BLOG: Read this if you are considering private equity
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On March 5, 2024, the Federal Trade Commission held a 3-hour webinar on what it sees as the problems with private equity in health care.
In this article, I want to briefly explain private equity, talk about why it can be a poor fit for a professional corporation and close with a story that demonstrates that purported experts often have no idea what they are talking about.
Private equity
Equity is a fancy term for ownership. Private equity funds are a group of investors seeking to buy parts of a company hoping to make money. Sometimes they assume that providing the company with additional capital will allow the company to expand. That expansion may be opening more locations near the business, offering additional services or “franchising” an idea to more locations. Sometimes the belief is the company they seek to purchase runs inefficiently, and that by improving its operations, profits will grow. In that case, investors hope better management will yield higher profit margins. To achieve that, the investors may seek layoffs, salary reductions and other cutbacks to improve profitability.
When it comes to private equity buying orthopedic practices, the main legal impediment is that most states have a prohibition on the corporate practice of medicine. Only individuals licensed to practice medicine can own a physician practice. There is a commonly used work around. The investor establishes a management company that provides administrative services to the practice in exchange for some stream of revenue.
Rarely a wise strategy
While there are certainly many times when private equity can make sense, I think it is very rare that it is a wise strategy for a professional entities, like an orthopedic practice, because it seems to me it will be hard for both the investors and professionals to come out ahead. Most professional entities do not technically return “profit.” Any money the organization makes is paid out in the form of compensation or salary to the physicians. That means if a professional entity is sending profit to an outside investor, it is almost by definition lowering the payment to its working professionals. I struggle to see how selling to private equity is likely to offer a good result for both the investors and the professionals owning a professional corporation.
One situation where private equity may be helpful to an orthopedic practice is when the practice wants to expand in ancillaries, such as imaging, therapy or an ASC, and it lacks the capital for the investment. Ancillaries can be more effectively leveraged than the professional work of a physician. That leverage greatly increases the possibility of both the investors and physicians receiving a return.
The 3-hour FTC conference was basically the government’s declaration of war on private equity in the health care industry. The session featured government officials, academics and employees of organizations that have been purchased by private equity. The presenters were overtly hostile to the notion that private equity could be a useful tool in the health care context.
I think it is safe to say that the FTC, Department of Justice and Office of the Inspector General will be making private equity an enforcement priority. This was 3 hours of people saying that, when it comes to health care, private equity is bad. One of those people was an academic who was introduced as an expert on private equity in health care. I am afraid I have to question that. She mentioned that most health care is now paid for on a value-based reimbursement. While I think the share of payments that are value-based is increasing, I am a bit skeptical that it constitutes most payments. But it was her next statement that really drew my attention. She offered the example of hospice as an area with value-based care. She said hospices were paid a flat rate and, I am not making this up, the reason for this was that it gave hospices an incentive to “keep patients healthy.” I guess that’s one way to look at it.
I do not know all of the pros and cons of private equity. But I know this – private equity in the health care world should prepare for careful scrutiny. And if you are considering a relationship with private equity, that is something to consider.
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