User login
CHICAGO – In this age of corporate megamergers, private practice gastroenterologists are increasingly weighing the pros and cons of selling their practices to private equity firms.
It’s becoming more difficult for solo or small group practices to go it alone. While there may be advantages in selling a medical practice to a private equity firm, physicians could be trading a degree of freedom for financial certainty and relief from administrative burdens, according to Klaus Mergener, MD, PhD, MBA, AGAF, a clinical gastroenterologist, affiliate professor of medicine at the University of Washington, Seattle, and chief medical officer of Pentax Medical’s Lifecare Division.
“Over the last decades, and ongoing, there have been massive downward pressures on reimbursements and costs are rising. Practices have tried to compensate, and they’ve added ancillary revenue streams, and they’ve tried to cut costs internally. It’s fair to say that depending on the local market, many practices find that one of the last viable options is essentially to spread overhead costs – meaning you have to get larger and you have to merge into larger entities,” he said on May 6 during a presentation at the annual Digestive Diseases Week® meeting.
The first independent gastroenterology practice was purchased by a private equity firm in 2016. Today, more than 1,000 gastroenterologists have been acquired by private equity firms, which amounts to a total value in excess of $1 billion.
The pace at which private equity firms are buying private medical practices is accelerating. On April 26, Kaiser Permanente – with 39 hospitals and 24,000 physicians – announced that it had acquired Geisinger Health System, a regional health care provider in Pennsylvania with 10 hospitals, forming a new entity called Risant Health.
Dr. Mergener likened the situation to the story of David and Goliath. David famously defeated the much larger and more powerful Goliath, but the metaphor is imperfect, because small private practices are running out of rocks to sling at the big guys.
In some small, rural markets with no significant competition, it may be possible for small practices to survive through mergers, “but in most U.S. markets, it’s fair to say that ... practices have found it hard to merge without external help. There are egos involved, there are many hurdles, and this is where private equity has essentially moved in as catalyst,” Dr. Mergener said.
Employees of large entities
Other physicians, however, say that while acquisition may seem inevitable, private equity is an option for survival.
“I don’t think this means the demise of private practice,“ said Lawrence R. Kosinski, MD, MBA, AGAF , chief medical officer at SonarMD, a Chicago-based company that specializes in facilitating managing the care of patients with chronic conditions.
“I think that private equity is just another way of aggregating GI doctors into an employment situation,” he said. “It’s just a different tool, and we can argue all day as to whether it’s the right tool, but it’s a tool no different than employment by a hospital. You can work for a hospital or you can work for a private equity funded group, but in the end, you’re an employee of a large entity.”
Michael Weinstein, MD, AGAF, president and CEO of Capital Digestive Care, a practice in Washington, and managing partner of the Metropolitan Gastroenterology Group Division, a medical group practice in Silver Spring, Md., advised taking a long and hard look before taking the leap into the hands of private equity.
“You have to have a strategy, but you have to know what you have and what you need. Ask yourself whether private equity is what you really need. They’re not in the business of making you a better practice,” he said. “Once you do it, you’re no longer in control of your future. Somebody else is in control of your future.”
Private equity firms sell a bill of goods
“They say, ‘We’re going to improve your services, we’re going to bring you tech, we’re going to negotiate better contracts and do all these things for you.’ Ninety percent of it is a lie, because that’s not what they’re going to do. They’re just going to try to increase the bottom line, bolt down a few more practices, increase the gross revenue, and thereby increase the net profit from where it was before, not necessarily because they’re making better lives for the individual providers. They’re just adding more cows to the field, but every cow is the same as far as they’re concerned. They really don’t care about the production of milk,” Dr. Weinstein said.
A few years ago, his practice considered whether private equity would be a good option. His practice, he said, needed to be bigger and more effective and efficient. Instead, his practice formed a partnership with PE GI Solutions (formerly Physicians Endoscopy), a developer and manager of endoscopic ambulatory surgery centers.
In Dallas, private equity firms have increased reimbursements for Texas Digestive Disease Consultants.
