Private equity firms show appetite for medical practices

Private equity deals for physician-led practices continued to grow in 2015, and experts say the trend should seep into more types of practices as buyers look to roll them up through economies of scale. So how do these deals compare with selling to a hospital or large group, and what are the financial mine fields to avoid?

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Selling to and becoming an employed physician in a hospital system can be the cleaner route to go, particularly if looking for a quick exit strategy, experts say, but some of the private equity deals can be compelling for doctors who want to maintain some control over their former practices and some financial skin in the game.
“There are big opportunities in primary care right now because it’s very fragmented,” says Joseph Davis, managing partner with Triton Pacific Investment Corp. in Los Angeles, California, a private equity firm. “By aggregating and consolidating back-office operations you can really get a lot of scale” as well as greater profitability, he says.

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With appetites for deals high, sale multiples are getting richer, experts say. Depending on the geographic market and type of practice, physicians are commanding multiples of more than six times practice earnings, far higher than typical sales to larger practices and hospitals, these sources say.

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“There’s a finite number of deals and a lot of auctioning going on so multiples are getting more expensive. And there is a more limited supply because a lot has been sold in the last few years,” says Saul Rudo, JD, a Chicago partner specializing in private equity at KattenMuchinRosenman LLP. Venture capital buyers are collecting enough capabilities through acquisitions to compete with large medical groups and hospitals in terms of synergies and cost containment, he says.
“Every situation stands on its own and a physician has to weigh how it will play out and whether he is of a certain age and just wants an exit strategy, but clearly a lot of doctors are looking for bigger, better situations,” Rudo says.

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Maximizing a practice’s appeal–and ultimately its financial success–to private equity partners involves getting rid of practice debt and embracing services that accountable care organizations will be paid for going forward, such as chronic care management, says Michael Presley, executive vice president of United MSO of America LLC in Wellington, Florida. The company is buying medical practices in several states, typically offering payments over five years to spread out tax liabilities, and introducing common back-office functions and new service lines that will garner better reimbursements as healthcare moves to outcomes-based payments.

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“A lot of times these VCs [venture capitalists] come in and it’s a bunch of blue suits changing the front office and it just doesn’t work,” he says. “Practices that are debt-free, hiring good staff and following up on patient care get our attention.”