Why Choose Private Equity?
Physician practices may look to private equity for a number of reasons. Independent private practices may have a tough time recruiting physicians in an era of hospital consolidation and physician employment, said Gavin Setzen, MD. Or, Dr. Setzen said, large independent practices may have limited capital for continued development in growth and infrastructure, while smaller practices may be strapped because of increased regulatory burdens and reimbursement models that favor value-based payment. Other practice owners may be interested in private equity because they feel uncertainty about the future direction of healthcare policy and reimbursement, said Dr. Setzen, who is past president of the American Academy of Otolaryngology-Head and Neck Surgeons (AAO-HNS) and associate clinical professor of otolaryngology-head & neck surgery at Albany Medical Center. He also sees a shift to private equity due to the fact that fewer hospitals are acquiring physician practices and the reluctance of physician practices to partner with hospitals.
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January 2020
Private equity could put some money in their pocket that they could not otherwise get if they went with an internal buy out. —John Fanburg, Esq.
“In an era of reimbursement reform, with recent legislation that eliminates so-called site of service payment differential, the incentive for hospital systems to continue to acquire private practices will decline,” he said. “Personally, I believe that independent groups are increasingly pursuing private equity options over being acquired by hospital systems in order to maintain greater independence and autonomy while securing greater financial security in the private equity arena.”
Craig Kilgore, CMPE, president-elect of ASCENT, an association that provides resources for otolaryngology practices, said practice owners are expressing more interest in private equity as an investment option. The main reason he hears for this interest is the desire to monetize practices for retiring physician partners.
John Fanburg, Esq., an attorney with extensive experience in health and hospital law, said practices with senior physicians who plan on remaining in practice for only three to five more years are particularly interested in private equity deals. “Private equity could put some money in their pocket that they could not otherwise get if they went with an internal buy out,” he said. Practices that are trying to grow and are having trouble expanding may also benefit from private equity investment.
Fanburg emphasized that focusing on a good business reason for investing with private equity is the crucial first step. “When clients come to me and tell me they’ve been approached by a private equity firm to monetize their practice, they often come in with not very good reasons for considering private equity,” he said.
Once practice owners formulate a good business reason, they should work with experts to ensure that negotiations with the private equity firm deliver the kind of contract they want, he said. Along with a lawyer familiar with mergers and acquisitions (M&A), he advised working with an accountant who understands the business of healthcare as well as the many tax implications of these transactions. He also advised partnering with an investment banker to represent the group when pitching to a private equity firm, to ensure that the practice gets the best price. He emphasized, however, not to consult with an investment banker until owners are absolutely sure they want to sell. “Investment bankers only get paid when they close the deal,” he said. “They do add value, but if you’re on the fence, don’t hire the investment banker yet, because they’ll convince you to sell whether you are ready or not.”