Not all PE firms are the same. That’s why physicians must approach a sale with caution.
Who hasn’t heard the story about a private equity deal gone bad? It usually goes like this: PE firm acquires old and beloved business, then slashes overhead and sells off bits and pieces of it, leaving a carcass and bad feelings.
That’s not how it has to be, says Gary Wayne Stewart, MD, FAAOS, a foot and ankle specialist at Resurgens Orthopaedics in metropolitan Atlanta, a successful practice that partnered with private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson) in December 2021. “Instead of becoming stagnant, our plan was to offer the next generation of care,” he says. The plan seems to be working out.
Private equity firms have been busy acquiring physician practices across several physician specialties since 2012, increasing from 75 deals in 2012 to 484 deals in 2021, according to a study from the American Antitrust Institute. At the local level, these firms are acquiring significant shares of physician practice markets. In 28% of metropolitan statistical areas (MSAs), a single PE firm has more than 30% market share in terms of full-time-equivalent physicians, and in 13% of MSAs, the largest PE firm’s market share exceeds 50%.
Case in point: Gastro Health, a gastroenterology medical group in Miami, Florida, which in 2021 was purchased by a private equity arm of a Canadian pension fund. Today the practice has a presence in seven states – Florida, Alabama, Washington, Virginia, Ohio, Maryland and Massachusetts – with over 375 physicians and 150 medical offices, infusion centers, imaging services and specialty pharmacies. Additionally, Gastro Health owns and operates endoscopy centers in five states and operates pathology and anesthesia services as well.
Why now?
Two years ago, Physician Growth Partners, a Chicago-based firm that represents independent physician groups in transactions with private equity, reported that much of private equity’s interest in healthcare was fueled by record-low interest rates, a prolonged bull market, and all-time-high levels of uninvested capital, or “dry powder.” Dental consolidation has been privy to private equity investment for over 20 years, while dermatology, eye care and pain management have been consolidating for over five years, according to the firm. More recently, specialties including orthopedics, gastroenterology, urology, podiatry, ENT and women’s health have begun to consolidate as well.
A private equity partner that is both an optimal cultural fit and offers a cohesive growth strategy enables a physician practice platform to scale significantly more rapidly than it could independently, according to Physician Growth Partners. Healthcare private equity groups typically look to scale physician practice platforms over a five-to-seven-year investment cycle before evaluating an exit. These investors continue to be attracted to physician specialties that benefit from growth in the aging population, supply and demand imbalance, and the growing incidence of chronic conditions.
Healthcare private equity firms often employ a “platform-based” strategy, says the company. They make a large initial investment with a regionally dominant practice that serves as an anchor, then invest in smaller practices to establish multistate and regional dominance. Another strategy is to acquire strong, clinically driven practices across multiple geographies, establishing a brand known for exceptional patient outcomes.
Are we OK with this?
Many physicians worry that private equity will interfere with patient experience. However, given the right fit, PE firms “provide scale to allow independent practice groups to survive and maintain their autonomy,” says Michael Kroin, founder and chief executive of Physician Growth Partners.
But not everyone regards PE firms favorably.
Prices for physician services increase 1.5 to 3 times in markets that are highly penetrated by private equity, according to the American Antitrust Institute. This is true for key areas of medicine, including gastroenterology, dermatology and obstetrics & gynecology.
In October 2021, the USC-Brookings Schaeffer Initiative for Health Policy published a report titled “Private equity investment as a divining rod for market failure,” in which authors blamed PE-backed physician staffing companies and air ambulance operators for exacerbating out-of-network surprise medical billing. The AAI report identified three ways that private equity’s growing healthcare involvement could harm consumers and physicians:
1. Private equity may more aggressively exploit market failures and payment loopholes than other potential acquirers, which could result in higher healthcare spending and patient and taxpayer costs.
2. PE’s growing investment in physician practices may accelerate horizontal consolidation in certain specialties, which could lead to increasing prices and/or poorer quality of care.
