Doctors, deep-pocketed investors are coming for your primary-care practice, whether you’re prepared or not. Until recently, private equity investment in U.S. healthcare had mostly flowed to physician groups in high-end specialty fields.
Since 2016, though, private equity has begun spreading its net to target primary-care physician groups. The basic model is the same—the firms provide an infusion of cash and business expertise while setting clear performance targets leading up to a sale. Physicians get two seductive bites at the apple: the initial cash injection and another potential windfall from the sale.
I meet with a lot of private equity people, and they generally are not shy about touting their success stories. So it may be telling that I have yet to hear of an exit from such a primary-care deal considered successful by both investors and physicians. The truth is there’s a big gap between the fantasy and reality of private equity involvement when it comes to primary care.
Even with a cash infusion and an efficient operation, the economics of primary care make it very hard for practices to make the multiples these firms demand. The other key misalignment is timing. Primary care’s long-term prospects are heavily dependent on the shift from the fee-for-service payment model to a value-based model. But that is going to take five to 10 years to bear fruit, whereas private equity firms usually have an exit horizon of about three years.
If their multiples aren’t hit, private equity firms may be able to take an “enhanced ownership position,” i.e., a lot more than initially agreed upon, leaving physicians with far less control than they expected. For this reason, doctors must go into these deals with their eyes wide open. Physicians are inherently some of the smartest people around and don’t tend to lack confidence. When dealing with private equity, though, they are effectively operating in a foreign land and speaking a new language, one they need to admit they can’t speak with any fluency.
Too often they focus only on the upside. One of the most important things they can do is to take emotion out of the decisions by bringing in a third-party expert that can assess the offer on its true merits.
Physician groups should also know that private equity capital is not the only way to grow their business. There are other options, especially for groups that have an entrepreneurial DNA and want to remain independent because they believe they can do better on their own.
In the end, all private equity is really offering is capital and some business expertise, and doctors rarely consider the true cost of that capital. If physicians are savvy enough to work out these solutions on their own, then they may be able to live without private equity and retain a lot more control over their business. After all, if they have three-quarters of the cookie recipe and all that they’re missing is chocolate chips, why not just go get their own?
Fortunately, we are seeing some creative capital-raising alternatives emerge.
One option is for physician groups to enter into joint ventures with larger healthcare systems, such as hospital groups or insurers. The hospital groups can become a subordinated joint venture partner rather than ending up owning the whole practice. For big health systems, such arrangements can also be a useful physician-alignment tool and help them to expand market share.
There are also steps that practices can take by themselves to enhance their efficiency, revenue and operations. All it really takes is the will to make changes. How can your process flow be improved? Are your doctors spending too much time on the computer rather than seeing patients?
And if a practice has already hired able people on the business side, then the doctors need to listen and pay heed before wading into a private equity deal. The consequences of getting it wrong could be significant.