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Private Equity in Ophthalmology

Discussion in 'Ophthalmology: Eye Physicians & Surgeons' started by Dusn, Nov 1, 2018.

  1. Dusn

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    There was an interesting article in the NYTimes recently about the Journal of the American Academy of Dermatology journal removing a paper on private equity in derm (the original paper should be attached):

    Why Private Equity Is Furious Over a Paper in a Dermatology Journal

    I'd be interested in hearing thoughts or experiences about how private equity is affecting ophthalmology.
     

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  3. Bgladney

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    Interesting article. I believe the jury is still out on this latest round of corporate buy-outs. I have seen many versions (Phycor, PRG, etc) but seemingly those who get in on the ground floor are the ones who make out the best.

    One concern I see is for the physician employees. Many of these situations do not have any sort of equity position in them. With multiple owners in the future, how will all be affected?

    It is a great situation for anyone planning to retire in the next few years. For those entering their careers, will be interesting to see how it plays out.
     
  4. MstaKing10

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    Controversial topic with pros and cons. The landscape of healthcare is changing and it is becoming more difficult to negotiate with insurance companies without having leverage. Costs of running a practice are increasing and reimbursements are decreasing every year. Consolidation, mergers and the like are to some degree necessary to counteract these effects. PE offers an alternative strategy. For sure the older doc about to retire benefits the most. But even a junior doc (depending on how the deal is structured) can also benefit. Ultimately, only time will tell how things work out over the coming years.
     
  5. LightBox

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    Pros: the original partners make out like bandits

    Cons: the associate who hasn't bought in yet...their future prospects are dim in that practice!
     
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  6. MstaKing10

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    Ok. But this new entity is no different than an employee position anywhere else (ie hospital system, Kaiser etc). Depending on the contract, a new associate may make nearly as much if not the same as a senior “partner” as opposed to a partnership contract where the senior partners make significantly more than junior partners or associates. Also the associate may have the option to purchase shares, which upon resale, may be worth a significant amount.
     
  7. dantt

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    A heated topic for sure with several discussions during the recent AAO meeting. While many senior ophthalmologists probably correctly believe many young physicians have no interest in partnering or running a private practice, fewer young physicians want to work as a cog in a private equity run practice.

    Working at an academic medical center, Kaiser, VA, etc long term is much different than working for a for-profit group who's sole interest is maximizing return for the owners. The benefits include long term job stability, excellent benefits, better hours. You won't see a doc at Kaiser seeing 40+ patients a day or doing dozens of cases a day. Their salary cap is much lower than a true private practice but the work is much much less and the motive is much different.
    And while a new associate may make nearly as much as a senior "partner" in a private equity owned practice, the senior "partner" already made their money in the buy out.

    Talks of private equity buyout should be a signal for junior associates to try to lock in their buy in at current valuation (big scam is for the partners to inflate the valuation) or run for the doors.
     
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  8. airplanes

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    I interviewed at a private practice several years ago and he mentioned he was having discussions with private equity but did not know if he was going through with it. He attempted to spin it like it would not make a difference to a new associate either way. In my head, alarm bells were ringing and red flags were waving.

    I suppose if you are in a poorly run group that is hemorrhaging money or slowly sinking, then PE may turn things around at the cost of lowering your long term potential. That being said, I really cannot envision how it would be beneficial to an associate if you are in a well run group with a good trajectory. You lose all your passive income stream potential and work under management that either wants to maximize profits, or maximize revenue to re-sell. Seems like the worst of all worlds. If you're already a senior partner, then great, you get your parachute early. Invest wisely.

    If anyone has first hand experience, I am happy to be corrected.
     
  9. MstaKing10

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    Academics and va setting aside, most other practice settings are for profit. This includes private practice, hospital, and PE run practices. Agree that PE run practices have the potential to favor profit over patient care given that ultimately they answer to investors. But this issue is prominent among other facets of healthcare including insurance companies, large hospital systems and the like.

    If I was a young associate or fellow/resident looking for a job I would definitely question the practice about a potential PE buyout. It’s reasonable to consider such practices but with much due diligence. Would avoid long/expensive buy ins and possibly pass altogether if there is no transparency or clear strategy.
     
  10. LightBox

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    I'm not sure what Kaiser you are working at, but all of my friends who work at Kaiser describe scheduling nightmares that are completely out of their control. Sure, their schedules may be capped at 30 patients or whatever, but the problem is that 20 of them are new and thus take a long time. They can only make scheduling changes with like 6 months notice, and often have to do after-hours cases (e.g. PKP at 8 pm). Kaiser and the VA are also like socialized medicine where the techs/workers have zero incentive to work harder since it is basically impossible to fire them. They do not fear the doctors since said doctors have no power over them. Thus, good luck on finding competent techs that want to work up your patients efficiently. You'll be doing a lot of the work ups yourself if you want to be done in a timely manner.
     