3. Driven by tax and regulatory advantages, private equity might “distort the organizational form of physician practices away from physician ownership,” which could adversely affect patient care.
Their warnings notwithstanding, the AAI report’s authors add this disclaimer: “[It] is unclear whether private equity investment is itself a problem or whether, in the absence of private equity, other sources of capital – such as public equity, venture capital, health systems and insurers – would similarly exploit existing market failures and legal loopholes in the health care system.”
GI Alliance
In 1978, Lawrence Kosinski, M.D., founded the Illinois Gastroenterology Group, now the largest such group in Illinois. In 2018, its partners started exploring a relationship with private equity. In 2019 they sold the practice to the PE-backed GI Alliance, which today is the largest PE-owned gastroenterological practice in the country, with 900 gastroenterologists in multiple states.
“One of the most important things that has happened – and this is across the physician spectrum – is the growth in the knowledge that must be mastered to practice medicine effectively,” says Dr. Kosinski. “Doctors just want to be doctors and put the management of their practice into the hands of somebody who will have their best interests in mind, such as a private equity firm.”
In many PE deals, physicians continue to control the medical side of the practice while a management services organization – owned predominantly by the PE firm – takes care of the business side (e.g., HR, contracting, billing, etc.), he says. In such deals, physicians maintain revenue earned from patient care but then give the MSO a portion of their earnings – usually annually – to fund its operations.
“What’s intoxicating about private equity is the money involved,” says Dr. Kosinski, who prior to his retirement from the GI group founded SonarMD, a firm that offers care plans for physicians treating patients with complex chronic diseases. Upfront payments are enticing, but doctors need to carefully examine the terms of any deal to ensure they and their patients will benefit from it long-term, he says. “The best thing that can happen is, less upfront money is distributed to the doctors and more is put back into the practice so a deep clinical infrastructure can be built.”
“There’s obviously risk in any deal,” says Kroin. “The question is, how do you mitigate it? How much control will the physicians maintain after the transaction is completed? Will they be able to practice medicine as they have historically and make decisions at the local level? There’s a reason a practice is successful for 30 or 40 years. You want to maintain that culture and DNA, and make sure it is written into the governance documents.
“Understand that not all private equity groups are created equal,” he adds. “Each one comes with its own opportunities and risks. Some PE firms want to maintain full control, but others leave control to the local entity. That’s why it’s so important to navigate through the noise.”
Resurgens
“PE-backed groups shouldn’t practice medicine differently than any others,” says Dr. Stewart at Resurgens Orthopaedics. “Patients shouldn’t notice any differences at all, except for positive things, like improved access, innovation, ease of service – things that any well-functioning practice should offer. But people get scared. They seldom hear of successful deals but are almost certain to hear about the bad ones.”
Resurgens and Welsh Carson formed their venture – United Musculoskeletal Partners – in December 2021. Today UM Partners has 400 providers in 56 locations, primarily in the Atlanta and Dallas metropolitan areas.
“We were the most successful orthopedic practice in the Atlanta metro area,” says Dr. Stewart. “We had 95 physician partners and a strong leadership structure in place. We were doing well. But it would be disingenuous to say we weren’t feeling headwinds. We were feeling pressure from hospital-based practices, market consolidation, unfavorable regulatory developments, and a gradual move toward value-based payment from fee-for-service. We knew we would need capital to stay competitive.”
Initially the group’s doctors were skeptical about private equity. Would a PE partner support growth? After all, some PE firms had built their reputation primarily around cost-cutting. “But we felt that Welsh Carson – which is well known in healthcare – could offer something different. They have deep experience in operations, reimbursement, the revenue cycle. We wanted to continue to change, to invest in state-of-the-art care, to be on the cutting edge. We made it clear we wanted a true partner, and we felt Welsh Carson could be one.
“Our physicians maintain complete autonomy over clinical decisions,” he says. “We have been able to offload many business functions, which only increases the amount of time we spend with our patients. We have established a physician leadership board, which oversees governance and quality of patient care. We have made sure there is a place for young physicians and that all specialties are treated the same. This is about partnership, medical innovation, patient care and finding a way to maintain physician autonomy in the clinical arena. We’re two years in. The idea and the goal was to get better, to not stand pat.”
