Do You Want $50 Million?
You get a phone call from a business group you’ve never heard of. “I want to buy your group for $50 million. Are you interested?” Your tech helps you off the floor and you ask a few questions. “Who are you? Are you serious? What’s involved here?”
Ophthalmology groups are selling around the country, sometimes for amounts even greater than $50 million. Private equity groups, flush with cash and without better investing opportunities, have set their sights on medical and dental practices. Dentistry and dermatology attracted such attention first but now ophthalmology is equally in the mix.
How deals work
The sale price for a practice is a multiple of the earnings of a practice, roughly speaking, the salaries of the doctors. The accounting term for earnings is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Since most practices disperse earnings to the doctors and don’t pay much in interest, depreciation or amortization and the doctors pay the taxes, you can think of the sales price as a multiple of the salaries plus the earnings of any ancillary businesses- surgery center, optical, etc. The exact multiple is negotiated but can range as high as 10-12x for an especially attractive practice. A large single-specialty group with a surgery center and busy optical can easily have combined earnings in the millions of dollars and you can see how a figure of $50 million or more can be achieved. Most of the payment is in cash and the remaining amount in stock of the new entity.
The dollars paid to a practice are disbursed to the shareholders in a manner unique to each group. Some practices have only a single or very few owners and in others, all but the most recently-added doctors are owners. After the sale, all doctors take a reduced salary to enable cash flow for the new owner.
Déjà vu?
Most of us seniors remember the scene in the late 1980s and early 1990s when ophthalmology and other medical practices sold to PPMCs- Physician Practice Management Companies. We also remember that this model collapsed and practices had to unwind as their PPMCs went under. What’s the difference?
A major difference is that the current buyers are better funded and more diversified. They pay much more of the sales price in cash and only a relatively small amount in stock. As the new entity grows, the plan is for it to be sold and the stock to be worth much more than the initial amount. PPMCs paid little in cash and most in stock that was never worth much from the very beginning.
Only the passage of time will tell whether this new model will last, but the portents are more favorable and buyouts are increasing.
Who Wins?
Buyers will maintain that the doctors win. This is certainly true for older doctors in the group and an argument can be made that all the doctors, even the young ones, will win. Certainly, a current payment of $1 million to $3 million, taxed at capital gains rates, put aside and invested wisely, along with the expected appreciation in value of the stock at the time of a future sale can offset a reduced salary for many years if not a practice lifetime. Factor in the unknown fate of physician reimbursement in the future, which is unlikely to increase by a great amount, and you may be glad to be paid a lump sum based on current reimbursement levels.
Practices that have been inefficient and suffered greater that average overhead may benefit from managers who are more business oriented and can reduce overhead. The amalgamation of doctors into new practice arrangements can allow the purchase of new technology, the price of which will be spread over more users.
Sub-specialists who are not fully busy may benefit as more doctors, both ophthalmologists and optometrists, are added to the new entity and begin referring within the company. Surgery centers may become busier and more productive.
Solo practitioners who are added to a group may have access to technology they previously could not afford.
Who Loses?
At the very least, doctors who join such groups in the future and did not get a lump sum payment since they were in training. Also, any non-shareholder doctors who will be paid less but get none of the initial payout.
The financial aspect of the buyout may be favorable, but all doctors lose control of their practices and any ancillary ventures. Doctors who have been the boss are the boss no longer. They may be required to work different hours, longer hours, see more patients, make do with fewer techs, adopt an EMR not to their liking, go to satellites and other measures they may not like. Office staff may not be as responsive to the doctors as they realize they have new bosses also.
Likewise, surgery center staff will no longer view the doctors as their boss. The latest gadgets may not be allowed by the new managers. Patients may be forced to go elsewhere if they cannot pay the full amount of their financial responsibility. Favored operating blocks may go to bigger producers.
What About the Patients?
Will patients win, lose or draw? Happy doctors make for happy patients. Doctors who are distracted by business matters about which they know little may be happier in a practice with more competent managers and greater access to new technology. If subspecialists are more available in a big group, patients may get quicker and better care.
Doctors who like to be in total control and have staff responding to their boss, not just another co-worker, may not be as happy. Bigger is not always better. Many of the doctors I know whose practice was bought by a hospital are not as content as they were when they were in a private practice situation. We don’t have enough data to know how patients and indeed doctors will fare under these new business arrangements.
The Future
Buyouts will continue and increase in number, affecting practices all over the United States. Key, large practices will be approached first and garner the most favorable multiples. Those who accept will be affected as discussed above. Those who decline may see their referral base shrink as a competing practice is acquired and grown by adding doctors currently loyal to the group refusing to sell.
Private equity companies are not the only ones acquiring practices. Hospitals, insurance companies and academic medical centers are doing the same. The March 2017 edition of Consumer Report’s On Health reports that only one third of doctors in the US were in private practice at the end of 2016 and the trend of consolidation will continue.
Will doctors who work in a more corporate environment be as loyal to the Academy as independent doctors? Will they come to meetings in the same volume as now? Will they have the same work ethic as current physicians do? All of these are unknown but bear watching.
In summary, private equity buyouts of our practices will only increase. Seniors are the most likely to benefit from buyouts and should be aware of all the implications discussed herein.
Recent Buyouts
The following list represents only a few of the transactions between 2012 and the spring of 2017:
- Koch Eye Associates
- Seacoast eye Associates
- Capital Eye Medical Group
- Nevada Eye Care
- Katzen Eye Group
- Lakewood Eye Clinic
- Anthone Eye Center
- Minnesota Eye Consultants
- Georgia Eye Partners
Editor’s note: Readers are encouraged to weigh in on the impact that equity buyouts may have on the future of our profession. What are the ethical implications? Will it present inherent conflicts of interest? How will it affect our patients?