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  • Private Equity – Round Two

    Private-equity acquisition of ophthalmic and other medical practices has grown significantly in recent years. Mid-Year Forum 2019 once again examined this trend during a session on what it means for the profession.


    There has been recent publicity regarding the purchase of ophthalmology practices by private equity firms. Physicians did not fare well in an earlier round of practice purchases by physician practice management companies in the 1990s. Is this time different? Hear from physicians who have explored or sold their practices to private equity firms and gain insights from their experience, whether you are considering selling your practice or joining one owned by a private equity firm.

    Background Information

    The business models of healthcare delivery are rapidly changing. There is increasing consolidation of practices within ophthalmology and health care in general. The Physician Practice Management Company buyouts of the 1990s did not fare well for physicians. Today, private equity (PE) companies have a more prominent presence in ophthalmology than in past years.

    Practices considering a move to PE have potentially seen high valuations in recent years, making a sale more attractive to senior partners. Although selling may be attractive to some ophthalmologists, weighing the financial impact against the loss of practice management control and impact on the younger physicians and future recruiting opportunities must be considered.

    Larger health systems traditionally have had a limited interest in ophthalmology, but the landscape is changing. Mergers and affiliations with other ophthalmology practices or organizations represent other opportunities for practices that wish to maintain some level of autonomy but have the benefit of a larger network for patient access. Efficiencies using common practice management systems and financial savings through group purchasing are positive outcomes with these models.

    Summary of Comments from Guest Speakers

    Robert E. Wiggins Jr., MD, MHA, senior secretary of ophthalmic practice, American Academy of Ophthalmology
    Partner, Asheville Eye Associates (co-moderator)

    Private Equity Round-One: The 1990s

    Physician Practice Management Companies (PPMCs) of the 1990s served as the forerunner of today’s private equity (PE) companies which are purchasing physician practices. The promise of PPMCs to consolidate physician practices was a means for physicians to increase their leverage in contracting with managed care organizations and maintain access to patients. In addition, PPMCs promoted management expertise which could streamline practice operations and reduce costs. Money from venture capitalists and stock sales was used to fund practice purchases and payments from acquired practices were also used to fund further acquisitions.

    Thousands of physician practices were purchased in the early-mid 1990s. The two largest PPMCs were Phycor and MedPartners, which combined had nearly 10,000 physicians in acquired practices by the mid-1990s. Revenues grew rapidly initially, but by the late 1990s, most PPMCs were reporting losses, and stock prices of those companies that had gone public had fallen precipitously. By the end of the decade, this business model had run its course.

    Physicians during this time had great concerns about their ability to compete without being part of a large network of physicians. The reality was that PPMCs did not provide these physicians with either significant contracting benefits or operational efficiencies.

    Physicians contemplating the sale of their practice to PE firms would do well to familiarize themselves with lessons learned from the experience with PPMCs of the 1990s. Is it different this time around? For the current private equity business model to be successful, PE firms need to:

    1. provide a true value proposition to physicians in terms of income prospects and reduced administrative burdens
    2. develop a model with effective governance that aligns incentives and engages physicians, and
    3. tailor the new company to allow it to thrive in the local market.

    Private Equity – Round Two

    Gary Markowitz, MD, consultant, Medical Practice Private Equity, founder and medical director emeritus, Delaware Eye Care Center, Blue Hen Ambulatory Surgical Center

    Private Equity – Is this Time Different?

    The larger question is how sustainable is private equity (PE) when compared to the Physician Practice Management Companies (PPMCs) of the 1990s. Unlike the PPMCs of the ’90s, PE companies are well-funded and do not depend on going to the public market to turn a profit. In most practice buy-out models, the private equity company gains full practice control.

    Practice valuation is a critical first step when considering a sale and involves a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA measures the practice’s operation performance, or net profit.

    Adjusted EBITDA (AjEBITDA) = EBITDA minus all doctors’ wages. PE companies use Adjusted EBITDA to value a practice. PE practice valuations have increased over the last five years (2014 to 2019).