What’s next?
Despite their growth, private equity firms face challenges in healthcare, including scrutiny from the federal government.
In June 2023, for example, the House Energy and Commerce Committee recommended a bill (H.R. 3561) that would require entities, including physician practices with more than 25 physicians, to report annually to the U.S. Department of Health and Human Services their business structure, mergers and acquisitions, and changes in ownership.
In September, the Federal Trade Commission sued U.S. Anesthesia Partners, Inc., the dominant provider of anesthesia services in Texas, and private equity firm Welsh, Carson, Anderson & Stowe, alleging the two executed a multiyear anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients, and boost their own profits.
In addition to the political headwinds, PE firms are facing some economic challenges as well.
Last fall, Politico reported that “a wall of debt” is coming due for private-equity-owned hospitals and nursing homes. “Cheap and flexible financing that helped big Wall Street buyout firms snap up health centers, long-term-care facilities and provider networks in recent years has evaporated. Higher borrowing costs are chipping away at margins. And bankruptcies at private-equity-owned businesses are on track to reach decade highs, which could result in job cutbacks.”
Physician Growth Partners’ Michael Kroin says rising interest rates and capital costs have already slowed down the pace of PE acquisitions and have created an imbalance between the expectations of sellers and buyers. “Sellers are expecting to receive the same sort of value that their colleagues may have received in the prior 12 to 24 months, but buyers today can’t pay as much as they historically have.”
There’s no doubt PE-backed groups will continue to make acquisitions, but they are modifying their approach, says Kroin. “In the past couple of years, a lot of these PE groups have built density within the same specialty. To keep growing, some are bringing together specialties that are adjacent to or that complement each other.” He cites Unio Health Partners, a Triton Pacific Capital Partners portfolio company, which built a urology practice but has since added gastroenterology and radiation oncology.
Dr. Kosinski advises physicians in PE-owned groups to consider what might happen to their practice when the firm decides to sell it. “The bottom line is, being a good doctor has become much more intensive given the demands of the profession, and doctors will continue to be employed by some entity,” he says. “The question is, who will be the consolidator? Hospitals look like they have an edge on that, but insurance companies are becoming major players. Whoever bears the risk of the cost of care will be the ultimate convener.”
Sidebar:
Antitrust and private equity
In September the Federal Trade Commission sued U.S. Anesthesia Partners, Inc. (USAP), the dominant provider of anesthesia services in Texas, and private equity firm Welsh, Carson, Anderson & Stowe, alleging they “executed a multiyear anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients, and boost their own profits.”
The FTC’s complaint, filed in federal district court, alleges that USAP and Welsh Carson:
- Executed a roll-up scheme, systematically buying up nearly every large anesthesia practice in Texas to create a single dominant provider with the power to demand higher prices.
- Further drove up anesthesia prices through price-setting agreements with remaining independent practices.
- Sidelined a significant competitor by striking a deal to keep it out of USAP’s territory.
The FTC alleges that USAP’s multi-pronged anticompetitive strategy and resulting dominance has cost Texans tens of millions of dollars more each year in anesthesia services than before USAP was created.
USAP denies the FTC’s charges. In a statement, Dr. Derek Schoppa, a practicing USAP physician in Texas and a USAP Board member, said, “The FTC’s intended outcome threatens to disrupt and restrict patients’ equitable access to quality anesthesia care in Texas and will negatively impact the Texas hospitals and health systems that provide care in underserved communities.”
Dr. J. Scott Holliday, another USAP physician in Texas and a USAP Board member, called the FTC’s actions “especially concerning given this moment in time when the healthcare infrastructure in the United States is facing multiple headwinds such as provider shortages, clinician burnout and turnover, and health disparities. While we fight the FTC’s overreach and misguided allegations, we will remain true to our mission of providing high-quality anesthesia care in the communities we proudly serve.”