Why private equity money targets physician practices

The emergence of private equity funding across physician practices has continued into 2019, with these firms targeting high-value platforms that can turn around a nice profit in a sale just a few years later. The phenomenon has led to a decline in independent physician practices and created new implications for care services, according to an article in the Annals of Internal Medicine.

The rise of PE money in the field has led to increased difficulty in capital raising for independent practices and tougher competition when it comes to recruiting physicians against practices owned by hospitals, PE firms and health insurers.

When PE firms make an acquisition in physician practices, they typically take on 60 percent to 80 percent ownership, though they may take a minority stake in larger medical practices, according to lead author Lawrence P. Casalino, MD, PhD, professor of healthcare policy and research at Weill Cornell Medical College, et al. The researchers interviewed 21 individuals, including consultants, attorneys, investment banks and leaders within PE, physician practices and health insurers.

While amounts vary, the cost can be as much as $1 million to $2 million per physician, and physician owners who keep a stake in the practice share in the growth objectives with the PE buyer.

Private equity firms anticipate returns of 20 percent or more from acquiring physician practices, according to researchers, with aims to sell practices within 3 to 7 years. To do this, PE firms look for ways to grow physician platforms, purchasing large, well-managed and reputable practices that also have some value-add. Firms look to add other smaller practices to their platform and increase revenue by bringing on new services. They may also focus on specialties with high potential for income from elective and ancillary services, such as dermatology.

A new sale can be a boon to physician owners, but also creates a “schism” between owners and non-owners in the field, the authors noted.

With PE firms and other mergers across the space creating significant competition and headwinds for independent practices, only those that are well-capitalized purchasers will be able to “shelter from the storm,” the authors wrote.

The influx of PE money into the healthcare space has helped push up valuations that may have slowed down the pace of investments into the space, according to a report from 2018. However, smaller physician practices, once acquired and added to a larger platform of physician services, can be an immediate value-add for PE firms, according to Casalino and colleagues.

With all the momentum in the space, the overall impact is still unknown.

“Many of the largest practices have already been acquired by a hospital, insurer, or private equity firm,” Casalino et al. wrote. “No peer-reviewed evidence examines the effect of private equity acquisitions on the quality and cost of patient care; physician professionalism; or the experience of patients, physicians, or staff; little evidence examines the effect of hospital or insurer acquisitions.”

Wherever these physician practices end up––in the hands of several PE firms over multiple sales, or ultimately in the pockets of hospital systems––independent practices have more control of their destiny, the article concluded.