• Private Equity, Part 2: 5 Questions to Consider About Private Equity Acquisitions

    Private Equity, Part 2

    The unprecedented boom in private-equity acquisitions of medical practices represents a complex business climate for early- and mid-career doctors.

    We have already explained that there are several types of consolidations, each with its own type of organization and compensation for physicians. But young ophthalmologists may still have questions about what this trend means to them and their future. Here are some answers to those questions:

    I am an early- to mid-career physician-owner of a practice. Why should I sell my practice?

    Selling often makes perfect sense for doctors nearing retirement. The payout from the sale will generally dwarf the earning potential of five to seven more years practicing, not to mention the relief of not having to worry about the minutiae of day-to-day management.

    However, early to mid-career physician-owners approached about a sale face a far more complex decision. On the surface, a sale may seem ludicrous. Without selling, you can maintain control of your practice and enjoy decades of setting your own salary and retaining all of the business earnings yourself. So, why sell?

    Although there are significant benefits to maintaining control, selling your practice can be a shrewd fiscal decision under the right circumstances. Generally, you will be compensated in cash and stock in the management company.

    A less common payout for the physician-owner involves cash at closing and a retained equity in the original practice. In both cases, the cash from a sale will be taxed at a capital gains rate, which is significantly lower than that of ordinary income. Receiving a sizable cash windfall presents an opportunity to invest and grow that money more than a standard income, which is spread out over many years and possibly subject to fee reductions.

    Investing this large sum early in your career may afford you the opportunity to develop an impressive nest egg and possibly cut back your hours or retire early down the line. Moreover, equity in the management company or the original practice (depending which model you have chosen) will ideally continue to appreciate as well. For some young owners, the idea of practicing medicine without the burden of management concerns may also be appealing.

    Moreover, groups with a large number of subspecialists need a wide referral base, and consolidation can add referral practices to the “mothership” practice. This is especially relevant if local competing practices have been acquired by other management companies and are looking to add to their own referral base.

    Another reason to sell to a management company is to avoid being sold to another entity, such as a hospital or insurance company. Although ophthalmology practices may be low on the priority list for now, these acquirers may come looking in the future.

    When and if this happens, doctors may prefer to have a large, consolidated eye practice rather than be acquired by these entities.

    I’m currently looking for a job – how should I evaluate a practice that has been or will be acquired by a private equity firm?

    Many ophthalmologists in the early stages of their careers seek nonequity positions working in private practices. On the surface, consolidation may not seem to affect them, provided the owner negotiated adequate protection of employees.

    However, working for a doctor or group of doctors is substantially different from working for a group of MBAs. If possible, it is prudent to study the management model the acquiring company has implemented or plans to implement.

    Some questions to ask: How controlling is the acquiring management company? Are management functions going to be centralized, decentralized, extreme decentralized or something in-between? What does the acquiring company offer employees?

    The most common types of compensation for employee doctors are:

    • Wage is based solely on productivity.
    • Wage is based on productivity, and the doctor is allowed to buy stock in the management company.
    • Wage is based on productivity, and the doctor purchases equity (or an equity-like investment) in the individual practice. This generally applies only with extreme decentralized consolidations.
    • Wage is based on productivity, and meeting certain productivity goals is rewarded with additional stock in the management company or equity/equity-like investment in the individual practice. Again, equity in the individual practice only tends to apply in extreme decentralized models.

    The goal of consolidation is to maximize profits. There is always a possibility that this profit-centered attitude will affect staff treatment, quality of new employees, investment in future equipment needs and practice infrastructure and, most importantly, patient care.

    Younger doctors who simply seek employment must investigate various corporate ophthalmology firms and make sure their views of how to practice are adequately aligned. Outcomes for work-life balance and financial gain can vary significantly depending on the management model. Thorough research into the acquiring company can make any transition not only comfortable, but profitable.

    In the past, most doctors entering private practice wanted eventual partnership in the practice with equity, the opportunity to vote on key decisions and the ability to sell their slot in the practice on retirement.

    Some young doctors still want this option, and others prefer to be employed. Whether or not an eventual sale is possible, young doctors should know what they want and choose a practice accordingly.

    Some practices have a dominant owner who never plans to share the practice, while others feel that the best option is for all doctors to share in ownership. Thorough investigation of job opportunities is essential for young doctors, regardless of a potential sale.

    As a young doctor without existing equity in the practice, how can I position myself to benefit from a sale?

    Although selling means a huge payout for physician-partners, employed doctors may be overlooked, depending on the original terms of employment.

