Private Equity Investment in Your Medical Practice: Is it Right for You and Your Patients?

Private Equity Investment in Your Medical Practice: Is it Right for You and Your Patients?

by Susan D’Antoni

Medical practices are hot commodities these days especially in particular specialties, like dermatology and ophthalmology. Investment companies, large for-profit corporations, insurance companies and hospitals are recognizing there is profit to be made from investing in or acquiring medical practices. Sometimes the investment companies or purchasers of medical practices have had nothing to do with healthcare previously which leaves many physicians scratching their heads and wondering if profits are being put ahead of patient care.

At a time when physicians and practice administrators are looking at many options to help their practices survive and thrive, equity investment represents an often attractive option when remaining independent, unaligned or going concierge do not seem to be the right answer in this ever-increasing challenging world of medicine.

How do you know whether your practice would be attractive to equity investors? In this case, bigger is probably better. A healthy bottom line with more patients, more physicians, more procedures, more locations, and more brick & mortar are what equity partners are usually looking for when they are considering acquisition or capital infusion. Why? Because this capacity produces greater profits.

Your practice’s positive financial health makes your practice more attractive to investors. The acronym, EBITDA, may be a new one in the medical practice vocabulary that physicians are not as familiar with as ACO, IPA, or COPD. EBITDA (earnings before interest, tax, depreciation and amortization) is a measure of a company’s operating performance. According to MarketWatch, some deals include “EBITDA multiples as high as 15 times” which physicians find appealing when faced by declining payment from insurers.

Clearly, every deal doesn’t include such attractive terms, but yet, having capital infused into the practice from an investment entity is good, right?

There are pros and cons to every business decision. The same goes for considering equity investment or acquisition of your practice. These are issues to consider according to Dermatology World’s “Pulling Back the Curtain on Private Equity” [January, 2018]:

Pro 1: Immediate Payout if your practice is valued favorably. Because the market is hot, especially in dermatology, the amount of capital being infused by equity investors is increasing accordingly.

Pro 2: Relief of administrative duties. Through consolidation of back office responsibilities, physicians are freed up to focus on patients.

Pro 3: Financial backing for ambitious expansion. If you have visions of more locations or expanding the services your practice offers, private equity can help you achieve those dreams.

Con 1: Loss of control. Understandably this is often physicians’ most significant concern. Will the decisions made by the equity partner affect patient care? Will long-term employees be terminated without consulting you? As profit takes on an even greater focus, some equity firms are reported to have replaced more trained health care professionals with lesser trained in order to produce more profit.

Con 2: Conflict of interest. Putting the patient first is your first concern even though your own financial success may be affected. Understanding how important decisions are made prior to selling your practice or having significant equity investment is critical.

Con 3: Weighing the pros and cons. Do your homework by engaging the right professionals to advise you. Talk to your medical colleagues who have experienced working with equity partners. Research what’s happening in your own specialty related to equity investment, and know the major equity investment players and their track record.

Maryland is a hotbed of equity activity. Know your options. Do your homework, and decide if an equity partner is right for you.

 

Susan G. D’Antoni, FAAMSE is CEO of Montgomery County Medical Society. She can be reached at sdantoni@montgomerymedicine.org.