Money Talks: Private Equity Has a Growing Interest in Otolaryngology

 

“In our group, the biggest con was loss of control to a private equity partner,” Dr. Pham said. “From the trends and experiences of other specialties, we saw that this business partner was set to cut excess and rearrange practices based on economics and that these decisions would be made by a suite of business administrators who would not necessarily have a good understanding of the clinical side of the day-to-day practice of medicine.”

“Private equity entities are answerable to shareholders and see the patient care journey through a very different lens than I do as a clinician,” Dr. Setzen said. “I think our obligation to patients is to not increase churn in RVUs [relative value units] but to provide consistent good care.”

Research to date suggests that PE investment may increase prices and adverse events. When researchers with the American Antitrust Center, Petris Center, and Washington Center for Equitable Growth analyzed the impact of PE acquisition of medical practices, they found statistically significant price increases relative to matched control practices, as well as statistically significant relative increases in expenditures per patient (Scheffler RM, et al. Monetizing Medicine: Private Equity and Competition in Physician Practice Markets. July 10, 2023).

A December 2023 JAMA article that examined the impact of PE acquisition of hospitals found that hospital-acquired adverse events increased after acquisition, even though PE hospitals treated patient populations that were younger than the populations at comparable hospitals that had not been acquired by private equity. Researchers discovered a 27.3% increase in falls, a 37.7% increase in central line-associated bloodstream infections (“despite placing 16.2% fewer central lines”), and a doubling of surgical site infections (from 10.8 to 21.6 per 10,000 hospitalizations) despite an 8.1% reduction in surgical volume (JAMA. 2023. doi:10.1001/jama.2023.23147).

There’s also concern that the pressure to generate profits may affect the physician–patient relationship. Because productivity-based incentive systems reward physicians for the number of patients seen, physicians may not be able to spend as much time with patients as they’d like.

“This, in turn, leads to an increased risk of more physician burnout, which may lead to more physicians exiting the workforce,” Dr. Pham said.

Physician compensation may be negatively affected by PE investment as well. Although physicians typically receive a payout when a deal is completed, their annual income in the years to come may be less than they’d otherwise make.

“I think the promise of income repair is hard to realize,” Dr. Setzen said. But Dr. Hockstein believes it can be done. “Ultimately, we do see a pathway toward income repair, and without partnership, we saw potential for long-term income erosion.” 

Collectively, these concerns may make it difficult for practices to recruit physicians post-acquisition. But Dr. Hockstein said his practice has seen just the opposite. “We’ve hired more than a half dozen physicians post transaction, and none of them had an issue with joining us in this private equity model. We’ve recruited well-trained people from Ivy League programs with subspecialty training with more ease than we had previously.”

Factors to Consider for Private Equity Deals

While it’s important to understand the general pros and cons of PE investment, it’s more important for physician owners to understand their market, challenges, and goals. Otolaryngologists who have considered PE deals said the following considerations are crucial.

Know your practice. Given the ever-shifting healthcare landscape, it’s smart to “do a deep dive into your practice state,” Dr. Setzen said. “Look at your accounts receivable, your debt service, and your infrastructure, including cybersecurity and healthcare compliance.”

Identify your practice’s strengths and weaknesses. Look at past trends for recruitment, retention, and billing. “Keep an open mind,” Dr. Pham added. “Though you may discover—and may need to acknowledge—weaknesses and mistakes, you may learn many things about your practice’s health that can help you in the long run,” she said.

Honesty is essential. “Is yours a healthy business, or is it a business where you always think, ‘Next year will be better; we just need to turn the corner?’” Dr. Hockstein said. Think about what you and your partners do well and discuss what needs improvement.

Define your goals. What does your practice want to achieve? Dr. Hockstein’s practice wanted to future-proof its business because theirs is currently the only ENT practice in northern Delaware. “If we aren’t good stewards of this practice, then our families and friends won’t have ENT doctors to care for them,” he said.

He and his partners recognized that limited redundancy among staff threatened that goal; there was no one to pick up the slack if key personnel left or were unable to work.

“In the event that one of our managing partners or our chief operating officer became ill, injured, or retired, we didn’t have a deep bench to help us run our business. So, we were looking for ways to insulate against those risks,” he said.

Think long term. Look beyond your current challenges. Draw upon your collective knowledge of healthcare trends and think about how those trends (and economic factors) may affect your patients and practice in five or 10 years. How will they affect you as physicians?

This is where things can get sticky. Otolaryngologic practices typically include physicians of varying ages and experiences. And while PE deals are almost always a boon for doctors who are close to retirement, they may or may not be beneficial for younger physicians.

“Both of the times that we considered private equity, it came down to the fact that what they were offering would be great for partners who were leaving in the short term but would have saddled our partners who planned to be around for another 10 or 20 years with significant debt,” Dr. Gold said. “As we spoke with partners in different regions, we saw the group start to splinter. At the end of the day, it’s not worth the money to lose a collegial atmosphere.”

Obtain professional advice and legal counsel. If you’re seriously considering an acquisition or merger of any kind, seek professional advice. Dr. Pham recommended retaining legal counsel with experience in medical mergers and acquisitions. You may also need financial services support.

Talk with colleagues as well, especially those who have already considered and/or completed deals. Did their experience match their expectations? What, if anything, do they wish they’d done differently?

There are no clear-cut answers when it comes to the future of medicine. Except, perhaps, this: “Practicing medicine is not going to get easier,” Dr. Hockstein said.

PE acquisition may help some practices to maintain their ability to care for patients, but it may not be a good fit for other practices. To date, Dr. Setzen and his partners have opted to stay independent. So have Dr. Gold and his partners. Dr. Pham’s practice joined a large otolaryngologist-run group, and Dr. Hockstein’s practice agreed to a deal with a PE fund. He now sits on the board of Parallel ENT & Allergy, a physician-directed practice management organization that currently has five medical practices under its umbrella.

That kind of involvement is crucial to the future of otolaryngology. “I do not think we should allow non-clinical administrators to solely determine the course of medicine,” Dr. Pham said. “Physicians are our best advocates. We need to be involved in these decisions.” 

Jennifer Fink is a freelance medical writer based in Wisconsin.