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  11. dantt

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    Does anybody know if non competes are enforceable if private equity were to buy the practice? Does everybody have to sign a new non compete or a promise to stay a certain amount of time?
     
  12. MstaKing10

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    This is a great question and I’m not completely sure. But I would guess if you are an employee and a PE purchase is made, then you can either choose to stay and sign a new non compete or leave and the prior/original non compete is enforced.
     
  13. airplanes

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    I agree, of course for-profit enterprises dominate our health care landscape. My point was that in private practice, the income generated from optical, ASC, building rent and practice revenue go to the senior physicians and remain in the hands of the providers, which is not true with PE.
     
  14. LightBox

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    When a PE firm acquires a practice, it will require all of the providers to sign new Employment Agreements. For the non-partnered providers, this new Employment Agreement will typically be almost identical to their original contract (i.e. same non-compete restrictions). However, for the equity-holding providers that received the lump sum of cash, they obviously will sign new Employment Agreements. These new agreements will be significantly different from their prior contracts, especially the length of the non-compete. The reason is because most "earn-outs" are over the course of 3 to 5 years (e.g. remaining 30% of the cash portion of the buyout over 3 years). The PE firm needs to ensure that the equity-owning provider just doesn't bail after getting the initial cash. Also, the equity-owning providers are typically the ones generating the most amount of revenue.
     
  15. dantt

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    Can the non owner docs leave and open their own practice or are they locked into the prior non compete?

     
  16. LightBox

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    PE firms aren't dumb. They aren't going to release people from their prior non-competes without good reason. PE firms realize that doing so is a threat to their revenue. But at least, the non-compete would only apply to offices in the original contract (i.e. will not apply to the dozens of new offices that they now officially own).
     
  17. increscence

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    I am finishing training and just starting to look for jobs, so I could be wrong, but a close friend who is going through a PE takeover advised me to include a clause in my contract stating that a PE takeover would invalidate my existing non-compete. He also advised me that any pushback from the practice should raise significant red flags.

    Airplanes - thank you for your comment, it was really helpful. Could you and other experienced commenters please give us newbies concrete examples of what working for a PE firm as a new associate might be like? What impact might it have on day-to-day practice, expected patient load, partnership tracks, salary, etc?

    Thank you!
     
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  18. MstaKing10

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    I supposed as a litmus test it makes sense. If they say no PE event is eminent but refuse the non compete clause then it’s a red flag. If they are transparent about considering a PE buyout then there’s no way they will accept that clause.

    Depending on the PE partner, there’s should be very little impact from a day to day standpoint. Clinic schedule, OR etc should be as it used to be. Payment structure will likely be similar, production based with some bonus structure. There will likely also be options to purchase shares of the new entity. There is no partnership track, you will be employed.
     
  19. LightBox

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    Asking for that "elimination of non-compete" clause is a good idea. But I don't think that it is necessarily a "red flag". Some practices don't want to limit themselves in any way like that.

    Working for a PE firm will be like working as an employee. Just clocking in and clocking out. You won't be able to make significant managerial decisions, which for some, is a significant bonus. Again, the biggest benefits are for the original partners because of their initial lump sum cash payment and significant equity shares in the new entity. Most original partners just want a bigger fund to buy them out again, and thus get a further premium on their equity shares.
     
  20. Bgladney

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    Recently, I have spoken with an associate in a practice being taken over by a PE. His original non-compete is still valid but the PE wants him to sign a new contract that will restrict him from practicing in an area about three times his current non-compete. This is one situation. Not sure if the norm or not.
     
  21. MstaKing10

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    I bet. Makes sense. Their goal is to expand, as such they don’t want competition in any geographic territory that has strategic value in an expansion scenario
     
  22. Bgladney

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    This one had purchased other practices in the region. I believe they wanted a covenant of 180 miles or something crazy! Probably would never hold in court but you never know.
     
  23. BS-medfinance

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    I can agree, and knowing what type of PE firm is buying out the practice is important. Not all PE buyouts or firms are going to be the same, as just like in medicine, not every case or diagnosis is going to present itself in the exact same manner. Is the PE firm historically more integrated and hands on, similar to venture capital, or are they more mixed and hands off. Looking at their past history in what they have done in previous acquisitions not just in optho field, but if other fields too.

    As with any PE acquisition, sometimes the employees or associate docs may get left out if they haven't bought in, and something you must consider not just from a financial standpoint, but ethical. And, if you're a senior partner, what do you really want the buyout money for? Thinking deep within oneself about what it could be used for is just as important. Finally, if you are an owner/senior partner, would giving up control be ok, or did you go into business yourself so you can be your own boss and enjoy being in control. Crazy, but people, even smart physicians sometimes don't think about these emotional factors as get blinded by the business and monetary aspect instead. I've seen a number of PE buyouts and can be fine. Most simply just want to practice medicine, and got into medicine for practice, not to stress over major business decisions.