“Our practice went through mergers, acquisitions, and now, with private equity coming onto the scene, it’s completely different,” said Kimberly M. Persley, MD, AGAF, a partner with Texas Digestive Disease Consultants and a member of the GI & Hepatology News board of editors.
“We were a five-person independent group negotiating contracts, getting cut every other year by some payer because they negotiated a better price with someone else. And having to go through that process every year when all we really want to do is take care of patients. Private equity adds to our group practice by having someone dedicated to negotiating these contracts, and getting reimbursed far more than we ever did prior to our involvement with private equity,” she said.
How it works
In the typical model, a private equity partner purchases the practice and creates a management services organization (MSO), which provides nonclinical services to the practice, theoretically freeing the physicians from the administrative burdens of day-to-day practice.
The practice then becomes the care center managed by the MSO, and the physicians in the practice at the time of the acquisition get stock in the MSO. “They sell a portion of their annual income, so going forward they’re making less money initially, until some of that is being recovered by higher efficiencies. They get an upfront check at a multiple of the income they just sold, and that provides the initial incentive. Then the entity is grown by adding other practices through the same mechanism,” Dr. Mergener said.
After about 5 years, the private equity partner typically sells the MSO to another, probably even larger buyer, and the cycle starts again.
In addition to the upfront incentive that makes practice mergers and consolidation work, the arrangement gives the GI practice access to top-notch administrators, as well as access to capital for investments such as information technology infrastructure, digital health, and data analytics.
He cautioned that it’s crucial for practices to enter the marriage with eyes wide open and be very careful in choosing the private equity partner.
“The goal is to find a partner that has values and a vision that matches the practice’s. In theory, they should be pulling on the same side of the rope, because if it’s a high-quality practice and efficiencies are being improved, more practices should be more likely to join,” which will benefit physicians, patients, and the private equity partner alike, Dr. Mergener said.
Although the private equity construct has been successful in the short term for many practices, it’s less clear what will happen long-term. There is a risk that after 5 years there won’t be a buyer for the MSO at the expected price, which may result in complex financial transactions that could leave the MSO in debt. In such a scenario, physician employees would not be personally liable, but might suffer the consequences of a failing or unsuccessful operation, Dr. Mergener said.
Dr. Mergener’s talk was presented as part of a an ASGE Presidential Plenary held during DDW 2023. He disclosed consulting, honoraria, advisory board activity or stock options from various corporations, but reported having no relationships with private equity.
DDW is sponsored by the American Association for the Study of Liver Diseases (AASLD), the American Gastroenterological Association (AGA), the American Society for Gastrointestinal Endoscopy (ASGE) and The Society for Surgery of the Alimentary Tract (SSAT).
CHICAGO – In this age of corporate megamergers, private practice gastroenterologists are increasingly weighing the pros and cons of selling their practices to private equity firms.
It’s becoming more difficult for solo or small group practices to go it alone. While there may be advantages in selling a medical practice to a private equity firm, physicians could be trading a degree of freedom for financial certainty and relief from administrative burdens, according to Klaus Mergener, MD, PhD, MBA, AGAF, a clinical gastroenterologist, affiliate professor of medicine at the University of Washington, Seattle, and chief medical officer of Pentax Medical’s Lifecare Division.
“Over the last decades, and ongoing, there have been massive downward pressures on reimbursements and costs are rising. Practices have tried to compensate, and they’ve added ancillary revenue streams, and they’ve tried to cut costs internally. It’s fair to say that depending on the local market, many practices find that one of the last viable options is essentially to spread overhead costs – meaning you have to get larger and you have to merge into larger entities,” he said on May 6 during a presentation at the annual Digestive Diseases Week® meeting.
The first independent gastroenterology practice was purchased by a private equity firm in 2016. Today, more than 1,000 gastroenterologists have been acquired by private equity firms, which amounts to a total value in excess of $1 billion.
The pace at which private equity firms are buying private medical practices is accelerating. On April 26, Kaiser Permanente – with 39 hospitals and 24,000 physicians – announced that it had acquired Geisinger Health System, a regional health care provider in Pennsylvania with 10 hospitals, forming a new entity called Risant Health.
