The Pros And Cons Of Private Equity Buying Into Your Surgical Practice
Private equity (PE) invested more than $206 billion in US health care throughout 2021 pouring funds into research, expanding or renovating facilities, and modernizing medical records. But in the last 20 years, there has also been a significant spike in PE acquisition of surgical practices. More than 250 PE investment deals in outpatient clinics were completed in 2020, especially in high-demand practice areas such as obstetrics and gynecology, dental, gastroenterology, ophthalmology, and dermatology. PE, for example, currently owns more than 10% of the US dermatology market.
PE investment into healthcare practices is often a great thing. It can provide the funds to improve healthcare delivery, expand the range and quality of surgeries on offer and allow practices to purchase better equipment. PE firms often invest in new technologies that will improve efficiency in areas like surgical scheduling, automation of manual procedures, and the use of EHR. This upgrades the practice without practice owners suffering the stress of having to fund these improvements.
On the other hand – depending on to what extent the PE firm “takes over” – practice owners can end up feeling that they have lost control over the practice they carefully built over the years. In certain cases, PE firms may make business-driven decisions that are not in line with the practice owners’ goals and vision for the practice. For example, they may decide to prioritize profitable surgeries at the expense of other surgeries reducing the range of services available to patients.
The PE game plan generally involves buying a practice, cutting costs, and changing procedures with a view to making an annualized return of 20% to 30% and then selling the practice for profit within three to five years. In the process, practices gain the advantage of having seasoned business professionals helping their operations become leaner, more efficient, and more profitable. In some cases, once profits have been maximized, the PE firm may sell the practice on to another PE, and then the cycle of improvement begins again.
While there are very clear benefits to a PE buyout, owners should consider the pros and cons before taking the leap, taking care to ensure that the intended PE firm shares their vision and goals for the practice.
The Pros And Cons Of Private Equity Investment
Streamlining And Cost-Efficiency
Many surgical practices and clinics do not operate as efficiently as they could, still using outdated manual methods to block out surgeons’ and OR time, order equipment, update the calendar, and disseminate information about surgeries to patients. The inefficiencies that result from these outdated procedures can mean that ORs lie empty when they should be full, surgical cancellations will occur more frequently due to poor tracking, and patient care will also suffer as a result of this.
Having a PE firm move in and manage the practice like any other profitable business could see inefficiencies addressed quickly – generally by investing in technologies that can streamline business processes and make practices more efficient.
Zirui Song, MD, Ph.D., assistant professor of healthcare policy at Harvard Medical School sees the advantages of PE investment in surgical practice, pointing out that “PE can help provider practices be more efficient, cut down on unnecessary costs of production [and] be more lean in the delivery of healthcare services.” These benefits will trickle down to the business stakeholders, as well as to the surgeons and the patients themselves.
The winds of change have hit smaller surgical practices posing new challenges that are causing the number of physicians working in private practices to fall. Today, less than 50% of doctors own or work in a physician-owned practice while many have been forced to work for a hospital, HMO, or insurance company.
New challenges include the difficulty of balancing clinical responsibilities with administrative work (such as coding), the declining pay rates from Medicare, Medicaid and other commercial insurers, and the lack of negotiating leverage smaller practices wield with insurers. The cost of growing large enough to wield power with insurers is unattainable for many practices.
In this rapidly changing and increasingly difficult medical environment, it can be hard for smaller surgical practices to survive and thrive, making PE funds an attractive prospect. Not only can surgeons hand over business responsibilities (such as ensuring profitability) to a competent authority, but they also get the injection of cash they need to invest in their practice, expand services, reach more patients, and improve the quality of care.
Room For Innovation
It has become virtually impossible to stay profitable in private surgical practice today without investing in new technologies to improve overall operations. Halee Fischer-Wright, MD, President and CEO of MGMA. says that “To compete in healthcare, you need that investment in the EHR, the technology platform, and more business management.” Technologies that help firms automate repetitive administrative tasks, improve surgical scheduling, process insurance forms, and track KPIs help practices provide better patient services, retain quality staff and gain competitive advantage in their fields.
Because they focus so heavily on streamlining administrative tasks and improving the billing processes, PE firms often look for new technologies to invest in that can help to these ends. This can be great news for surgical practices that want to innovate and improve but don’t have the available funds to invest.
