Private equity ensures strong succession, peace of mind for some practices
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In the last 10 years, private equity has grown to become a larger part of ophthalmology.
According to OSN Regulatory/Legislative Section Editor Allison W. Shuren, MSN, JD, and J. Matthew Owens, JD, partners at the law firm Arnold & Porter, where they represent buyers and sellers in the health care private equity space, private equity appears to be here to stay despite its wide-ranging growth in the industry. That is because the private equity marketplace still views ophthalmology as fragmented with room for consolidation.
Source: CVP Physicians
There are also several reasons why ophthalmology is a unique target for buyers looking to make a lucrative investment.
“There is a very defined referral path, if you will,” Shuren said. “The vast majority of primary eye care is likely to be done by optometrists, and ophthalmologists take on more complex and tertiary care. It’s not as in other medical specialties where maybe you may have referrals coming in from lots of other different kinds of specialties of physicians. That makes it really easy for a buyer to understand the business of a particular ophthalmologist.”
Ophthalmology practices also offer a lot of procedures that have a seemingly continuous supply of patients. Along with unique pay structures, Owens said this supply and demand makes ophthalmology practices good targets for acquisition.
“We have an aging demographic with an increasing demand for eye care,” he said.
Landscape for acquisitions
Ravi Parikh, MD, MPH, of Manhattan Retina and Eye and New York University, has an interest in studying private equity in medicine. He said understanding how care is delivered can be just as important as understanding the science of medicine.
“We focus so much on what’s going on with basic science or clinical medicine, but there’s a whole new field of medicine focused on understanding how medicine is practiced,” he said. “Ultimately, that’s what affects patients.”
Parikh was a senior author of a study published in Ophthalmology in 2020 that explored trends in private equity acquisitions in eye care between 2012 and 2019. Researchers looked at acquisition and financial investment data from databases, news outlets and press releases to compile their analysis.
During the study period, private equity-backed groups acquired 228 ophthalmology and optometry practices, including 186 acquisitions between 2017 and 2019.
One of those practices acquired by private equity was Matossian Eye Associates. As the sole owner of the business for 35 years, OSN Cataract Surgery Board Member Cynthia A. Matossian, MD, said that the sale was part of her exit strategy from the practice.
“Partly it was to ensure a smooth transition for my patients, who have become accustomed to a certain level of care from Matossian Eye,” she said. “Partly it was to plan for my retirement. With that in mind, I found a broker who represented my practice to help me find a suitable partner to close the deal.”
After going through the process and evaluating several potential partners, Matossian chose to make a deal with Prism Vision Group and closed the sale in March 2019, before the pandemic. Even though she has been the head of her business and practice since its inception, Matossian said the transition has gone smoothly and provided peace of mind through a challenging, COVID-riddled period since the sale.
“In my career, I never had any hesitation spending money on new equipment because I knew I would recapture it over time,” she said. “Since I was getting later on in my career, I didn’t know how much more time I was going to have to recoup those investments. After selling to Prism, they were the ones spending money to upgrade different pieces of equipment and processes that we needed. We were able to upgrade appropriately without me having to worry about return on investment in a relatively short period of time.”
Although her business had nearly 100 employees across two states, Matossian said being part of an even bigger entity has been a benefit with the backing of private equity.
“We are able to bring the bigger gorilla into the room, so to speak, to negotiate with insurance carriers and have a place at the table,” she said. “Going forward, I’m not sure if smaller practices will have it as easy getting a spot at that table.”
For John D. Sheppard, MD, MMSc, FACS, selling his Virginia eye practice to CVP Health was part of a larger growth strategy. He said the practice had been growing rapidly and needed to expand to keep up, which was a lot for the partner physicians to maintain.
“We have great ideas for growing and improving our practice and continuing our expansion,” he said. “But we had some trepidation due to the personal financial risk and the extent of the project sizes. So, 2 years prior to our final investment and teaming with a private equity firm, we began a deliberate process of seeking advice and attending forums.”
Sheppard said the partners interviewed several firms but did not find an immediate fit. The firms either did not have direct experience in medicine or ophthalmology or their business models did not align with Sheppard and his partners’ vision for additional growth and amalgamation with other practices.
