Medicine’s business model is rapidly changing. Following is a summary of this Mid-Year Forum 2018 session examining the current state of private equity buyouts and other options for ophthalmology practices.
Private equity firms’ purchase of ophthalmology practices has yielded recent publicity. Understanding how these firms value practices is important for any ophthalmologist with ownership in a practice, as well as associates considering purchasing an equity position within the practice. This session explored what issues to consider, whether selling a practice to a hospital, private equity firm, an ophthalmology or multi-specialty group; merging with other doctors; or buying in or out of a practice.
More and more practices within ophthalmology and health care in general are seeking to consolidate.
- In an era of reimbursement challenges, rising office expenditures, a more complex regulatory environment, and high costs of new technology, ophthalmologists are exploring options to partner with larger organizations.
- Private equity companies have renewed interest of in purchasing and consolidating eye care practices. Eric Yetter, managing partner at PhysiciansFirst, wrote that there were eight major acquisitions of ophthalmology practices by Nov. 1, 2017.
- Large multispecialty groups and health care systems have also shown increasing interest in the purchase of ophthalmology practices.
- Ophthalmologists are also consolidating into mega groups in order to maintain independent ophthalmic private practices.
Other recent trends include updates to practice valuations, sale leaseback of medical practice real estate, and new approaches to partner buy-in given a rising interest rate environment.
Summary of Comments from Guest Speakers
Robert E. Wiggins, Jr., MD, MHA, Academy senior secretary of ophthalmic practice and a partner at Asheville Eye Associates, moderated the session.
Valuing Your Practice
Mark A. Abruzzo, ESQ – Attorney and Shareholder, Wade, Goldstein, Landau & Abruzzo, P.C.
Traditional valuation methods in ophthalmology have not changed. Goodwill recognition in ophthalmology has very slowly, and fairly steadily, eroded during the past 30 years, but, nonetheless, remains prevalent today. This is, and has been, a trend.
Private equity companies use a capitalized excess earnings valuation method that values practices based upon a multiple of “earnings before interest, taxes, depreciation and amortization” or EBITDA – usually in the range of 5 to 10. This method is not novel, but historically hasn’t been used in ophthalmology when valuing medical practices. ASC management firms or hospitals buying ASCs have used EBITDA. It’s also popular in other industries. Different methods don’t necessarily yield drastic differences in result.
What we are seeing now from private equity is not a trend. This phenomenon also occurred in the 90s. What differs now is the use of higher valuation multiples and availability of cash.
Private equity purchases have not generally increased ophthalmology practice values, nor created a market for doctors/groups to follow for buy-ins/buy-outs and/or sales/purchases.
Doctors are not paying these same prices to buy-in or to purchase. Private equity firms overpay to get practices or markets they desire. This is much like the initial free-agency period in baseball or other professional sports.
Who is My Neighbor? Selling to a Hospital, Larger Group or Health System
Ruth D. Williams, MD – President, Wheaton Eye Clinic; Chief Medical Editor, EyeNet Magazine
Large integrated health systems haven't been interested in acquiring ophthalmology, but this may be changing. There is a shifting strategy to outpatient care with dedicated medical specialty centers, ASCs and a focus on population health through a more comprehensive approach.
Large health systems offer insurance products including Medicare Advantage and employer-sponsored plans with a "not-so-narrow" network of their own physicians and facilities.
These systems are now looking at ophthalmology, both for revenue and for the ability to minimize leakage. Some large health systems are partnering with private equity and have capital to purchase ophthalmology practices.
Selling to Private Equity Firms
Gary Markowitz, MD – Consultant, Medical Practice Private Equity; Medical Director Emeritus, Delaware Eye Care Center, Blue Hen Ambulatory Surgical Center
A sale to private equity firms can be financially lucrative and very tax-favorable. It provides an excellent exit strategy for physicians in their 50s and 60s who are on the verge of retirement or cutting back their time at their practice.
Some, however, would argue that, from a financial standpoint, there is strong evidence that sale to private equity is far riskier for early and mid-career physicians. The variety of opportunities has increased for everyone, including younger physicians. Private equity firm management companies have exploded in numbers, increasing the number in ophthalmology.
A sale generally results in a loss of control, which can be difficult to adapt to. This loss of control can vary substantially by choice of private equity partner firms. The business models vary and include centralized with limited control remaining with doctors; decentralized with some control remaining; and extreme decentralized with zero centralized services and more physician autonomy.
As the physician(s) cedes control, the work environment may become difficult for employees or employees may lose their jobs if you don’t carefully negotiated the contract.
A sale to private equity firms can vary, yielding a diverse set of outcomes. You should carefully study the different private equity company models, and vet them to find the optimal match for your practice. It is important to take advantage of the variety and choose a model that will lead to a satisfying transaction and post-transaction life for you and your employees.
Selling the Real Estate
Many young ophthalmologists who join a private practice expect to become partners. A new partner may be offered partnership in the medical practice real estate entity.
