A few years ago, private equity (PE) firms began to focus on independent gastroenterology practices as a target for investment. The first PE investment transaction closed in March of 2016, and now an additional three such partnerships have occurred. Investment firms believe gastroenterology is ripe for investment and subsequent consolidation for the following reasons:
- Gastroenterology is a highly fragmented specialty with many small and mid-sized groups that could be rolled up into larger practice entities that create favorable scalability.
- There are multiple revenue streams through ancillary services that can be packaged into a comprehensive, high-quality gastroenterology practice that has high value for patients and that are delivered outside of a hospital environment.
- There is a growing need for gastroenterology care with increasing demand for chronic GI disease management (fatty liver disease, inflammatory bowel disease, and obesity management, for example) and increasing demand for colon cancer screening.
- Most independent gastroenterologists have natural entrepreneurial spirit.
- The current financial environment is favorable for investment and other sectors of the health care market are rapidly consolidating.
A PE transaction is not appropriate for every practice nor every physician. Further, not every physician group will be desirable for a PE firm. Nonetheless, the current business climate in the GI sector is generally favorable for accepting the PE capital model.
The following are 10 common questions dealing with a PE transaction:
1. What does a PE deal mean for the independent gastroenterologist? A PE transaction and the resulting formation of a managed services organization (MSO) will be a liquidity event for all current owners in the acquired practice. Financial benefits are typically substantial, especially when considering the funds can then be invested by the individual physician and often the money paid can be taxed as capital gains rather than ordinary income. In exchange for the pay-out, the physician group relinquishes managerial control of nonclinical decisions through a managed services agreement (MSA) with the MSO. The MSO is typically formed by the partnership between the practice and the PE firm and provides all nonclinical services to the physician group.
2. What autonomy will be left after signing a PE deal/MSA? Autonomy after the deal closes is determined largely by terms written into the contract prior to the closing and will differ among the various PE firms. There will be conditions important to the MSO and some important to the practice that can be codified in the contract. These conditions are spelled out in an employment agreement with the continuing physician group. Both the PE group and physicians will want to ensure that practice culture is not negatively impacted through an acquisition. Physicians must feel that they retain complete autonomy when it comes to clinical decisions, and the PE group must avoid interfering in the patient-doctor relationship. The PE group wants to improve nonclinical management of the practice, without interfering with the actual care of a patient. Physicians may influence nonclinical managerial decisions, but providers must understand that all nonclinical managerial decisions ultimately will be made by the MSO and PE firm.