Finally, Sheppard’s practice team found a suitable partner in Revelstoke Capital Group and struck a deal along with the Cincinnati Eye Institute in early 2019. He said both groups shared similar clinical quality and growth philosophies, used the same EMR and had hired the same architect. They immediately forged strong ties with their private equity partners. He also said the practice experienced some immediate perks.
“We saw an immediate 50% reduction in the cost for our surgery packs at our surgical center,” he said. “We’ve found that the new professional and business relationships were all very exciting, educational and, to some extent, enlightening. We realized that so many colleagues from other organizations had the same view of clinical medicine that we did. And this July, we opened a new state-of-the-art six-room ASC, laser center and administrative hub that would never have materialized had it depended upon traditional financing.”
Impact of pandemic
In his study, Parikh and colleagues found that private equity-backed acquisitions began to slow slightly in 2019. While his research continues, it remains unclear how the COVID-19 pandemic may have affected the proliferation of private equity in ophthalmology.
Anecdotally, Parikh said COVID has shifted the size of practice that may be looking for outside buyers.
“COVID has put a lot of stress on smaller practices,” he said. “Typically, it was more midsized and larger practices that have been purchases. However, I think in certain areas, there are smaller practices, maybe one to three doctors, that want to sell to private equity and have their practices absorbed.”
The stress of the pandemic has accelerated the trend of physicians looking for an exit plan through private equity, Parikh said. Lower interest rates also make financing easier for buyers.
The pandemic threw a wrench into negotiations that were ongoing in March 2020. Owens said he was part of several deals that hit a speed bump because of COVID.
“Understandably, there was a bit of a pause,” he said. “In some of them, there was a bit of renegotiation around payment structure. I think some buyers got a little concerned about whether businesses were going to rebound.”
He said some buyers were not willing pay the full value upfront and instead worked out deferred payment plans to ensure practices could return to their pre-COVID numbers.
“It changed the deal structure for some of those deals that got done in the first 6 to 12 months after COVID hit,” Owens said. “Now, I feel like we’re sort of back to where things were.”
Having the backing of a private equity firm provided Matossian with some comfort throughout the pandemic. It meant she did not have to navigate the tricky waters of safety, staffing and government programs alone.
“As the sole owner, it would have been me sweating it out and trying to make every decision possible, whether it was who to furlough or what loans to sign up for,” she said. “I did not have to deal with any of those stresses. All of those business decisions were done internally though leadership and management teams of the Prism Vision Group.”
Prism’s human resources team was able to handle difficult staffing transactions, leaving Matossian to focus on patient care in a troubling time.
“All of these were really wonderful pluses,” she said. “They reinforced that it was the right thing for me to sell my practice when I did.”
Sheppard said he had similar feelings about having a safety net during the pandemic.
“It reduced our blood pressure and allowed us to sleep at night knowing that we had the backing of a company that could generate eight-figure government protective agreements executed by financial professionals,” he said. “I saw colleagues in small self-run practices scrambling to pay idle staff and decipher the government acronym nightmare that supposedly allowed businesses to survive throughout the crisis.”
Planning for a sale
Does an ophthalmology practice need private equity ownership to survive in today’s world? Shuren said no, and there will likely always be a base of independent practices in the field.
“There are many very well-run ophthalmology practices out there that are very entrepreneurial and understand their marketplace,” she said. “These practices are in tune with the changes in health care delivery and changes in value-based medicine. They know the newer ways to negotiate with payers and understand how to grow with new technology that’s meaningful for their practices.”
While private equity might not be the right option for everyone, if that is the route a practice is looking to go, the most important thing is to be prepared, Shuren said. Shuren and Owens have been giving out “private equity 101” tips for a long time. However, they hope they can start to go a little deeper as advisers to health care practices, whether in ophthalmology or elsewhere.
“You have to remember that you’re buying in, too,” she said. “You’re picking a new strategic partner, and you should take as much time as you need to do the due diligence on your new partner. It’s going to have a major impact on your professional career. Physicians need to do the work to understand and feel comfortable with who they’re going to potentially partner with.”