    • Platform Practices (larger practices): Adjusted EBITDA > $2 million
    • Satellite (smaller practices): Adjusted EBITDA < $2 million                         

    Platform Practice Value: 2014 = 6 x AjEBITDA                2019 = 8-14 x AjEBITDA
    Satellite Practice Value: 2014 = 2-4 x AjEBITDA              2019 = 5-8 x AjEBITDA

    PE Companies buy with possible intent to:

    1. sell to larger PE Companies
    2. take the corporation public or
    3. find alternate institutional investors

    Their goal is to sell the practice five to seven years after purchase with a growth in the value of the stock to three to five times the initial value. Practices are acquired for higher prices now leading to less profit initially and long term if multiple sales occur.

    Private equity sales may create different classes of stock and practice owners should be aware and research the implications. “PARI PASSU” – creating an equal class of stock for all investors.

    Has private equity interest peaked? In 2019, valuations have not risen. Healthcare reform could put a cap on consolidations profits. Downturns in the market could also result from a recession and a lack of attractive practices to buy. Private equity will likely continue to be a factor in ophthalmology, but not a driving force. It is critical to be conservative and do your due diligence before deciding to sell.

    Administrator Perspective

    Dustin Carter, director of clinics, M&M Eye Institute - A division of American Vision Partners, a portfolio company of H.I.G. Capital

    M&M Eye Institute partnered with American Vision Partners (AVP) an eye care physician services organization. H.I.G. Capital is the private equity sponsor for AVP.

    Know what your motivations to sell are, as these will define your future.

    • Early preparations include investment bankers and finding the best legal team.
    • Review examples of contracting.
    • Identify potential buyers and create one due diligence period to review multiple offers to purchase.
    • Know which PE companies are entering your area.

    Our practice reviewed eight offers and narrowed down to three before making a final decision. It is critical to document every step of the process in writing and not just verbal discussions/agreements. It is important to identify what is the driving force behind the PE Company’s interests in buying the practice.

    Integration of business processes is important to the decision to sell. Human resources, IT, optical, revenue cycle management, accounts payable, credentialing of providers and surgery processes are critical. These changes can impact overall revenue. What type of support will the PE company be providing? Decisions about facilities, how purchases are made, who provides the training to staff and providers, and communications that are consistent and timely must be a part of the integration process.

    The process of selling your practice is stressful. The greatest success is achieved with a team approach. It is critical to establish a command center with good communications flow. There is a great deal of actions to track; it is important to separate the emotions from fact.

    Successes of PE sale for M&M Eye: Greater Benefits, Better Training and Guidance, Contract Negotiation Power, Expanded Services to patients, Capital for Development. The sale did create new bureaucracies, but with new benefits as well. Cons do exist with the sale, but are within reason.

    Private Equity: Expectations and Preparations for Change

    K David Epley, MD, physician, Children’s Eye Care Pediatrics Medical

    When considering a sale to a private equity firm or other company, you must consider the purchase price which is complex because of taxes, opportunity costs, the compounding effect of interests, retirement timelines, equity/stock in the company, company plans and stability. PE Firms won’t assume any liabilities – any debt the practice has will need to be paid off. Do your due diligence: Know the company, have frank discussions with partners and staff.

    Know the effect on partners in different stages of life and practice. PE firms typically offer employment contracts and pay physicians a base rate with bonus, often based on wRVU productivity. A restrictive covenant is common practice. Know the impact on your staff. Benefit structures, professional development allowances, PTO and human resource policies are just some areas that will change.

    It is important to hire a good attorney experienced in PE negotiations, BUT you still need to carefully read the contracts. Get financial advice from your practice administrator and/or accountant

    Plan for the optical if you have one. You must plan for the real estate if you own the building/land. Take time to list all the Pros and Cons of selling your practice. Know that the sale will have a global effect on your staff and physicians. The transition will require many meetings to address changes/questions. Pay attention to post-sale details: insurance contracting, IT considerations, support for office staff, patient flow, etc. Expect the unexpected and give the transition a year plus to stabilize. 

    How a Practice Should Manage Due Diligence

    Kimberly Drenser, MD, PhD, physician at Associated Retinal Consultants, director at Pediatric Retinal Disease Molecular Genetics Laboratory

    The decision to engage a PE deal is the biggest decision of your career; physicians are uniquely inexperienced in this arena. A sale is not “easy money.” The entire process requires careful due diligence by the practice. Post deal outcome should be “thrive” not just “survive.”