There are pros and cons to buying or selling practice real estate for both the new and senior partner(s). For the new partner, ownership may provide a supplemental source of income, and growth of the equity over time provides another source of funding for retirement. However, the investment may require a significant cash outlay or debt or the investment may not be a good one. The senior partner can create a sense of true partnership in the practice by selling a share of the real estate, but loses some control and financial benefit.
In a rising interest rate environment, such as we are currently experiencing, the current partners may not wish to completely refinance the loan. There are methods besides complete refinancing that will make it easier for new partners to participate in the real estate partnership.
In some cases, a practice may find it advantageous to arrange for a sale-leaseback of the real estate with a commercial investor.
Merging with Other Ophthalmology Practices: Mega Groups
Julia Lee, JD – Chief Executive Officer, Vantage EyeCare, LLC
On Jan. 1, 2018, seven well-established groups in the metro Philadelphia area formed Vantage EyeCare, LLC. It’s the largest private practice in the area, with 45 providers and 25 locations, and includes comprehensive and subspecialty care.
The group formed the LLC to continue practice independence, preserve ownership and remain patient focused. Vantage EyeCare’s integration model allows each practice to maintain autonomy while pooling resources to meet future challenges.
The structure includes a single TIN, NPI and group billing numbers. Each practice operates as a division of the LLC, which is governed by a board of managers composed of two owner physicians from each practice. Key decisions are made by all owner physicians with a “supermajority” vote. All other decisions made at the division level.
Divisions retain current practice management and electronic health record systems. They use the IRIS Registry for clinical data aggregation. Divisions share a common payroll platform, but each one maintains its own payroll and bank accounts. Divisions also retain their name identity as part of transition.
The corporate level services provided include: strategic planning and execution; credentialing and payor contracting; help with compliance and the Merit-Based Incentive Payment System , HR benefits and 401(k) plan; medical malpractice insurance; corporate insurance and management; branding and marketing; and coordinated purchasing power.
Summarizing the Landscape
Private equity sales may make sense for succession planning and/or for infusion of capital to facilitate growth.
Ophthalmologists have a compelling core value of maintaining and improving the vision of those we serve. This continues to remain at the front and center of our mission.
Private equity will likely have an ongoing, but modest, role in ophthalmology. The large health care systems are likely to effect more lasting change than private equity. These are very fluid times and the rate of change creates concern for physicians.
Summary of Audience Comments
The creation of Vantage Eye Care is creating more “at the table” conversations with payers and has led to preferred rates with one major payer to date.
Physician practice valuations for physician-to-physician practice buy-ins and buy-outs are lower than current private equity firm valuations. Private equity firms have access to large amounts of capital and are looking for immediate action with the intent of a future resale market. These high valuations (e.g. 10-13x multiples of EBITDA) are not likely to persist once they have acquired key strategically valuable platform practices. There doesn’t appear to be a current market for resale.
One benefit of a sale to a private equity firm relates to the “time value” of money. Upfront cash has more value now than it does in the future. Taking a payout now may mean less income later, but you also face the uncertainty of life and future earnings. It may take 12 or more years for a physician to break even on cash provided in high multiple deals.
It is more difficult for solo practices to attract interest from private equity firms. EBITDA multiples are lower for the small/solo practice compared to those of large ophthalmology practices. Often the best model for small or solo practices is to affiliate or merge with larger group practices and/or health systems. The solo practitioner will often continue to work for the larger practice until s/he is ready to retire. Large practices also benefit from acquiring small/solo practices.
Antitrust issues don’t typically arise with mergers/acquisitions because the market for eyecare includes optometric providers.
What’s the core difference of private equity firm sales today versus the 90s? Many who sold their practices in the 90s had poor outcomes. The panel suggested the private equity firms today have more cash for purchases and don’t need to seek public cash infusions. The health care market in the 90s was more fragmented than today, with more small and/or solo practices.
Young ophthalmologists are concerned with the possibility of sales to private equity firms and how these will affect their future. The panel suggests that young ophthalmologists joining a practice need to ask about the practice’s vision and whether it’s contemplating a sale to a private equity firm. Try to get clarification in the contract regarding a sale of the practice and its effect on “non-compete” restrictions. If you are a shareholder, you have a right to refuse to go along with the sale. The other partners may buy your shares at market value. Young ophthalmologists are the lifeblood of the practice; attracting and retaining top talent is critical to any practice.
Medicine’s business model is rapidly changing. Larger health systems traditionally have not had an interest in ophthalmology, but the landscape is changing.
Private equity firms have a more prominent presence in ophthalmology than in past years. While selling may be attractive to some owners, you have to weigh the financial result against the loss of control and effect on younger physicians and future recruiting opportunities.
Before selling, you should explore all options. Know the valuation methods and understand the numbers. Know the effect on your employees, including physicians and staff.
Mergers and affiliations represent other opportunities for practices that wish to maintain some level of autonomy but want the benefit of a larger network for patient access. These models have positive outcomes such as efficiencies from using common practice management systems and financial savings through group purchasing.