Dr. Mergener likened the situation to the story of David and Goliath. David famously defeated the much larger and more powerful Goliath, but the metaphor is imperfect, because small private practices are running out of rocks to sling at the big guys.
In some small, rural markets with no significant competition, it may be possible for small practices to survive through mergers, “but in most U.S. markets, it’s fair to say that ... practices have found it hard to merge without external help. There are egos involved, there are many hurdles, and this is where private equity has essentially moved in as catalyst,” Dr. Mergener said.
Employees of large entities
Other physicians, however, say that while acquisition may seem inevitable, private equity is an option for survival.
“I don’t think this means the demise of private practice,“ said Lawrence R. Kosinski, MD, MBA, AGAF , chief medical officer at SonarMD, a Chicago-based company that specializes in facilitating managing the care of patients with chronic conditions.
“I think that private equity is just another way of aggregating GI doctors into an employment situation,” he said. “It’s just a different tool, and we can argue all day as to whether it’s the right tool, but it’s a tool no different than employment by a hospital. You can work for a hospital or you can work for a private equity funded group, but in the end, you’re an employee of a large entity.”
Michael Weinstein, MD, AGAF, president and CEO of Capital Digestive Care, a practice in Washington, and managing partner of the Metropolitan Gastroenterology Group Division, a medical group practice in Silver Spring, Md., advised taking a long and hard look before taking the leap into the hands of private equity.
“You have to have a strategy, but you have to know what you have and what you need. Ask yourself whether private equity is what you really need. They’re not in the business of making you a better practice,” he said. “Once you do it, you’re no longer in control of your future. Somebody else is in control of your future.”
Private equity firms sell a bill of goods
“They say, ‘We’re going to improve your services, we’re going to bring you tech, we’re going to negotiate better contracts and do all these things for you.’ Ninety percent of it is a lie, because that’s not what they’re going to do. They’re just going to try to increase the bottom line, bolt down a few more practices, increase the gross revenue, and thereby increase the net profit from where it was before, not necessarily because they’re making better lives for the individual providers. They’re just adding more cows to the field, but every cow is the same as far as they’re concerned. They really don’t care about the production of milk,” Dr. Weinstein said.
A few years ago, his practice considered whether private equity would be a good option. His practice, he said, needed to be bigger and more effective and efficient. Instead, his practice formed a partnership with PE GI Solutions (formerly Physicians Endoscopy), a developer and manager of endoscopic ambulatory surgery centers.
In Dallas, private equity firms have increased reimbursements for Texas Digestive Disease Consultants.
“Our practice went through mergers, acquisitions, and now, with private equity coming onto the scene, it’s completely different,” said Kimberly M. Persley, MD, AGAF, a partner with Texas Digestive Disease Consultants and a member of the GI & Hepatology News board of editors.
“We were a five-person independent group negotiating contracts, getting cut every other year by some payer because they negotiated a better price with someone else. And having to go through that process every year when all we really want to do is take care of patients. Private equity adds to our group practice by having someone dedicated to negotiating these contracts, and getting reimbursed far more than we ever did prior to our involvement with private equity,” she said.
How it works
In the typical model, a private equity partner purchases the practice and creates a management services organization (MSO), which provides nonclinical services to the practice, theoretically freeing the physicians from the administrative burdens of day-to-day practice.
The practice then becomes the care center managed by the MSO, and the physicians in the practice at the time of the acquisition get stock in the MSO. “They sell a portion of their annual income, so going forward they’re making less money initially, until some of that is being recovered by higher efficiencies. They get an upfront check at a multiple of the income they just sold, and that provides the initial incentive. Then the entity is grown by adding other practices through the same mechanism,” Dr. Mergener said.
After about 5 years, the private equity partner typically sells the MSO to another, probably even larger buyer, and the cycle starts again.