    If possible, acquiring equity in the practice can be a great way to ensure that you profit from its growth. Young doctors who currently hold no equity in the practice but would like to do have some options. Since you own no equity, you have nothing to sell other than your skills.

    Most firms will pay a base wage of approximately 30 percent of funds collected for an individual physician, excluding the revenues for certain services such as diagnostic testing or injectable drugs. Here is an example of how it would work: If a physician’s collected revenues (minus the funds for excluded services) is $1.2 million, the base pay would be $400,000.

    Additional bonuses will be determined largely by which of the compensation models the acquiring management company puts into place.

    The ideal compensation model is the incentive program, in which reaching productivity goals yields equity in the management company or original practice. This is certainly a better option than investing your own money for several reasons. Incentives align your business objectives with the company’s, allow you to invest in the company without touching your personal savings, and come with substantial tax advantages. 

    Although the growth potential is substantial, it is important to remember that stock has risk. There is no guarantee of appreciation or having funds returned. More risk-averse physicians may request a cash incentive program, though this will have far less growth potential than stock.

    Occasionally, it is possible to acquire equity in the practice’s ambulatory surgery center. There are also acquiring entities that will allow you to buy or earn an equity interest in your own practice. If you want an equity interest in your practice, these types of acquiring firms may present the perfect opportunity.

    There is a higher ceiling for earnings if one wants to own and invest in their own practice. However, it is essential to study the acquiring firms, because there are a diverse set of opportunities from an equity standpoint.

    Moreover, there is a vast difference in how practices are run in terms of control, quality of medical care and equipment expenditures. Note that companies offering equity in ambulatory surgery centers and/or in the original practice are in the minority. That said, opportunities for this type of equity investment do exist, and young doctors who are less risk-averse can benefit from them.

    Some employed doctors are on a track for future “partnership,” (i.e. ownership). Should a sale occur before the doctor reaches this partnership level, depending on the largesse of the current owners, some of the initial payout could be allocated to the employed doctor. Whether or not employed doctors are on an ownership track, they have little control over the outcome of a sale.

    Learn as much as you can about the model, future plans, degree of control of the acquiring company, treatment of practices already acquired and all other variables we’ve discussed. Arming yourself with this knowledge will help you decide if you need to seek other employment. The sooner your know, the sooner you can carve out the future you want.

    How will patient care be affected?

    Effects on patient care depend on the management style of the acquiring firm. In theory, equipment and software purchasing benefit from economies of scale and private equity firms, with greater size and funds, can better afford to purchase updated equipment and software (including electronic medical records). In principle, this should increase the quality of patient care. Unfortunately, firms bent on a quick sale will skimp in these areas to make overhead as low as possible. In this situation, patient care and staff morale may suffer,

    Sales can also lead to more turnover in staff, as focus on profit may exceed interest in employee quality and loyalty. This may cause decreased stability in patient care, particularly if the firm puts less money into hiring high-quality employees. If the firm centralizes its functions, patients addressing billing issues will have to talk to professionals who are not directly involved with the day-to-day workings of the practice.

    A patient may be directed to a call center in Houston in order to discuss a billing issue at a practice in New Jersey. For patients, this can lead to frustration and feeling like they are receiving impersonal treatment.

    There are Corporate Practice of Medicine (CPOM) laws in place that vary from state to state. In most places, these laws prevent business entities from influencing clinical decisions. Unfortunately, there are legal workarounds, and some management companies will try to influence calls that should be left to physicians.

    Hopefully thorough research will help you avoid involvement with businesses that micromanage medical decisions. However, if you do find yourself in this unfortunate position, it is essential to know the specific CPOM laws in your state so that you are armed to advocate for your patients.

    What is the future of consolidation in ophthalmology? Is it just a fad?

    It is difficult to predict the future of consolidation in ophthalmology. Unlike private equity’s predecessor, Physician Practice Management Corporations (PPMCs), which went defunct within a few years, it seems that present consolidations are ongoing businesses that are here to stay.

    The main question is whether the boom in acquisition of ophthalmology practices will continue to grow or plateau in coming years. Regardless of whether acquisitions continue or level off, there is significant opportunity outside of private practice for younger doctors. With proper research and forethought, it is possible for early- to mid-career doctors to maintain a stable lifestyle and even profit from the present flux in practice ownership.

    Pitfalls and opportunities abound in the current practice landscape, and it is essential for doctors to be as shrewd and prepared in the board room as they are in the operating room.

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    By Gary I. Markowitz, MD, Thomas S. Harbin, MD, MBA, and Jillian Markowitz