Everything independent doctors need to know about private equity

You’ve no doubt heard about large healthcare companies and hospital systems being purchased for staggering sums by private equity firms.

Further reading: Can physicians maintain independence while working as part of a large health system?

There’s a clear appetite for investment-and this trend may be poised for even more eye-popping growth. In 2014, for instance, Bain & Co. found that private equity funds invested $29.6 billion in healthcare company buyout deals globally, nearly doubling the $16 billion invested in 2013.

But it’s not just the mega-mergers that are in on the action. In my relatively small town of Hagerstown, Maryland, I know of several significant private equity transactions involving local medical practices.

Investment firms are on the lookout for the right medical practices to invest in. Doctors stand to capitalize on their well-managed, low-debt practices.

Make the Trend Your Friend

For decades, private equity firms were reluctant to invest in health care services, given the complexity of the payment models and the accompanying regulatory environment. Today, firms running the gamut from sophisticated boutiques to giants like Goldman Sachs and Blackstone Group are active participants in the sector.

In case you missed it: Hospital ownership of physician practices on the rise

Why is this happening? Simply put, it's getting harder and harder to stay independent-even for mid-size-to-large practices. A 200-provider practice once had a competitive edge against smaller practices. But now, even those larger practices feel powerless versus the large hospital groups. Physicians are challenged with addressing mounting costs while being expected to improve outcomes and adhere to regulatory demands while reimbursements get slimmer. In case you haven’t noticed, the era of disruption is here.

Next: With disruption comes opportunity

But as I’ve said before, with disruption comes opportunity.

You can go with the flow instead of fighting it. Here are some questions to ask yourself if you are considering selling your practice.

What are your goals?

Do you want to grow? Do you want to simplify your life? Know what is most valuable to you. For example, a hospital buyout is simpler compared to a private equity buyout, but you have zero skin in the game. That said, a hospital buyout will relieve you of the increasing administrative and regulatory burdens you face as an independent practice.

More advice: Physicians must harness their power to ensure independence

But giving up ownership and control is not for everyone. Multiple doctors have told me that they would be highly unwilling, if at all, to ever go the hospital route. With private equity, there is some flexibility in how you structure your deal and how you retain some ownership and control.

How in demand is your specialty?

Becker’s Hospital Review reported on 15 niche investment areas in the healthcare sector that are ripe for private equity activity. Certain specialties like dermatology are especially hot with private equity firms, because there is a shortage of dermatologists, which nearly guarantees more patient demand and higher profit potential. While these niches make attractive targets, it doesn’t mean they can command prices significantly higher than fair market value-such offers can raise red flags for the Department of Justice.

Are you looking for economies of scale?

Some private equity firms have a deep expertise in a sector and can increase efficiencies in a multitude of ways, from coding to scheduling and marketing. This can help increase the top-line growth of a practice or increase the profit margins while addressing and improving the patient experience.

Related: Is your practice's location financially hurting you?

On the downside, not all private equity firms are created equally. It’s important to link up with a partner who is focused on your sector and can demonstrate through their past investments that they can add value beyond just adding cash.

Next: Do you really understand the risks?

Lastly-are these good people? Do you like them? Don’t overlook the human factor and prior track record.

Do you understand the risks?

Selling your practice to either a non-hospital entity or a hospital partnership entails compliance risks and considerations.  Especially with a non-hospital entity, you will need to consider how the acquiring company plans to reach its profitability goals, and if that entails changing patient protocols to maximize financial benefit. Be sure that your due diligence also addresses any vulnerabilities you could face as an employee. For example, in a worst-case scenario, in the event you were let go, would you be unable to practice medicine due to restrictive non-compete clauses in the partnership or employee agreement?

Further reading: This is how CPC+ is changing physician offices for the better

Every decision-including the decision to do nothing-involves risk. The private equity option may give independent doctors a chance to become more competitive and to look to the future while transitioning to retirement. By preparing yourself and studying your options, you can be ready to take full advantage of the disruption occurring in healthcare.

Karen Coyne, CFP, is a strategic wealth adviser with Raymond James Financial Services Inc. Member FINRA/SIPC in Hagerstown, Maryland. With over 15 years of experience, she helps doctors make smart financial decisions so they can focus on what they do best. Email karen.coyne@raymondjames.com or call 301-739-7002.

Investment advisory services offered through Raymond James Financial Services Advisors, Inc.

Any opinions are those of Karen Coyne, CFP® and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.