Private equity?

[Atlantoraja]

Glaucoma fellow here looking for jobs summer 2021. I keep running into some of the best apparent opportunities for private practice jobs being owned by private equity firms. How much of a potential deal breaker is this? I worry about not having a say in how the practice is run and having income being skimmed off the top in the future. What kind of questions should I be asking these practices in figuring out the details of how this might affect me in the future? Thanks for any insight that can be offered.

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[Super66]

In the same boat here.

A recent Ophthoquestions post made by someone who recently sold their practice to PE provides a nice overview of the mechanisms behind the scenes, written in a way that's more or less comprehensible to folks with little background in these things. Unfortunately, "Part II" is supposed to address the cons of the deal and has not been written or posted yet.

My Experience Selling To Private Equity (Part 1 -- the Good) - OphthoQuestions

From my standpoint, one thing I keep in mind is that in the current economic climate w/ possible additional future temporary shutdowns due to COVID outbreaks, I suspect these PE groups can weather such things much more easily than the standard private practice as they literally have billions of dollars in capital at their disposal. But of course, they will base their decision-making on whatever is perceived as most profitable for them (i.e. keeping their investment afloat vs. cutting losses).

Looking forward to hearing more replies hopefully, particularly from folks who have actual personal experiences with this.

 

[dantt]

Nobody knows what the future will look like after the 2nd sale. Just make sure you don't have a non compete or the non compete is reasonable. Otherwise anything they promise can just be changed and you have no recourse.

 

[salami bahama]

In the same boat here.

A recent Ophthoquestions post made by someone who recently sold their practice to PE provides a nice overview of the mechanisms behind the scenes, written in a way that's more or less comprehensible to folks with little background in these things. Unfortunately, "Part II" is supposed to address the cons of the deal and has not been written or posted yet.

My Experience Selling To Private Equity (Part 1 -- the Good) - OphthoQuestions

From my standpoint, one thing I keep in mind is that in the current economic climate w/ possible additional future temporary shutdowns due to COVID outbreaks, I suspect these PE groups can weather such things much more easily than the standard private practice as they literally have billions of dollars in capital at their disposal. But of course, they will base their decision-making on whatever is perceived as most profitable for them (i.e. keeping their investment afloat vs. cutting losses).

Looking forward to hearing more replies hopefully, particularly from folks who have actual personal experiences with this.

Having tons of money in reserve to weather the storm makes sense, but our friends over at Solo Building Blogs have made the opposite point: the average PE practice may have a higher overhead dependent on high patient volumes that have been cut down a lot over the past 5 months.

Does anyone have any thoughts on managing difficult pathology in a PE setting? I worry that a PE firm may be more interested in having their docs see patients that would generate more money for the practice (ie premium IOLs, refractive surgery, etc.) with the least chair time. Or if you're in a setting going to multiple locations in a week, could you closely follow a patient? Curious if anyone has any thoughts on that.

 

[percyeye]

The PE firm wants to make as much money off of you as possible so they get a bigger multiple when they sell the practice here in a 3-5 years. If that sounds exciting I'd join right up.

 

[Atlantoraja]

The PE firm wants to make as much money off of you as possible so they get a bigger multiple when they sell the practice here in a 3-5 years. If that sounds exciting I'd join right up.

Agreed. I am so disappointed that our favorite practices in our favorite location(s) have been all PE owned. Feel like we will have to make a decision between a less than ideal practice setting or a less than ideal location.

 

[dantt]

Does anyone have any thoughts on managing difficult pathology in a PE setting? I worry that a PE firm may be more interested in having their docs see patients that would generate more money for the practice (ie premium IOLs, refractive surgery, etc.) with the least chair time. Or if you're in a setting going to multiple locations in a week, could you closely follow a patient? Curious if anyone has any thoughts on that.

PE will not prevent you from managing difficult pathology if you so choose. They typically do not micromanage your practice.

Agreed. I am so disappointed that our favorite practices in our favorite location(s) have been all PE owned. Feel like we will have to make a decision between a less than ideal practice setting or a less than ideal location.

What is it about the practice that you like? You spend a few years working and you start to realize that you actually bring quite a bit to the table and your practice starts to reflect you. Or you dont. In that case, pe employment is as good as any.

 

[MstaKing10]

Like it or not PE is here and likely here to stay. If you are joining a practice that’s PE owned you know what you’re getting into. If you’re going into one that is not PE owned theres a good chance they are at least looking into it. PE owned practices vary widely dependant on owner, but most do not want to micromanage. They want happy productive doctors. They especially want bright, well trained and satisfied young doctors. As such, the starting salary is usually quite high (compared to the traditional partnership track practice) with good benefits. No need to worry about huge buy ins or practice management issues. Many offer equity ownership and an alternative partnership track where revenue streams outside of pure productivity are offered. The “run them lean and dry” misconception doesn’t work well as it doesn’t benefit the firm or the doctors. It’s not all rainbows and butterflies and it’s certainly not for everyone but there certainly is a lot of misconception regarding PE these days.

 

[Bgladney]

The biggest questions I field regarding private equity are:

1. When they have overpaid for the practice the first time, who is going to overpay for the practice the second time?
2. Will PE continue to overpay for practice acquisitions in the future?

After 23+ years in the industry, I have seen some "corporate version" of today's private equity. In each model, those on the front end make out like bandits. Those joining later, it never works out well.

While they have "money", several physicians have been let go by PE practices due to COVID. Others were given the choice of a major pay cut or a layoff. One private equity practice had the office copier repossessed! A physician in the practice had his paycheck reduced to around $450 pre-tax. Again, a take it or leave it. Obviously COVID has been something we could not forsee, and this might be an outlier, but it is happening.

