available through other avenues of retirement.

Another benefit is access to capital to acquire more practices, bring new technology, improve facilities, integrate clinical and practice information, and weather reduced demand (like occurred with COVID-19). Independent practices are struggling to incorporate digital technologies that patients now expect, enhanced (and more expensive) endoscopes, new service lines, and the demand for real patient outcomes data during payer or health system negotiations.

So, what takes private equity from a clear “yes” to a “depends”? During COVID-19, physician incomes dropped substantially, since any revenue went first to pay bank debt, then fund fees, payment of overhead (leases, vendor commitments, residual staff), and finally to the doctors. A recent Medscape survey of 5,000 US physicians, revealed that 62% of MDs saw their income drop (23% by more than 50%). Physicians employed by health systems did not see nearly that income drop.

Once a practice is sold, physicians lose autonomy. When you are acquired by a private equity fund, the primary goal of the fund is a financial target. Long-term staff may be downsized, you may be asked to use equipment or supplies that are not to your standard, relationships with regional payers or health systems may become adversarial, productivity targets may alter your patient care decisions (more procedures, less external referrals), and relations with your partners may be strained (younger versus older).

A young physician who enters a private equity–acquired practice may work for decades at an income level discounted from preacquisition levels. They face a substantial buy-in if they hope to benefit from the second sale. Of course, one might argue that future salaries for all gastroenterologists will be reduced by increasing technology costs (endoscope companies are adding AI – can’t wait to see their pricing), reduced reimbursements, and increasing labor and supply costs. Serious threats to colonoscopy-based cancer screening are here, a development that makes future values of GI practices more tenuous. Finally, our payer mix will be worse than before COVID-19 because of long-term financial strains on the US economy.

We have to reflect on a similar practice acquisition trend that occurred in the 1990s, where practice management companies bought independent practices. While times are different now (for many reasons), all but one of those companies went bankrupt and the acquired practices had to rebuild from the ground up. Private equity funds that are heavily leveraged are especially vulnerable, as can be seen by current bankruptcies of large established companies (Hertz, Neiman-Marcus, and others).

Finally, we have to ask ourselves how patients will view your practice as more of us become acquired by financially driven partners. No matter how we paint private equity acquisitions, people understand that these funds are financially driven and practice sales are an income enhancement play for physicians. In 1986, Arnold Relman (Editor of the New England Journal of Medicine) gave two Tanner Lectures on human values at the University of Utah. He asked the following question:

“Is medical care a consumer good like any other, a commercial service provided by skilled vendors for consumers willing to pay the market price, or is there something fundamentally different about the relation between doctor and patient?”

I am not a Luddite, nor am I Don Quixote jousting at windmills. I do, however, want you to consider carefully before giving up on the traditional practice models that made our specialty what it is.
 

John I. Allen, MD, MBA, AGAF, is clinical professor of medicine, department of internal medicine, division of gastroenterology and hepatology, Institute for Healthcare Policy and Innovation, University School of Medicine, Chief Clinical Officer, University of Michigan Medical Group, Ann Arbor. He has no disclosures and takes full responsibility for the content.