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 private equity is investing in medical practices  Benefits and risks of private equity

3 Assumptions Physicians have become big business, yet most remain fragmented and not professionally managed Click to edit Master title style 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

4 What is private equity? PE refers to organized groups of PE firms balance the risk of the Click to edit Master title style private investors – pension funds, investment against the return it sovereign wealth funds, high net‐ will generate – with a focus on worth individuals, and university ensuring they can get their money endowments – who wish to put out at some point (liquidity) while their money or capital to work in anticipating average annual diverse investments. returns of 20% or more.

5 How private equity investment generally works PE firms PE firms rarely PE firms aim to Click to edit Master title style typically take seek 100% sell practices 60% to 80% ownership within 3 to 7 because they want ownership, years. physician owners to although sometimes share their growth they accept minority objectives. ownership in very large medical practices.

6 How PE deals are structured Acquisition prices are based on EBITDA (earnings before interest, taxes, depreciation, and amortization) which is a proxy for cash flow. Click to edit Master title style 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. 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. 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.

7 Physicians increasingly turn to private equity for capital Click to edit Master title style PE is accelerating their investment beyond high volume, high margin practices – dermatology, ophthalmology, emergency medicine, anesthesia, cardiology, orthopedics, urology, radiology, gastroenterology, and dental. 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.

8 Why have primary care practices become a hot investment? 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. Click to edit Master title style According to McKinsey Health care is a relatively around $1.8 trillion of “dry recession‐proof industry – powder” or funds sitting demand remains constant idle and ready to invest even during downturns Investors see an opportunity to Follow the Gretsky Rule – skate to create value by increasing where the puck is going (value‐ efficiencies and consolidating based payment) not where the market power puck is (fee‐for‐service)

9 How private equity is achieving returns and creating value – specialist Click to edit Master title style • Improve revenue‐cycle management and back‐office administration • Consolidate fee‐for‐service providers to maximize revenue by ensuring correct and exhaustively coding patient encounters • Encouraging physicians to see more patients • Vertical integration by acquiring providers of services which may have been referred out

10 How private equity is achieving returns and creating value – primary care Click to edit Master title style • Negotiate higher paying risk‐based or value‐based contracts from payers and Medicare Advantage • Upgrade technology platform to realize back‐office efficiencies, care management capabilities, clinical analytics, and implement best practices for care • Bring strategic, financial, and administrative acumen to support medical practices

11 Potential Benefits • Capital to improve care and expertise in financial discipline, business operations, and acquisitions of other practices to grow the practice and develop it into a much Click to edit Master title style stronger and more financially viable entity • New capital to invest in technology required to succeed in value‐based payment arrangements • New capital to assist in recruitment of new physicians and talent • “Shelter from the storm” and freedom from running a practice

12 Potential Risks • Loss of control of the business side of the practice • Buy‐in from owning and non‐owning physician shareholder Click to edit Master title style regarding contract incentives – those ready to retire versus mid‐career versus new physician shareholders • Fear of placing profitability over patient outcomes • Nearly all physician practice management companies that were publicly traded in the 1990s failed

13 Questions that must be asked  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? Click to edit Master title style  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?

14 The road goes on forever, but the party never ends • Many of the largest practices have already been acquired by hospital, insurer, or PE firms Click to edit Master title style • No peer‐reviewed evidence exists that examines the effects of PE acquisitions on the quality and cost of patient care; physician professionalism; or the experience of patients, physicians, or staff • PE practice acquisition is increasing and EBITDA multiples are reaching excessive levels that may not be sustainable • Most PE sales to date are to other PE firms, but if the ability to sell at higher multiples declines, the ultimate buyer could be hospitals and health insurers

15 Final thoughts There should be an Have a clear Involve legal counsel unambiguous alignment of Click to edit Master title style who are familiar with governance similar transactions. physician and document investor goals that outlines who and incentives does what and that regarding growth, … survives any strategy, and long‐term transaction – physician prosperity. and can only be modified by the physicians in the organization.

THANK YOU Tom Banning CEO/EVP Texas Academy of Family Physicians www.tafp.org | tafp@tafp.org