Private equity firms are struggling to find buyers for physician groups in the wake of increased oversight and financial pressure.
Rising interest rates, lower evaluations and tougher regulations have scuttled potential private equity-led physician group deals. Healthcare attorneys say a softening sellers’ market has irked doctors, many of whom were promised a pay boost once private equity-backed management services organizations flipped a physician practice to another buyer.
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“There is some frustration from physician groups, saying they are getting squeezed,” said Thomas Hutchinson, a healthcare lawyer at the law firm Barnes & Thornburg who advises physician groups. “The plan was to grow these groups with a second flip, and that has been delayed.”
Over the past decade, an increasing number of physicians have left their private practices to work for corporations, including private equity-funded management services organizations, health systems and insurers.
As part of private equity management service organization transactions, physicians would often take a pay cut, under the expectation they would be made whole after a secondary buyout via another private equity firm, health system, insurer or an initial public offering.
However, interest rates rising over the past four years led to higher borrowing costs — though the Federal Reserve cut rates by half a point Wednesday. The IPO market also stagnated as evaluations cooled.
More states, including Massachusetts, Rhode Island and Connecticut, also enacted laws requiring tougher oversight of private equity-linked healthcare transactions.
For instance, the California legislature passed a bill last month that would require private equity groups and hedge funds to notify and obtain consent from Attorney General Rob Bonta (D) when those companies pursue transactions linked to healthcare. Gov. Gavin Newsom (D) has not signed the bill.
“AB3129 has everyone’s attention now because it could affect several national healthcare platform deals and platform growth strategies starting in 2025,” said John Saran, a healthcare attorney at the law firm Holland & Knight.
These factors deterred buyers, industry observers said.
Healthcare private equity activity was sluggish in the second quarter, accounting for just 10% of all private equity deal value, according to Pitchbook. That fell below the five-year quarterly average of 15%, the data analytics company found.
Antitrust scrutiny is also expected to shift more PE investment from healthcare delivery to digital health, healthcare information technology companies and other sectors of the industry, Pitchbook analysts said.
Without the financial boost from the so-called second bite of the apple, some physician groups have turned to health systems, asking for more shares in jointly operated ambulatory surgery centers, for instance, experts said.
“You could see the fracturing and possible destruction of some practices due to the ongoing compensation scrape remaining in place with no offset provided with the second bite of the apple,” said Michael McCaslin, a managing director at the financial services firm CBIZ and a member of OrthoForum, which is one of the founding members of the Coalition for Patient-Centered Care. The coalition opposes corporate investment in healthcare.
The American Investment Council, the trade association that represents private equity firms, did not respond to a request for comment.
The American Independent Medical Practice Association, which advocates for physicians operating under management services organizations, also declined to comment.
Private equity firms may look to improve physician groups’ financial metrics to offset some of the regulatory and economic pressures. Some of those changes could involve reducing expenses, experts said.
“In the short-term, you could make some overhead cuts that might prop up earnings,” McCaslin said. “Now the question is, do some of those short-term enhancements make long-term problems for sustainable profitability?”
Private equity supporters, such as the American Investment Council, have previously said private equity investment fuels innovation and high quality care.
But, in some cases, private equity has opted to cut rather than invest in physician practices, said Robert Miller, a healthcare lawyer at the law firm Hooper Lundy & Bookman who works with providers.
Cost cutting could make it harder for these physician groups to hit their financial goals and make deals for these physician groups less inviting, he said.
“Private equity will become less attractive to potential sellers, and the pendulum will swing back to traditional entities like health systems,” Miller said. “If you are a large health system with access to capital, now might be a prime time to better align with physician groups.”