    Exploring the option is a full-time job and requires a carefully assembled team of professionals for the practice including: selling group members, bankers, accountants, and legal team (attorneys). The buyers’ team includes: buyers, accountants and attorneys. Expect the total time invested to be one plus years.

    The greatest amount of time is spent with the bankers and it is important to have good rapport. There must be a willingness to understand your practice’s unique culture. Bankers help determine valuation, structure and deal process. You should interview multiple bankers before identifying the best for the transaction. Negotiate the banker’s compensation knowing the full details of expected costs.

    The bankers and legal team work together to evaluate the proposals from prospective investors and help negotiate and consummate any proposed transactions. The legal team provides direction with purchase agreement, legal/tax impacts, asset distribution and compliance issues found with buyer’s due diligence. You will spend the most money on having the best legal team, but they are essential to the process and help achieve the best possible outcome for the seller.

    The extra time you spend developing the best financial and legal team will pay off in the end. The dollars and time invested will be well spent when a deal to sell is made.

    Practice Impact for the Young Ophthalmologist

    Arvind Saini, MD, MBA, physician practice owner, Hidden Valley Eye Associates; Graduate AAO LPD (co-moderator) 

    There are compelling reasons for the senior ophthalmologist to sell a practice. Higher technology costs, burdensome administrative regulations and an ever-changing payment structure are all concerns. Incentives to sell include a large cash payout with continued employment and retirement planning.

    Young ophthalmologists (YOs) are naïve relative to their college peers, as they have never had to seek a professional job. They are also naïve relative to practice management and employment contract negotiations. These decisions are made during their last years of residency and/or fellowship and can cost them hundreds of thousands of dollars in lost opportunities. In the first two to three years the financial and professional benefits may be better with PE. After the traditional associate period in PE-owned practices, the potential equity and max salary as well as physician control are all different and can be less satisfying as private practice with an option for partnership.

    There are YOs who are entrepreneurial and motivated to run a practice. The involvement of private equity in ophthalmology does not have a clear benefit to YOs, especially those that are interested in partnership with traditional private group models.

    The impacts of leaving a PE practice are also a concern to the YOs. If you leave a PE practice and you have equity, how do you get your cash back? Is there a difference in the “class” of your stock? How long do you have to stay if you don’t like the changes? If you leave, how will your non-compete impact you since many PE ophthalmology companies extend across state lines. If you stay and the PE is sold again, what will the next owner be like?

    Transparency in discussing potential PE transactions to prospective YO employees is critically important to allow them to make informed decisions about their career choices.

    Summary of Audience Comments

    Questions addressed by YOs when interviewing for new junior positions have changed with the growth of Private Equity. Questions that commonly raise discussion include:

    1. Do you own the practice?
    2. Do you plan to continue owning?
    3. Are you considering a sale to private equity?
    4. Do practices owned by PE really have better contract negotiation with payers?

    The panel suggests that often PE does get better contract pricing, but much depends on the penetration of the market. Markets with lower PE penetration would not have as much influence. Physician compensation is often based on wRVUs with a conversion factor so contract pricing for the physician compensation isn’t as relevant. Pricing is relevant to the PE company.

    Medical corporations continue to exist and impact the PE sales. Corporate Practice of Medicine Laws vary across the country and state to state. Most PE companies have their own team of attorneys that review and insure the new practice models meet the terms of the laws.

    Physician owners have a stewardship responsibility to the younger physicians. It is important to be honest and direct with all impacted and to know what the PE companies’ stance is on current junior physicians as well as hiring new junior physicians.

    Ophthalmologists also have a stewardship responsibility to their patients. A PE sale can significantly impact the culture of the practice and impact patient care standards. The Academy’s mission, “Protecting Sight, Empowering Lives,” must be kept at the front of decisions.

    High Priority Objectives

    Private Equity firms are a more prominent presence in ophthalmology than past years. Although selling may be attractive to some, weighing the financial impact against the loss of control and impact on the younger physicians and future recruits should be carefully considered. Due diligence and understanding the valuation methodologies are critical. Involving those impacted by a sale and open communication is key.

    Review more sessions in the full Mid-Year Forum 2019 Report (PDF, 360 KB).