As many readers are aware, private equity ownership of medical practices is increasing every year. Before reading on, take a look at this post which is a great overview of private equity investments in medicine:
Radiology is no longer immune from private equity with large investments by entities like Rad Partners and co. Look at any job board and you’ll see there are certain markets (Arizona and Florida especially) where a large proportion of radiology groups have been acquired by private equity firms. These days, just about every specialty of medicine has been targeted by private equity.
What is private equity?
Simply put, private equity consists of privately raised capital which is used to acquire assets. The goal of any private equity firm is to make money. The particular way private equity makes money is really no different than what any other investor seeks to do. They buy low and sell high.
This concept became particularly real for me as an active real estate investor and being a part owner of an OBL. Let’s use real estate investing as an analogy because in many ways it’s pretty simple. You make money in real estate through several means: loan pay down, depreciation, market appreciation and forced-appreciation. The concept of forced-appreciation is how wealth is built quickly. By renovating a property and/or simply by raising under market rents to a near market rate, we increase the value of a given property by increasing the income the property produces (Net operating income divided by cap rate for you nerds out there). The property can then be sold or can be refinanced to tap into the increased equity in order to acquire new assets. In many ways, this same principle applies to medical practices.
Why would private equity firms want to acquire medical practices?
The goal of private equity is to significantly increase the EBIDTA of any given network of practices so they can be sold at a very favorable multiple. EBIDTA stands for earnings before interest, depreciation, taxes and amortization. Profitable practices can be sold a multiple, conservatively 5x EBIDTA (though recently history suggests selling for 10-15x).
Any good investor is not only concerned with making a return on their investor, but they are concerned with the velocity of their money. That is to say they not only want to make a return, but they want to get their money back in the market as soon as possible so their money continues working for them. Most private equity plays (both in commercial real estate and healthcare) are usually on 5 to 10-year cycles, sometimes less. Why would another group of investors pay a multiple for a medical practice? Well, there are investors out there who are looking for stable cash-flow and may not be interested in doing work to increase the value of a practice. Think of investing for cash-flow as opposed to appreciation. Medical practices are largely mature industries with perpetual demand. Let’s say there’s a particular type of practice that can perform magic on an outpatient basis, but most people don’t know about it yet. Can you smell the dollars yet?
As I said before and will continue to say for the forseeable future, healthcare in America is a hot mess. In many ways it’s actually more like a dumpster fire, but I digress. The point is, the market for healthcare services is incredibly inefficient and there are significant opportunities to significantly improve revenue and decrease expenses. Here’s an overview on how that can be do
1. Optimize insurance payments.
Insurance companies negotiate payment rates with healthcare facilities and practices. As you can imagine, the larger the entity that the insurance company is playing ball with, the more leverage that entity will have. Mom and pop practices tend to get the short-stick and behemoth healthcare systems do quite well. For this reason (among others), private equity is often not interested in acquiring a single practice, but often a network of practices. PE firms can then leverage the size of their acquired practice network to negotiate better rates with insurance companies.
2. Improve practice efficiency.
You become more efficient by optimizing your ability to bill. From a clinical standpoint this can simply mean seeing more patients or doing more procedures in a given period of time. From a billing standpoint, this can mean using technology to stream-line billing. The EMR was more or less created for this purpose.
3. Reduce practice expenses.
The one hits home for many radiologists because your professional fees are an expense to the practice. In the world of IR you simply take the salary that is offered to IRs in standard hospital IR/DR practices which are now PE owned and simply offer the same but for a “cooler job” where you get to do 100% IR in an office. Of course, you do other things like leverage scale to aggressively negotiate the price of equipment and medical devices. By having a large network of practices and employees one can also work to reduce expenses like benefits for employees.
So why should I care about private equity when it comes to my future in the OBL?
The OBL is interesting because large private equity firms have largely not been on the hunt for outpatient based labs, or if they have perhaps not as aggressively as with other types of practices. Why? Because most OBLs are independently owned and operated with revenue far less than the revenue generated by large medical practices, such as hospital-based radiology groups.
With that being said, private equity is certainly on the minds of those in the OBL world. There are three particular groups who are interested in PE buy-outs: corporate multi-state OBLs, MSOs and sharks.