Focus On The Patients
Many clinicians are driven by their chosen careers and doing the work they love. In today’s competitive medical space, they can end up increasingly drawn into the business side of things, jumping through administrative hoops, worrying about regulations, and becoming obsessed with KPIs and profitability. On the other hand, PE firms are experts at business but need partners with the clinical skills they lack. The partnership between the two can be a win-win that is especially desirable to surgeons who want the freedom to work in their practice, interact with their patients and utilize their surgical skills fully.
Reduced Costs And Risk
Few surgical practices have enough buying power to negotiate favorable rates with insurers, suppliers or third-party providers such as labs. PE firms are changing the game by combining multiple practices of the same type to dominate a market or create a larger multispecialty practice. The result is a larger combined practice with much better purchasing power and the ability to get good deals for the practice under its remit. Also, spreading risk throughout a larger patient population, such as occurs in this model, makes it less likely that any cases that “go bad” will affect the practice’s quality ratings.
Lower Quality of Patient Care
As the rate of PE investment in medical practices increases, questions are being asked about the effect on the quality and delivery of care. Zirui Song, MD, Ph.D., assistant professor of healthcare policy at Harvard Medical School, feels that these fears might be legitimate, although not enough studies have been done to know for sure.
An entity whose main focus is profitability might sometimes inadvertently operate at odds with patients’ best interests. For example, they may promote more profitable surgeries over less profitable ones, reducing the range of surgeries a practice can offer and leaving some patients out. They may also push practices to purchase equipment from their desired suppliers, sometimes resulting in inferior products being used.
The same goes for using certain labs or external service providers over others that the practice was happy using in the past because they are also owned by the PE firms in charge.
Poorer Work Conditions
In a bid to achieve greater efficiency, PE stakeholders may demand that surgeons work longer hours or take shorter breaks which can affect the quality of their work. As a result of policy and cultural changes imposed by PE firms, existing employees may become less happy at work and seek to leave. Even practice owners – despite the financial upside they gained from PE investment – can grow unhappy with the changes and with their loss of decision-making power and autonomy.
Higher Insurance Premiums for Patients
Richard Zall, JD, chair of law firm Proskauer Rose’s healthcare group points out that, in some cases, just combining practices can lead to higher insurance premiums for patients. This is because PE firms use their leverage to negotiate better rates with payers, and sometimes insurers pass on these price increases to the end user.
Dangers of Cost-Cutting
Cost-cutting is an integral part of the PE approach, and when done right, it can benefit both patients and surgeons. The problem arises when too many corners are cut. Some issues are mere inconveniences, but others can be downright dangerous. Waiting for corporate approval when ordering new supplies can lead to delays that, while not life-threatening, can hamper day-to-day operations. It is not unheard of for practices to be left for days without gauze, hand sanitizer, or even toilet paper.
When cost-cutting results in the use of inferior surgical products, you have to seriously question whether the benefits of working with a PE firm outweigh the risks.
Having Less of a Say in Practice Decisions
There can be a significant lack of alignment between the PE business model and the interests of the practice. A successful practice is generally built over the course of years by surgeons who genuinely care about their patients and the delivery of good care and who put the profits side of the equation on the back burner while they build their reputation and gain market share.
When PE takes over, the focus tends to shift towards profit maximization in a short space of time. In the interests of profitabilty, the former business often has to give up their power to make decisions and drive practice culture.
It is worth bearing in mind that there are exceptions. While some PE firms insist on taking over and view the physicians as their employees, others are more interested in involving practice owners as physician leaders and directing growth from the sidelines. Such deals can operate more like a partnership. For this reason, it is critical to understand the culture of the firm you are thinking of working with when considering entering into a PE deal. If the vision of the practice owners is aligned with those of the PE firm and the cultures are complementary, very successful partnerships can result. Says Halee Fischer-Wright, MD, president and CEO of MGMA, “It’s like dating: you really have to get to know your partner.”
Private Equity In Healthcare – Is It Worth It?
Accepting a PE deal for your practice is a big decision that requires careful consideration. In a successful deal with a suitable PE partner who shares your vision and goals (and there are many of these), you stand to acquire the funds you need to enhance and grow your practice and invest in new technologies that will improve overall efficiency and your bottom line. Just take care not to enter into an arrangement with an unsuitable partner for your needs. The most successful PE takeovers – which result in efficiency and service-level improvements for the practice as well as to the bottom line – are those where the practice owners are retained as valuable advisors and are consulted before making major decisions.