Private Equity Investment in Health Care —Is it Positive for Doctors?
Private equity investment in health care practices is affecting patients and payers, but what about the physicians?
The past 10 years have been a time of tremendous change in US health care. A key driver of this change has been growing investment from private equity (PE) into both larger health care companies and, more recently, into specialty medical practices. Although this activity is reported and sometimes scrutinized, less often is any focus given to the positive impact that this inflow of capital has had, both for doctors and patients.
THE NUMBERS
According to public reports, PE acquisitions of health care-related businesses have risen from an estimated annual deal value of $41.5 billion in 2010 to more than $200 billion in 2021.1 PE firms have pumped more than $750 billion into US health care during the past 10 years, and this money has had an impact. These funds have helped unlock lifesaving treatments, such as mRNA vaccinations, helped to level the playing field between doctors and payers, and created thousands of new jobs by funding research and development in the life sciences and expanded care in medical practices.
Copious data on PE’s health care investments has been compiled by the Washington, DC-based American Investment Council and the venture capital/private equity research site PitchBook. The numbers tell a compelling story. Since 2012, PE funds both large and small have invested $280 billion in more than 1,800 life sciences and medical devices businesses.2 More than 250 deals in 2020 plowed PE money into outpatient clinics, ambulatory surgery centers and urgent care centers.3 All of this activity has expanded access to care, funded new technologies, and made health care businesses more efficient by eliminating duplicative administration costs.
Even America’s Health Insurance Plans (AHIP), the lobbying group for insurance payers, acknowledges in a recent report that PE firms consolidate smaller health care entities to increase their market power and leverage in setting reimbursement rates with payers. AHIP regards this as a bad thing, pushing for federal scrutiny of even the smallest transactions, and portraying physician practice mergers as a threat to care. In fact, the main threat these practice mergers represent is to the massive profits of health care payers like the ones AHIP represents.
NOT FOR EVERYONE
Matthew Zimm, DO, a Pennsylvania ophthalmologist who concluded a PE partnership in 2022, said the benefits for a practice like his were clear. “In the end, this is an individual decision. It is not for everyone, but trends in the health care market suggest that private independent practices are not the future. Doctors faced with the increasing complexity of practice have the choice to join a health system or work with a managed services organization (MSO). My peers have had way better experiences working this way (with an MSO) and so far I am also.”
Even payers recognize the benefit of consolidating health care delivery businesses for greater efficiency. In 2011, UnitedHealth Group, one of America’s largest health insurance companies, created Optum, a subsidiary that provides pharmacy services and health care delivery. In the past 10 years, this UHC-Optum model of vertically integrated payer and care has sparked a pattern of health care acquisition resulting in transactions fusing Aetna with CVS, Cigna with Express Scripts, and Humana with Kindred. Surely, these mega mergers would not occur if there were no value to be gained in this kind of consolidation.
Research suggests that the benefit is not limited to strengthening the financial leverage of the practice. A September 2022 JAMA Health Forum investigation compared 578 private PE-acquired dermatology, gastroenterology, and ophthalmology physician practices with more than 2,800 similar independent practices.4 The study found that from 2016 to 2020, internal spending (such as on new equipment), reimbursement, new and unique patient volume, and total patient encounters all increased substantially at the private equity-acquired practices. This revelation suggests to us that PE-owned practices are more profitable and also more accessible, providing increased care and choice for patients.
BUT WHAT ABOUT THE PHYSICIANS?
Clearly, PE investment in health care practices is affecting patients and payers, but what about the physicians? During the pandemic, the media has been filled with stories of health care workers who are stressed and struggling. Research bears this out—according to a Medscape annual survey of more than 12,000 US physicians, before COVID-19 in 2020 a total of 69% of doctors reported being “largely happy at work.”5 However, in the 2021 report, only 49% expressed happiness with their work environment.6
One of the key drivers of what we do is making physicians more satisfied in their work by helping them get the financial, operational, and administrative tools to deliver great care to patients while also controlling their own work lives more effectively.
Transaction advisors represent physicians who are considering PE investment and help them navigate the investor landscape, get the best valuation, and find partners that are the best cultural fit and best positioned to help physicians achieve their goals. There are three key benefits to medical practices attracting PE investment—better technology, expanded facilities, and economies of scale offering more leverage dealing with vendors and payers.
Doctors who are partnering with an organization are doing so for the rest of their careers. All are focused on maintaining excellent patient care—delivered in a way that preserves doctors’ voices, decision making, and patient scheduling. The model we espouse enables physicians to achieve those objectives through a combination of strategic financial and operational consulting plus encouraging competition among PE firms.