    Important thing-do your due diligence. Understand how the PE firm or just how PE firms in general function. Absolutely get clear transparent info on non-competes as stated above. Seek advice with attorney or other professionals as needed, and don't always rush into things. Just like anything, don't judge until seeing the whole picture.

    **Retina Today had a brief but decent article in Volume 1 No. 1 Business Matters Issue this year. Even potentially consulting the two MD's that published the article can be of resource.
     
  24. Dusn

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    I think it would rarely make any sense to join a private practice if you are not going to make partner at some point. If that's the situation you'd be better off joining academics, Kaiser, the VA or starting your own practice. If you are an employed doc in private practice, you will be assigned the worst techs (the senior partners are going to understandably keep the best techs for themselves), and you will have no authority to fire them and will likely find that they are no better and may be worse than the techs at the VA you worked at in residency (granted my residency's VA was very well run).

    Are there people here who would join a private practice if they knew they could never be partner? Why? What salary or work schedule would make it acceptable and do you think you'll be able to get that employed in PP?
     
  25. MstaKing10

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    Not sure the tech issue is really pertinent. This may happen in PP as employee or junior partner with or without PE involved. I think the VA and Keiser are very different than PP with or without PE. That said, I’d much rather join a practice with a partnership track than permanent employee
     
  26. increscence

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    Thank you for everyone who's commented, it's been so helpful. Couple of questions:

    If you're an associate in a practice whose owners sell to a PE firm, and the PE firm wants you to sign a new employment contract that you really don't like (e.g., really bad noncompete terms, as mentioned above), are you required to sign it anyway? Do you have any recourse?

    Also, could anyone give examples of major PE firms? Right now, they're some faceless corporate cloud in my head. I'd like to have a better understanding of what these firms are about, who they're run by (business people? other doctors?), their typical size/number of practices under their belt, etc.

    Sorry if these questions are dumb, this whole aspect is new to me, and PE is this concept that kind of scares me right now as I'm looking for jobs.
     
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  27. Dusn

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    Agreed. It was more of a response to LightBoxs comment above about tech help in private practice being better than at Kaiser and the VA. If you’re not an owner, you’ll have the same problems with techs that do not answer to you.
     
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  28. Bgladney

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    There are exceptions to every rule. I agree for the most part, however, there are practices where the cost of becoming a partner is so high, it doesn't make financial sense. The good practices in these situations essentially treat employees as partners.
     
  29. LightBox

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    There is definitely a huge difference between techs working in private practice versus those working at Kaiser/VA. Our techs treat our non-partner physicians exactly the same as the partner-physicians. Our techs respect all of our physicians and our physicians, in turn, treat our techs very well. I think it's easier to have this "personal" relationship in a private organization, versus some huge bureaucratic organization like Kaiser or the VA. Many huge organizations have unions which "protect" the techs/office staff... protect meaning make them feel entitled.

    There are definitely many good situations out there in private practice that do not include partnership. Some doctors just want to earn a decent income and go home and have zero risk and responsibilities. Like Bgladney states, buy-in's aren't cheap, nor are the business loans one has to sign off on for expensive pieces of equipment, office expansions, etc. Some docs also do not want to be geographically-restricted or have a shorter timeline before retirement, so an employee-situation works the best for them.
     
  30. Bgladney

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    I don't understand where everyone thinks that a majority of physicians do not want partnership. Heard that multiple times during the AAO which is just not true.
     
  31. MstaKing10

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    I also don't agree that there are many good employee only situations. There's really not that many and if they are they are not good in any way. Your boss will always siphon your revenue from you and pay you a "fair" income with some bonus that over the course of your career will be significantly less than had you joined a partnership or gone solo, all the while fattening their pockets with the fruits of your labor. The business aspects of running a practice are challenging, but to leave that much money on the table due to the fear of signing a check or a loan is something I don't understand. Maybe I've been in private practice too long and am out of touch?
     
  32. Bgladney

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    Totally agree.
     
  33. TheLesPaul

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    It's just dishonest senior physicians rationalizing to themselves to soothe their conscience after offering unfair deals.
     
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  34. Fpg1245

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    It’s sort of like saying that the majority of homeless people prefer to remain homeless. Or those stupid surveys about millenials that they prefer renting to buying a home (theyre broke so what do you expect?) Just like I “prefer” to take on truckloads of debt to fund my education. Your choices are only as good as circumstances allow.
     
