By Tom Harbin, MD, MBA and Gary Markowitz, MD
Do you really want that $50 million?
A year ago Scope had an article on private equity (PE) buyouts of ophthalmology practices in which the first sentence was a question: “Do you want $50 Million?” Now the question is slightly different. Read on and be sure you can answer this new question.
Seniors viewed this article in unprecedented numbers and, given that level of interest, we now present an update. One of this article’s authors, Gary Markowitz, MD, participated in one of the very early buyouts and has experienced this phenomenon. The past year has seen a number of new companies enter the arena and many more practices have sold. At the end of this article we list the companies that are engaged in some sort of PE acquisitions.
PE buyouts comprise a number of different features with a continuum from extremely centralized to decentralized.
With this model, the acquiring company takes over all administrative and management functions including billing, collections, optical, etc. Here the doctors lose all control over decisions heretofore theirs. All acquired practices employ the same EMR system. The goals of the new owners are efficiency, control and cost savings. The focus is on acquiring more and more practices with centralized management and maximized short-to-medium term profits, thus making a future sale of the rolled up entities more attractive.
These practices are usually acquired for cash, note and stock. The stock is in the management company, which is essentially a mutual fund of practices which is generally sold in 3-7 years.
Several companies employ this model, and many practices have been acquired under this scenario.
In this model there are fewer centralized services or administrative functions and a smaller corporate structure. Practices have more ability to continue in much the same way as before they were acquired. At the same time, the practice is incentivized to grow by endogenous growth and local acquisitions. The doctors receive money and stock in the buying entity as in the centralized model and frequently have more control in day-to-day decisions and actions as compared to the centralized model.
There is an extreme variant of the decentralized model done by one company where the perspective is much longer term than in the centralized model and the objective of the practices is to grow both internally and externally, thereby increasing practice profitability. As practices are added in different areas and incentivized to grow individual practice profits, the entity as a whole grows. In this model doctors invest only in their own practice and the philosophy is buy and hold and there are no plans of a future sale.
The majority of models are decentralized with different blends of centralized management. A common feature of all models is reduced future income for the doctor in return for a lump sum of cash, taxed at capital gains rates, based on current practice profits- EBITDA. In addition, the doctors receive stock in the new entity which theoretically will grow in value.
Is the bloom coming off the rose?
Paul Koch, MD wrote his last editorial for Ophthalmology Management (March 2018, p. 16) entitled “You may want to think twice about private equity.” The subtitle was “Every positive has a negative, and PE is no exception.” His practice was one of the first to sell to a PE company. As time went by, he noted the lack of long-term planning because of the short-term profit mentality. He noted that “requests for equipment and facilities that would enhance the practice over the long term stalled.” His practice is now with a different company with a different model.
Another quote from his editorial, “Once this model achieves national penetration, it’s hard for me to see why any medical group would go the PE route and be subjected to short-term practice management instead of long-term stability; senior partner cash-out versus all doctors having skin in the game.”
Clearly, there is a lot to consider before embarking on such a journey, if one wants to go there at all.
What to do?
Plan, plan, plan. Due diligence to the max. The article last year listed reasons why a PE buyout might be right for a given practice. The doctors in a practice need to engage in considerable long-term planning before deciding to go with a PE buyout. Be sure you know the model the company employs and whether you can live with the constraints, whatever they may be, as well as the reduced future income. Be sure the details are fair to all doctors in the practice, young and old. In fact, you should have a plan to attract new doctors to the practice. Have an idea of how the change in ownership will affect the culture of your practice and the care of patients.
Get advice from attorneys and other advisors. Matt Owens, a corporate partner at Arnold & Porter in Washington, DC, says, “While PE firms and other potential partners will be doing their due diligence on the physician practice, the physician practice likewise needs to do its due diligence on its potential partner. It’s not always about the money; you want to make sure you and your new partner share the same vision with respect to the future of your practice and how it will grow and be managed.” Be savvy with your choice of attorneys and be sure there is specific experience in the area of practice buyouts. Investment bankers and practice brokers can be very expensive so get the fees set ahead of your engagement.
Doctors should talk to as many other doctors as possible. Reach out to unhappy people as well as happy ones. You want to discover problems. Some ophthalmologists have been squeezed out of their practice with nowhere to go. They may have received a nice sum of money, but does that compensate for losing their practice? Be aware that some doctors enmeshed in a new entity may not be able to be totally frank and open, for legal reasons such as a non-disparagement clauses or the desire to maintain the financial health of their new company. Such doctors could be heavily invested in the company you are considering with a consequent conflict of interest. Your due diligence should be extensive.
After long-term strategic planning, getting advice from knowledgeable attorneys and other advisors, you may decide PE is the way for your practice to thrive. Or, you may not. Selling now is not imperative. Some practices need time to grow on their own before considering this option. Whether you sell or hold, we wish you the best.