The private equity proposition
Private equity firms typically pay a great deal more for practices than hospitals or even many large private practices, according to James D. Wall, an attorney in Winston-Salem, N.C., who has handled many private equity deals. Mr. Wall said private equity often organizes physicians around one specialty. One advantage these physicians have over hospital-employed physicians is that they aren’t under pressure to refer within a network.
Private equity companies set values for practices on the basis of their earnings before interest, taxes, depreciation, and amortization (EBITDA), said Howard Bogard, an attorney with Burr & Forman in Raleigh, N.C., who has handled many deals. Mr. Bogard said the amount physicians are paid is usually between 4 and 12 times’ EBITDA, so if your practice is earning $1 million a year in EBITDA, you would get $4 million to $12 million for it.
Of the total price tag, “Doctors get a hefty immediate payment when they sell,” Mr. Bogard said. “It might be 70% of the purchase price up front, and the 30% left over is equity in the buyer. The private equity firm then sells the practice 5-7 years later, and at that time, the physician’s equity is converted to cash and equity in the new buyer, often at the same 70/30 ratio. The idea is to keep the doctor interested in staying.”
Private equity firms expand practices to receive more favorable reimbursements and achieve economies of scale, according to Jane Zhu, MD, an assistant professor of medicine at Oregon Health & Science University, Portland, who has studied the phenomenon. Dr. Zhu said these firms may enhance profits by contracting with Medicare Advantage plans, joining accountable care organizations (ACOs), having their physicians work longer hours, and using advanced-practice clinicians instead of physicians.
“They want to make a large return in the order of 20% per year over several years, but they don’t want to strip the practice of value, because they’ll need to sell it to a new investor,” Dr. Zhu said.
When doctors sell to a private equity firm, they become employees and often have to take a pay cut, but their pay may rise again as new efficiencies are instituted. This occurred for partners in Minnesota Eye Consultants (MEC), an 11-member ophthalmology practice in Bloomington, Minn., that helped found Unifeye Vision Partners (UVP), a private equity company financed by Chicago-based Waud Capital Partners.
“When we sold the practice in 2017, we expected to see a 30% cut in the partners’ personal income,” said Richard L. Lindstrom, MD, who headed MEC until he retired last year. “Now, coming into the 6th year, all of the former partners who are still working are earning 10% above presale levels, except for one doctor who wanted to work fewer hours.” These doctors aren’t working longer hours but rather are benefiting from efficiencies, such as adding scribes and improving scheduling, he said.
Private equity brought discipline to the practice, said Dr. Lindstrom, who still sits on the Unifeye board. “In an independent practice, the partners may decide on a new piece of equipment because it would be fun to have, not because they’ve done a financial analysis,” he said. “We don’t wing it anymore.”
On the other hand, according to Dr. Zhu, some private equity firms may use draconian methods to improve efficiency. “Doctors may be expected to order or perform more services or work faster or longer to reach a certain threshold,” she said.