  35. LightBox

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    I don't think blanket statements are beneficial (yes, I've made them myself about Kaiser and the VA :). I know from personal friends that good, employment-only situations exist. Sure, being a partner in a well-run practice is a great long-term strategy for overall financial reward. But again, some people (yes gasp, there are people out there like that) who don't want the mental stress of running a practice, dealing with the day-to-day nonsense, or incurring the financial liability especially if they feel the practice isn't doing that great. I would hazard to say that that some of these folk are the same ones who find the VA/Kaiser model more attractive. My only point is that if you are looking for an employment-only situation, I still believe being in a private practice setting is better from a quality of life perspective compared to working at Kaiser or the VA.

    I also think that new graduates need to stop feeling so entitled to partnership just because a practice hires you. There are absolutely no guarantees that anyone will offer you partnership, unless you have it in stone-cold writing. Offering partnership is a big deal, probably on the same level as marriage. No one is going to take that decision lightly or feel "forced" to partner you just because you worked for them. Of course, if a practice blatantly lies to you about potential partnership, then that isn't good (this is really easy to sniff out by talking to past associates). New grads just don't realize how much work it took for the founder-owners to establish a presence in their areas. These founder-owners will definitely ask to be compensated for that work and initial start-up risk if they are giving up equity. On the flip-side, if a new associate isn't happy with his or her situation, then (s)he is free to start up a practice de novo and see how easy or hard it is. No one is stopping you.
     
  36. TheLesPaul

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    The problem is when you expect someone to work like a partner, but be treated as an associate. Sure, a small minority of graduates may only want employment -- for that, there are the Kaisers and VAs of the world. But if you offer associate-level compensation, expect associate-quality work.

    An associate cares about the call schedule, how many patients they "have" to see per day, how long their lunch break is, whether the practice compensates them for CME, vacation days, etc. There will be no personal investment in the work, and rightly so -- after all, that is the benefit they gain for the long-term reduced earnings. If you want someone to work hard, you must offer them partnership and not be disingenuous about it.
     
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  37. Bgladney

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    Like marriages, several partnerships do not last over the years.
     
  38. dantt

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    Well...there is that non compete...which in many circumstances can extend throughout the entire metropolitan area. Those should be illegal.

     
  39. MstaKing10

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    It’s as if a new associate is a leech on the practice, sucking out revenue and time all the while contributing nothing to the practice. If that’s the way it’s viewed then sure, hire employees and never offer partnership. Also you will likely self select those types and further reaffirm the belief that new grads are a bunch of entitled you know whats. If on the other hand you are looking for an entrepreneurial type who will work hard, add revenue, expand the practice, bring something to the table and add value, then that’s a partner you should want on board, and pay them as such and offer a fair partnership track that’s mutually beneficial
     
    #38 MstaKing10, Nov 8, 2018
    Last edited: Nov 8, 2018
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  40. LightBox

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    Anyways, getting back to the point of this thread. PE acquisitions are EVERYWHERE. Better get partnered up as soon as possible to take advantage. I feel bad for the associates who thought they were on the partnership track only to learn they are being cut out due to PE lump sum money. Time for new grads to learn how to go solo.
     
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  41. 4ophtho

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    Do you think the PE takeovers will be successful in the long run and crowd out the small and solo groups? There is a PE venture in dentistry in my city with a huge branding and advertising push, but I see these storefronts open and change names because they can't stay in business. In ophthalmology, I regularly have patients come to me from the PE-acquired practices because they didn't like the new employee doctor that replaced their old doctor. People still want a personal relationship with a doctor that will care for them over the long run, and I believe PE has overlooked the importance of the doctor-patient relationship in an attempt to create a "brand." If I was an employee, I wouldn't really care about being friendly and charming to try to keep my patients and get them to refer their friends to me, I'd just clock in and get my paycheck at the end of the month.
     
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  42. LightBox

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    Very doubtful that PE-run groups will be successful in the long-term. But that's not the point of PE firms acquiring practices. Most of these firms have a time horizon of 5-7 years. After that period, they almost invariably want to be acquired by a bigger fund. These guys don't want to be in the Ophthalmology business for the next 30 years! The best practice model for patient-centered care will always be the physician-owned one. These practices are the most nimble and flexible and can always pivot toward enhancing patient care.

    But the entire attraction of PE for most practices is the huge buy-out at the beginning, and then the prospect of your shares' value amplifying if another fund acquires your mega-group. No one is doing it thinking about the longevity of their practice model.
     
  43. MstaKing10

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    No one can be certain about the future, but there are examples of PE acquisitions in other specialties growing into huge mega corporations (ie Sheridan healthcare recently purchased by Amsurg for $2.4 billion).

    Some practices have been squeezed by PE firms by first buying all the referral practices in the area then finally purchasing the target practice for much less than had they sold early. Also it really seems that consolidation will be the best way to keep practices solvent going forward given the healthcare landscape of reduced reimbursement and increased costs of running a practice.

    Ultimately only time will tell, totally understand those that prefer to watch from the sidelines.
     

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