Physician 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
“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.