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February 2024Physician editor’s note: ENTtoday is excited to introduce a new column, ENT Economics. Healthcare economics impacts how we deliver healthcare to our patients, the care that can be provided, and how we pay and support our staff, as well as how well we handle our own personal finances. Understanding the changing healthcare economy will allow us to make better informed financial decisions.
—Robin W. Lindsay, MD, MBA
Patients, payors, pharmaceutical reps, and fellow physicians aren’t the only ones calling otolaryngology practices these days. Private equity firms are calling as well.
“I get solicitations all the time,” said Gavin Setzen, MD, a past president of the American Academy of Otolaryngology–Head and Neck Surgery (AAO-HNS) who currently works in private practice at Albany ENT & Allergy Services. “At least two or three times a month, I’ll get a reasonably serious outreach where they’ve done some research on the practice and expressed some interest. I just ignore them for the most part.”
Ignoring entreaties from private equity (PE) firms—financial entities that invest in and take an active role in the management and structuring of the companies—is becoming more difficult for otolaryngologists. Private equity investment in healthcare increased almost three-fold between 2010 and 2019, from $41.5 billion to $119.9 billion, according to a report by the American Antitrust Center, Petris Center, and Washington Center for Equitable Growth (Scheffler RM, et al. Monetizing Medicine: Private Equity and Competition in Physician Practice Markets. July 10, 2023). And while private equities’ initial investments in healthcare were in orthopedics, ophthalmology, and dermatology, interest in otolaryngology has been increasing (JAMA Otolaryngol Head Neck Surg. 2020. doi:10.1001/jamaoto.2019.3738). Between 2015 and 2021, 23 otolaryngology–head and neck surgery practices were acquired by PE firms or PE-backed management groups. The pace of acquisition has increased over time, with just one PE acquisition of an otolaryngology practice in 2015, four acquisitions in 2019, and eight in 2021 (Otolaryngol Head Neck Surg. 2023. doi:10.1002/ohn.342).
“These deals are keeping us on our toes,” said Annette Pham, MD, a facial plastic surgeon and otolaryngologist currently practicing as a partner physician at Metro ENT and Facial Plastic Surgery, part of The Centers for Advanced ENT Care, a group of eight ENT practice divisions with 18 clinic locations across the Mid-Atlantic. The Centers for Advanced ENT Care considered and ultimately decided to turn down a PE deal; instead, they joined ENT Specialty Partners, a practice community led by Ron Kuppersmith, MD, MBA, an AAO-HNS past president, and Tony Natale, MD, an experienced healthcare executive and physician who trained in otolaryngology–head and neck surgery.
“As physicians, most of us don’t understand the nuances of the socioeconomic and fiscal aspects of practice management,” Dr. Pham said. “It was a learning curve to understand private equity, market conditions, and the different models and options out there for mutually beneficial partnerships.”
Why There’s Mutual Interest
Simply put: There’s a lot of money in otolaryngology. While the economics of running an otolaryngology practice seem to get more challenging each year, financiers see plenty of opportunity for profit.
As noted in a 2019 JAMA Otolaryngology–Head & Neck Surgery article, investors are attracted to the field because they recognize that otolaryngologists can perform many procedures in office and at ambulatory surgery centers (ASCs), and they know that “otolaryngology procedures performed at ASCs are overall profitable … particularly compared with other high-volume specialties, such as ophthalmology ….” (JAMA Otolaryngol Head Neck Surg. 2020. doi:10.1001/jamaoto.2019.3738). PE investors also know that the demand for otolaryngologic care is expected to increase and that the “market of otolaryngologic services is generally fragmented, with many small practices centralized within and around urban centers” (JAMA Otolaryngol Head Neck Surg. 2020. doi:10.1001/jamaoto.2019.3738).
That’s interesting to PE firms, which use capital from limited partners to purchase controlling interests in medical groups. They aim to generate profit by increasing the value of purchased entities over a relatively short period (usually, three to seven years) and then selling for more than the sum of their investments. To achieve that goal, PE groups typically buy and consolidate several practices. They may also purchase and roll up related businesses, such as audiology groups and ambulatory surgery centers. Consolidation presents new opportunities for income and the potential to decrease costs via operational efficiencies.
Despite strong demand for otolaryngology services, otolaryngologists in private practice struggle with reimbursement and regulation, as well as increased competition from non-traditional players such as Walmart and CVS, Dr. Setzen said.
The recent COVID-19 pandemic and resulting shutdowns added tremendous economic stress. While some practices thrived with the help of financial assistance from the government, others had a tough time making ends meet. “Additionally, one of the issues coming out of the pandemic is that access to capital via cheap debt no longer exists,” Dr. Setzen said. “We currently live in a high inflation environment, and medical practices are disproportionately impacted.”
The Pros and Cons of Private Equity Investment
It’s important to carefully consider the pros and cons of private equity investment and conduct due diligence before accepting or declining an offer.
An influx of capital can be extremely advantageous to a medical practice, as that money can be used to purchase equipment and technology to facilitate business expansion. As noted in a JAMA Otolaryngology–Head & Neck Surgery article, “private equity-backed otolaryngologic practices may thus be able to pursue market-desirable services,” such as robotic surgery to treat obstructive sleep apnea (JAMA Otolaryngol Head Neck Surg. 2020. doi:10.1001/jamaoto.2019.3738). Physician owners who accept a PE deal also receive upfront compensation that may be as high as $2 million dollars or more. After acquisition, physician salaries are based on market rate salaries.
Of note: Otolaryngology practices may have access to more capital via PE investment than they do via banks. “Venture capital typically has much deeper pockets than a bank,” said Daniel Gold, MD, an otolaryngologist in private practice at ENT and Allergy Associates. His practice—which was created in 1998 when three practices merged—considered three different PE deals. “The access to capital was phenomenal,” Dr. Gold said. “They were talking multiples of what a bank would allow us to borrow.”
PE acquisition can also ease a practice’s business headaches. That’s one reason Neil Hockstein, MD, and his partners at ENT & Allergy of Delaware carefully considered, and ultimately decided to accept, PE investment. “We experienced rising HR costs, difficulty with recruitment of staff, and simple things like managing phone calls, billing, and collection became more and more complex,” he said. “One of the reasons we thought it would be important for us to aggregate—either via partnering with a hospital, aggregating with other practices, or through private equity—is because as our practice got bigger, we noticed we really had limited redundancy in our back-office management staff.”
Access to capital and business acumen are great, but private equity “comes with strings,” Dr. Gold said, which is why his practice ultimately decided against a PE deal. Chief among these is a loss of control, as physician owners become employees after acquisition and cannot make business decisions independently.
The access to capital was phenomenal. They were talking multiples of what a bank would allow us to borrow. — Daniel Gold, MD