The idea that the management will be "hands off" will not happen. Obviously, they need to show a "profit". I don't see management allowing a physician to continue to see current patient levels after the proposed 6% CMS cut. Investors want a profit and there is only two ways of doing that, cutting expenses (staff/salaries/benefits) or seeing more patients. If you don't like it, you still have the choice of staying or leaving.

I have seen some equity models as @MstaKing10 mentioned, that could be a nice "partnership" between the PE and Physicians. The problem is that we will not know if these models work for several years.

My two cents.

 

[MstaKing10]

The biggest questions I field regarding private equity are:

1. When they have overpaid for the practice the first time, who is going to overpay for the practice the second time?
2. Will PE continue to overpay for practice acquisitions in the future?

After 23+ years in the industry, I have seen some "corporate version" of today's private equity. In each model, those on the front end make out like bandits. Those joining later, it never works out well.

While they have "money", several physicians have been let go by PE practices due to COVID. Others were given the choice of a major pay cut or a layoff. One private equity practice had the office copier repossessed! A physician in the practice had his paycheck reduced to around $450 pre-tax. Again, a take it or leave it. Obviously COVID has been something we could not forsee, and this might be an outlier, but it is happening.

The idea that the management will be "hands off" will not happen. Obviously, they need to show a "profit". I don't see management allowing a physician to continue to see current patient levels after the proposed 6% CMS cut. Investors want a profit and there is only two ways of doing that, cutting expenses (staff/salaries/benefits) or seeing more patients. If you don't like it, you still have the choice of staying or leaving.

I have seen some equity models as @MstaKing10 mentioned, that could be a nice "partnership" between the PE and Physicians. The problem is that we will not know if these models work for several years.

My two cents.

All good points.

Playing devils advocate for a bit:

What makes you say PE overpaid? These firms are full of smart, business savvy investors. The process to arrive at a figure is so intense and under so much scrutiny by accountants, attorneys and investors alike I would be surprised (though not overly) if the figure was too much. Most PE firms entering the initial space are small. But there is always a bigger fish with more cash on hand. This model has worked (debatable wether well or not) in other fields like anesthesia, derm, ER, dentistry etc. so what makes ophthalmology higher risk than those?

There are not guarantees a traditional private practice/partnership track job will work out either, though admittedly these PE ventures are in their infancy and it is harder to predict how they will work out compared to a well established practice. Unfortunately, it is not uncommon to hear about a practice churning through associates, underpaying them and overworking them to pad the older docs wallet. In a PE firm the younger docs are valued perhaps more than the older docs as they are likely to be more productive and have a longer future tenure with the practice. In fact, it could be argued that in this model older doctors are at a disadvantage especially if they are unable to keep up pace with their younger colleagues depending on how the employment contract is structured.

COVID has led to unemployment issues in all fields. Having a PE partner during these times can be viewed as a benefit as there is sufficient capital to withstand the huge hit taken by these practices during the pandemic.

Profit can emerge from multiple different avenues. While seeing more patients is one, it's certainly not the only one. Clinical research, expansion into different territories, additional practice acquisitions, etc all drive up the entities value.

 

[beijing67]

Two of your main concerns are not having a say and having profits skimmed off the top. I know it's not always the easiest or best option, but solo practice addresses both of those issues.

Given that glaucoma is a more in-demand subspecialty, does that make hanging a shingle a viable option? I don't personally know enough about the economics so I'm just spitballing, but maybe people with more knowledge on the matter could provide some insights.

 

[Bgladney]

What makes you say PE overpaid?

Ask around. I retina surgeon I worked with last year was offered 5 times the value of his practice. He had to take the deal! He lasted the two year requirement and left because they were starting to ask him to add more patients to his schedule. He saw the writing on the wall.

Most of the practices that are being sold are owned by older physicians. It is a great way to retire! Cash out now, work for two more years and retire. In the past, this has been the common process. As we go further into it, the PEs will start offering less cash up front, with long term payouts....that is when you know the money is drying up.

The first I remember was Physician Resource Group back in the late 90's early 2000's. Last version was American Optical Services. Look them up. AOS was great for those who sold out on the front end. Those who sold towards their demise not only did not get paid for the practice, but had to try to obtain their practices in court, since they had signed the ownership over to AOS.

Again, not saying PE's are bad, just know the history of prior PE's.

 

[MstaKing10]

Ask around. I retina surgeon I worked with last year was offered 5 times the value of his practice. He had to take the deal! He lasted the two year requirement and left because they were starting to ask him to add more patients to his schedule. He saw the writing on the wall.

Most of the practices that are being sold are owned by older physicians. It is a great way to retire! Cash out now, work for two more years and retire. In the past, this has been the common process. As we go further into it, the PEs will start offering less cash up front, with long term payouts....that is when you know the money is drying up.

The first I remember was Physician Resource Group back in the late 90's early 2000's. Last version was American Optical Services. Look them up. AOS was great for those who sold out on the front end. Those who sold towards their demise not only did not get paid for the practice, but had to try to obtain their practices in court, since they had signed the ownership over to AOS.

Again, not saying PE's are bad, just know the history of prior PE's.

The series of acquisitions in the 90s is much different than now. Those PE groups were much less sophisticated, had less capital and offers were highly leveraged with more of the payout coming in the form of equity. Firms now have tons of capital and payouts are cash heavy thus putting more of the burden on the firm and less on the practice

Not sure how they arrived at the value of the practice of the retina doctor you mentioned but a 5 X multiple honestly is quite low. Not sure I would’ve taken that deal. Also not sure what PE firm is letting these doctors quit after just 2 years. They usually have you sign contracts with longer terms as they want you to have skin in the game and stick around until the second sale.