PRIVATE EQUITY AND THE FUTURE OF FAMILY MEDICINE CEO/EVP, Texas - - PowerPoint PPT Presentation
PRIVATE EQUITY AND THE FUTURE OF FAMILY MEDICINE CEO/EVP, Texas Academy of Family Physicians Tom Banning 2 Objectives Review current market assumptions Click to edit Master title style Understanding the basics of private equity Why
CEO/EVP, Texas Academy of Family Physicians
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Review current market assumptions
Understanding the basics of private equity Why private equity is investing in medical practices Benefits and risks of private equity
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Physicians have become big business, yet most remain fragmented and not professionally managed
Physician practice stressors are mounting Physician aggregation/consolidation is intensifying as practices of all kinds are being snapped up by larger groups, hospital systems, insurance companies, and other corporate entities Remaining independent and surviving the future will require a capital partner
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PE refers to organized groups of private investors – pension funds, sovereign wealth funds, high net‐ worth individuals, and university endowments – who wish to put their money or capital to work in diverse investments. PE firms balance the risk of the investment against the return it will generate – with a focus on ensuring they can get their money
anticipating average annual returns of 20% or more.
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PE firms typically take 60% to 80%
although sometimes they accept minority
large medical practices.
PE firms rarely seek 100%
because they want physician owners to share their growth
PE firms aim to sell practices within 3 to 7 years.
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Acquisition prices are based on EBITDA (earnings before interest, taxes, depreciation, and amortization) which is a proxy for cash flow. PE firms generally pay 2 to 4 times or less EBITDA for “tuck‐in practices” – which are smaller practices being added or merged to an existing group. PE firms typically pay 8 to 12 times EBITDA for “platform practices” – the first group acquired by investors which is generally a larger, well managed, and reputable practice in the community. After an acquisition, physician owners typically receive market rate salaries but cede all or most additional revenue (for example, from ancillary services) to the PE firm.
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In 2017, 102 physician practices were purchased by private equity firms, according to a Weill Cornell Medicine study published in the Annals of Internal Medicine; According to Bloomberg Law, 181 deals were reported in 2018. PE is accelerating their investment beyond high volume, high margin practices – dermatology, ophthalmology, emergency medicine, anesthesia, cardiology,
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According to McKinsey around $1.8 trillion of “dry powder” or funds sitting idle and ready to invest
These titans of capitalism or so-called “smart-money” investors are hungry for deals and primary care physicians are an attractive target – they have not consolidated like other specialties.
Health care is a relatively recession‐proof industry – demand remains constant even during downturns Investors see an opportunity to create value by increasing efficiencies and consolidating market power Follow the Gretsky Rule – skate to where the puck is going (value‐ based payment) not where the puck is (fee‐for‐service)
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administration
ensuring correct and exhaustively coding patient encounters
have been referred out
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payers and Medicare Advantage
care management capabilities, clinical analytics, and implement best practices for care
medical practices
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discipline, business operations, and acquisitions of other practices to grow the practice and develop it into a much stronger and more financially viable entity
in value‐based payment arrangements
and talent
practice
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regarding contract incentives – those ready to retire versus mid‐career versus new physician shareholders
were publicly traded in the 1990s failed
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Know ahead of time what PE investors expect to get out of the deal. Why would an outsider want to buy part or all of my practice? What is the PE firm’s philosophy and track record in health care? Are they willing to cede clinical decision‐making to the physicians in a meaningful, legal, and organizational structure? Is the return more than investors can achieve through other similar risk investments? What is the typical timeframe for an investment? What is the exit strategy for the investor? Who will they sell their interests to when they want to divest and move on?
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quality and cost of patient care; physician professionalism; or the experience of patients, physicians, or staff
that may not be sustainable
declines, the ultimate buyer could be hospitals and health insurers
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Involve legal counsel
who are familiar with similar transactions. There should be an
unambiguous governance document
that outlines who does what and that survives any transaction – and can only be modified by the physicians in the
Have a clear alignment of physician and investor goals and incentives
regarding growth, strategy, and long‐term physician prosperity.
Tom Banning CEO/EVP
Texas Academy of Family Physicians www.tafp.org | tafp@tafp.org