A DIFFERENT STRUCTURE
When we met Dr. Zimm, he had spent nearly 15 years building a strong eyecare and cataract surgery practice in Northwest Pennsylvania. A third-generation doctor, he had a better understanding than most of how to run a practice successfully. Still, Dr. Zimm recognized that he had done as much as he could on his own. “The administrative burdens of being a doctor get bigger every year. Insurance companies put roadblocks in our way when we are trying to focus on the patient. Hiring, firing, contracts, negotiating with suppliers. The level of bureaucracy we deal with now is ridiculous. My grandfather started practicing in the 1950s, and what he had to do, compared to now … well, it’s a whole new ball game.”
Dr. Zimm negotiated a partnership with Sunvera Group, a Michigan-based eyecare platform that is a unit of Ridgemont Equity Partners. A month after the deal closed he said, “I think the wave of the future is to have doctors dealing with the patient while leaving the back-office work to professionals that specialize in that. Just a short time into our partnership we are already seeing the structures that Sunvera has in place that are making the transition easier. Wheels are turning to help us learn about how to build and grow the practice with input from me.”
Getting access to new technology so they can offer new capabilities and services is very important to most doctors. New technologies and techniques can lead to better patient care, improved outcomes, and professional growth for physicians. However, doctors often aren’t willing or able to invest $500,000 or more in the latest equipment. Private equity capital makes these advances possible.
Another benefit of PE investment is the opportunity to expand care into new and underserved areas. This was the motivation of Orthopaedic Specialists of Austin (OSA), a Texas-based clinic with seven physician shareholders and three locations. They sought out an arrangement with Growth Ortho, a PE-backed platform that was building out in several different regions. OSA specifically wanted a partner that could expand their ability to care for the greater Austin community while offering clinical autonomy and the opportunity to move into other markets in Central Texas. Now, nearly 6 months after the transaction close, they are pursuing a strategy of provider recruitment and de novo geographic expansion and seeking opportunities for additional practice acquisitions throughout the state.
Gaining economy of scale is another key benefit when PE investment is considered. This happens with the kinds of administrative and operational support that many PE firms excel at implementing. For example, a consolidated back-office group can help a practice bill more efficiently and completely for the services provided, secure lower costs on supplies, and eliminate duplicative paperwork.
WHAT’S THE MOTIVATION?
Dr. Zimm cited the drive for efficiency as a major motivation for his decision to link up with a PE-backed platform. “There is a massive shortage of ophthalmologists in the US. It’s estimated that the country will be 5,000 or 6,000 short by 2030. We must work smarter with what we have. Over the years, my team and I have built our clinic to focus on great results, but it means we also must focus on new technology and fight for surgical time. There are massive administrative demands on us, and that’s where I saw we really needed to get help if we are going to stay at the forefront with our practice.”
PE investment can provide medical practices and specialty groups with more leverage to negotiate with hospitals and insurance payers, both of which have historically held much greater bargaining power. With more business strength and operational efficiency backing them up, doctors can maintain their focus on patient care and perhaps be more satisfied in their work as a result.
Physician Growth Partners is a Chicago-based investment bank and advisory firm dedicated to representing specialty medical practices in transactions with private equity and investing in growth companies focused on health care. Since 2017 the PGP team, led by co-founders Michael Kroin and Ezra Simons, has assisted more than 50 practices in closing successful private equity partnerships. Learn more about their work by visiting www.physiciangrowthpartners.com
1. Scheffler, RM, Alexander, LM, Godwin, JR. Soaring private equity investment in the healthcare sector: consolidation, accelerated competition undermined, and patients at risk. Publichealth.berekeley.edu. Published May 18, 2021. Accessed February 18, 2023. https://publichealth.berkeley.edu/wp-content/uploads/2021/05/Private-Equity-I-Healthcare-Report-FINAL.pdf and https://www.bain.com/insights/year-in-review-global-healthcare-private-equity-and-ma-report-2022/
2. Improving medical technologies: private equity’s role in life sciences. American Investment Council. Published March 2022. Accessed February 19, 2023. https://www.investmentcouncil.org/improving-medical-technologies-private-equitys-role-supporting-life-sciences/
3. American Investment Council. Pitchbook. US health care - how PE is filling the gaps. PitchBook. Published March 2021. Accessed February 18, 2023. https://www. investmentcouncil.org/wp-content/uploads/2021/03/pitchbook-healthcare-report.pdf
4. Singh, Y, Song, Z, Polsky, D, Bruch JD, Zhu JM. JAMA Health Forum. Published Sept 2022. Accessed February 21, 2023. Association of private equity acquisitions of physician practices with changes in health care spending and utilization. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9440392/
5. Medscape. Published online January 25, 2021. Accessed February 18. Medscape’s 2021 Physician burnout report finds Covid-19 takes a toll: physician happiness plunges. https://www.medscape.com/2021-lifestyle-burnout Medscape.
6. Medscape. Published January 21, 2022. Accessed February 19, 2023. Physician burnout & depression report 2022: stress, anxiety, and anger. https://www.medscape.com/slideshow/2022-lifestyle-burnout-6014664
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