“Part of that may be talking to other groups that are part of the platform to better understand what has changed in terms of day-to-day schedule and professional services, as well as management control of the practice governance,” she said.
A large part of the process is ensuring everything in the business is in order, which starts with the people at the top.
“If you are thinking about going down this road, first and foremost, you have to make sure all of your owners are on the same page,” Owens said. “I’ve seen too many situations where a practice spends a ton of time and money considering a deal only to realize they all don’t want the same thing.”
Owens said physicians, even ones who own their practice, may not be prepared for the levels of scrutiny they will experience during a sale.
“It’s unlike anything you’ve ever been through in terms of the due diligence and the army of lawyers that the buyer is going to send your way,” he said. “They’re going to look under every rock, and if there are any issues, they’re going to find them.”
The best way for a practice to prepare is to do a self-assessment before the sale process goes too far down the road. Owens said practices have to look at their compensation structures and referral relationships and ensure they are compliant and above board when they begin the process.
“Understand your organization and the way you’re set up from a tax perspective and how that might impact a deal,” Owens said. “Should you restructure? These are all the things that we counsel.”
Matossian said it is critical for a practice to partner with a broker or banker to represent the practice throughout the proceedings because having a trusted ally makes a tough process more comfortable. Selling her practice was not an easy decision because she loved learning the business side of the practice. Even though she did not have formal business training through medical school or residency, Matossian made educating herself as a business leader a focus of her career.
“Decide for yourself if it is the right time to let go of the reins,” she said. “If you go from being captain of the ship to being an employee, some people have a hard time with that transition. It’s a very individualized decision because once it’s a new entity, things will not be the same as they were prior to the transaction.”
When making that decision to transition from owner to employee, Sheppard said it is important to remember what can be achieved when working within a collective.
“There are so many destructive things we can do in a competitive atmosphere,” he said. “Whereas working as a single unit, we can achieve so much more by concentrating on patient care, innovation and moving forward on behalf of our profession rather than becoming a cutthroat business competitor.”
Parikh is continuing his research on the intersection of medical care and private equity. He said it will be important to explore how new financial models might be affecting patient care.
“Physicians and patients have an outlook of having a relationship that can last 20, 30 or 40 years, particularly in ophthalmology,” he said. “Some of these financial companies, their outlook and goals are in the next 5 to 7 years. That might create an asymmetry of goals and incentives when a patient is looking to be taken care of for the rest of their lives. Things may be great in the short run, but once a company is recapitalized and sold, everything can change. Physicians can have little to no control over the delivery of care and their own compensation. Ultimately, private equity may lead to physicians ceding their role as captains of the ship and being relegated to employees, which is a concerning trend.”
“It’s important for physicians to know the exact structures and who they’re working with,” Parikh said. “It’s also important to make an effort to educate patients so they can make an informed decision as to who is administering and running where they get their medical care.”
Ultimately, Sheppard said private equity has given him an opportunity to focus on patients.
“It’s such a gift,” he said. “We’ve been allowed to create this new business entity and thereby eliminate so many of the distractions that were previously part of our everyday lives. ... I really have no new impediments to my style of delivering what I believe to be the best possible health care and eye care to my patients.
- Reference:
- Chen EM, et al. Ophthalmology. 2020;doi:10.1016/j.ophtha.2020.01.007.
- For more information:
- Cynthia A. Matossian, MD, can be reached at Matossian Eye Associates; email: cmatossianmd@icloud.com.
- J. Matthew Owens, JD, can be reached at Arnold & Porter, 601 Massachusetts Ave. NW, Washington, DC 20001; email: matthew.owens@arnoldporter.com.
- Ravi Parikh, MD, MPH, can be reached at Manhattan Retina and Eye, 67 E. 78th St., Suite 1C, New York, NY 10075; email: rap120@mail.harvard.edu.
- John D. Sheppard, MD, MMSc, FACS, can be reached at Virginia Eye Consultants, 241 Corporate Blvd., Norfolk, VA 23502; email: jsheppard@cvphealth.com.
- Allison W. Shuren, MSN, JD, can be reached at Arnold & Porter, 601 Massachusetts Ave. NW, Washington, DC 20001; email: allison.shuren@arnoldporter.com.
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