Corporate OBLs generally consist of multiple OBLs across state lines and are great acquisition targets for private equity firms. You ever notice how some of these OBLs seem to proliferate like rodents? They celebrate grand-openings in random new cities every few months and magically market IRs who have zero ties to said market. You ever wonder why that is? Why would they spend so much money investing in the infrastructure, paying off podiatrists to scale so quickly? They are targeting a PE buy-out!
Sharks and MSOs kind of go hand-in hand. I introduced the concept of the OBL shark a few posts ago. Simply put, a shark is an entrepreneurial physician who has gone out and built their own OBL. They have persevered despite significant odds and have become quite profitable. What issues do sharks have? Well, they kind of live in a sea all by themselves. They tend to scare off other IRs for a variety of reasons, but generally because it is difficult for younger partners to obtain meaningful equity stake in their already mature practice. As such, sharks have a tough time exiting for retirement. And we’re only going to start noticing this difficulty as current handful of IR OBL sharks are only beginning to enter retirement age. Remember, OBLs have only been around for 20 years or so.
So you’ve built this great OBL, but want to sell? You’re too small to attract a meaningful investor, so what is one to do? Well, your friendly MSO can help with that. Can you imagine if you joined forces with a network of other OBLs? All of a sudden, you’ve now attracted the attention of private equity investors.
Consolidation of OBLs is happening as we speak. It’s really no different than consolidation in other facets of healthcare. While I have presented it in the context of an exit strategy for a senior IR, the issue is actually more complex. With changes in healthcare regulation, the administrative burdens/headaches of running a medical practice have caused many practice leaders to either sell-out or consolidate in some shape or fashion. The promise of an exit with significant financial upside only sweetens the pot for existing IR OBL sharks.
How does all of this affect the young IR?
Less money and autonomy for you or me if we join a practice that has PE on its mind. You’ll hear all sorts of promises: a schedule full of prostate embos from the jump with no practice building required, 1 million dollars a year doing atherectomies for days, “equity ownership” and opportunity to profit at a sale though with none of the autonomy. This all comes the cost of complete loss of practice autonomy and financial upside for the IR who takes this opportunity. Unfortunately, many young IRs may view these practices as the “lesser of evils,” falsely believing that there are only 2 paths forward in a given market: PE run IR/DR job or corporate OBL IR job.
Private equity in healthcare is bad and particularly so for those of us early in this game or who are still in training. These firms exist only to make money at your expense and do nothing to really improve healthcare. Sure they may implement some fancy technologies and claim they are doing so for the betterment of patient care, but all they’re doing is trying to make a buck. Just like a lot of us are. This is America. It’s awesome and it sucks at the same time.
I don’t necessarily blame current IRs in OBLs banking on a private equity buy-out. They are simply trying to ride the wave. But you need to be aware of the tactics and market forces at play or you’ll end up in a position financially not too different from the mediocre PE IR/DR jobs out there.
The problem really comes down to how we view healthcare. There are a lot of cooks in the healthcare kitchen, but very few who actually care about patient well-being. As far as I’m concerned, the majority of us in IR are in it for the right reasons, but we are forced to deal with the realities of a capitalist society. I have my feelings on this, but at the end of the day, I think it’s imperative that we as physicians maintain our autonomy as much as humanly possible. When we direct care, patients benefit. Do I have tons of data to support it? Not really, but I have my own experience where I directly controlled the patient experience. The relationships I developed with those patients still drives me to this day. Being the healthcare quarterback, including the important non-clinical work required for a practice to successfully run, results in a tremendous number of headaches dealing with administrative burdens which artificially exist for the sole purpose to turn us into revenue generating cogs for people who frankly do not share our values.
So why keep feeding into this machine? We have the power to take control, but we don’t because we are largely lacking financial education and the entrepreneurial mindset to take control of our lives. We don’t want it enough. We look for quick fixes like guaranteed jobs doing cool cases and not having to deal with the work required to build organically. When you decided to do IR, I’m sorry but you did not sign up to be handed a job. You need to create that job whether you like it or not. It’s a total rude awakening, but the sooner you acknowledge this, the better your future.
I will keep beating this dead horse until I spread the message to every IR and future IR. We have the power to change our course as a field and I sincerely think we can. I’m so encouraged by hearing all the stories of young IRs out there who are doing great things.
As always, share your thoughts below. Until next time.
Great articles. How can we contact you for personal advice? Thanks so much!