In addition to the upfront incentive that makes practice mergers and consolidation work, the arrangement gives the GI practice access to top-notch administrators, as well as access to capital for investments such as information technology infrastructure, digital health, and data analytics.
He cautioned that it’s crucial for practices to enter the marriage with eyes wide open and be very careful in choosing the private equity partner.
“The goal is to find a partner that has values and a vision that matches the practice’s. In theory, they should be pulling on the same side of the rope, because if it’s a high-quality practice and efficiencies are being improved, more practices should be more likely to join,” which will benefit physicians, patients, and the private equity partner alike, Dr. Mergener said.
Although the private equity construct has been successful in the short term for many practices, it’s less clear what will happen long-term. There is a risk that after 5 years there won’t be a buyer for the MSO at the expected price, which may result in complex financial transactions that could leave the MSO in debt. In such a scenario, physician employees would not be personally liable, but might suffer the consequences of a failing or unsuccessful operation, Dr. Mergener said.
Dr. Mergener’s talk was presented as part of a an ASGE Presidential Plenary held during DDW 2023. He disclosed consulting, honoraria, advisory board activity or stock options from various corporations, but reported having no relationships with private equity.
DDW is sponsored by the American Association for the Study of Liver Diseases (AASLD), the American Gastroenterological Association (AGA), the American Society for Gastrointestinal Endoscopy (ASGE) and The Society for Surgery of the Alimentary Tract (SSAT).
CHICAGO – In this age of corporate megamergers, private practice gastroenterologists are increasingly weighing the pros and cons of selling their practices to private equity firms.
It’s becoming more difficult for solo or small group practices to go it alone. While there may be advantages in selling a medical practice to a private equity firm, physicians could be trading a degree of freedom for financial certainty and relief from administrative burdens, according to Klaus Mergener, MD, PhD, MBA, AGAF, a clinical gastroenterologist, affiliate professor of medicine at the University of Washington, Seattle, and chief medical officer of Pentax Medical’s Lifecare Division.
“Over the last decades, and ongoing, there have been massive downward pressures on reimbursements and costs are rising. Practices have tried to compensate, and they’ve added ancillary revenue streams, and they’ve tried to cut costs internally. It’s fair to say that depending on the local market, many practices find that one of the last viable options is essentially to spread overhead costs – meaning you have to get larger and you have to merge into larger entities,” he said on May 6 during a presentation at the annual Digestive Diseases Week® meeting.
The first independent gastroenterology practice was purchased by a private equity firm in 2016. Today, more than 1,000 gastroenterologists have been acquired by private equity firms, which amounts to a total value in excess of $1 billion.
The pace at which private equity firms are buying private medical practices is accelerating. On April 26, Kaiser Permanente – with 39 hospitals and 24,000 physicians – announced that it had acquired Geisinger Health System, a regional health care provider in Pennsylvania with 10 hospitals, forming a new entity called Risant Health.
Dr. Mergener likened the situation to the story of David and Goliath. David famously defeated the much larger and more powerful Goliath, but the metaphor is imperfect, because small private practices are running out of rocks to sling at the big guys.
In some small, rural markets with no significant competition, it may be possible for small practices to survive through mergers, “but in most U.S. markets, it’s fair to say that ... practices have found it hard to merge without external help. There are egos involved, there are many hurdles, and this is where private equity has essentially moved in as catalyst,” Dr. Mergener said.
Employees of large entities
Other physicians, however, say that while acquisition may seem inevitable, private equity is an option for survival.
“I don’t think this means the demise of private practice,“ said Lawrence R. Kosinski, MD, MBA, AGAF , chief medical officer at SonarMD, a Chicago-based company that specializes in facilitating managing the care of patients with chronic conditions.
“I think that private equity is just another way of aggregating GI doctors into an employment situation,” he said. “It’s just a different tool, and we can argue all day as to whether it’s the right tool, but it’s a tool no different than employment by a hospital. You can work for a hospital or you can work for a private equity funded group, but in the end, you’re an employee of a large entity.”
Michael Weinstein, MD, AGAF, president and CEO of Capital Digestive Care, a practice in Washington, and managing partner of the Metropolitan Gastroenterology Group Division, a medical group practice in Silver Spring, Md., advised taking a long and hard look before taking the leap into the hands of private equity.
“You have to have a strategy, but you have to know what you have and what you need. Ask yourself whether private equity is what you really need. They’re not in the business of making you a better practice,” he said. “Once you do it, you’re no longer in control of your future. Somebody else is in control of your future.”
Private equity firms sell a bill of goods
“They say, ‘We’re going to improve your services, we’re going to bring you tech, we’re going to negotiate better contracts and do all these things for you.’ Ninety percent of it is a lie, because that’s not what they’re going to do. They’re just going to try to increase the bottom line, bolt down a few more practices, increase the gross revenue, and thereby increase the net profit from where it was before, not necessarily because they’re making better lives for the individual providers. They’re just adding more cows to the field, but every cow is the same as far as they’re concerned. They really don’t care about the production of milk,” Dr. Weinstein said.
A few years ago, his practice considered whether private equity would be a good option. His practice, he said, needed to be bigger and more effective and efficient. Instead, his practice formed a partnership with PE GI Solutions (formerly Physicians Endoscopy), a developer and manager of endoscopic ambulatory surgery centers.
In Dallas, private equity firms have increased reimbursements for Texas Digestive Disease Consultants.
“Our practice went through mergers, acquisitions, and now, with private equity coming onto the scene, it’s completely different,” said Kimberly M. Persley, MD, AGAF, a partner with Texas Digestive Disease Consultants and a member of the GI & Hepatology News board of editors.
“We were a five-person independent group negotiating contracts, getting cut every other year by some payer because they negotiated a better price with someone else. And having to go through that process every year when all we really want to do is take care of patients. Private equity adds to our group practice by having someone dedicated to negotiating these contracts, and getting reimbursed far more than we ever did prior to our involvement with private equity,” she said.
How it works
In the typical model, a private equity partner purchases the practice and creates a management services organization (MSO), which provides nonclinical services to the practice, theoretically freeing the physicians from the administrative burdens of day-to-day practice.
The practice then becomes the care center managed by the MSO, and the physicians in the practice at the time of the acquisition get stock in the MSO. “They sell a portion of their annual income, so going forward they’re making less money initially, until some of that is being recovered by higher efficiencies. They get an upfront check at a multiple of the income they just sold, and that provides the initial incentive. Then the entity is grown by adding other practices through the same mechanism,” Dr. Mergener said.
After about 5 years, the private equity partner typically sells the MSO to another, probably even larger buyer, and the cycle starts again.
In addition to the upfront incentive that makes practice mergers and consolidation work, the arrangement gives the GI practice access to top-notch administrators, as well as access to capital for investments such as information technology infrastructure, digital health, and data analytics.
He cautioned that it’s crucial for practices to enter the marriage with eyes wide open and be very careful in choosing the private equity partner.
“The goal is to find a partner that has values and a vision that matches the practice’s. In theory, they should be pulling on the same side of the rope, because if it’s a high-quality practice and efficiencies are being improved, more practices should be more likely to join,” which will benefit physicians, patients, and the private equity partner alike, Dr. Mergener said.
Although the private equity construct has been successful in the short term for many practices, it’s less clear what will happen long-term. There is a risk that after 5 years there won’t be a buyer for the MSO at the expected price, which may result in complex financial transactions that could leave the MSO in debt. In such a scenario, physician employees would not be personally liable, but might suffer the consequences of a failing or unsuccessful operation, Dr. Mergener said.
Dr. Mergener’s talk was presented as part of a an ASGE Presidential Plenary held during DDW 2023. He disclosed consulting, honoraria, advisory board activity or stock options from various corporations, but reported having no relationships with private equity.
DDW is sponsored by the American Association for the Study of Liver Diseases (AASLD), the American Gastroenterological Association (AGA), the American Society for Gastrointestinal Endoscopy (ASGE) and The Society for Surgery of the Alimentary Tract (SSAT).
AT DDW 2023