This episode wraps up our three-part series and focuses on Culture; an extremely important transaction issue to both buyers and sellers. We discuss the new partnership approach and the many ways that a private equity transaction can be very positive for physician-owners of all ages and practice size.
We also discuss why orthopedics and spine will soon become a hot vertical.
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This is a different investment approach by private equity relative to what happened in the 90s. 90s investment was very intrusive, we're not seeing that now, we're seeing extreme deference to positions in that area and in other areas across the practice.
Welcome to PF Insights hosted by the leadership of Physicians First Healthcare Partners. If you're a physician practice owner or an ambulatory surgery center owner and you're wondering how to navigate the mergers and acquisitions ecosystem this is the podcast for you.
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Chris: Welcome to PF Insights episode 3, we are wrapping up a three-part series on private equity interests in physician practices in 2018. Today we're going to take a look at kind of where we've been, where things are today and where this is all going in the future in terms of private equity and physician practices. I'm joined today by the leadership team of Physicians First Healthcare Partners Eric Yetter and Andy Snyder. Guys, good to see you again.
Eric & Andy: Thank you, good to see you.
Chris: What I want to talk about today is culture, so anytime you have an outside entity such as a private equity firm investing, buying a physician practices, there's an injection of culture whether it be operational, financial, clinical. So we want to talk about how that sort of thing shaked out in the past for these acquisitions and what that looks like now. Eric let's start out with you. Just in terms of clinical practice, when these types of transactions happened in the past what were the sort of things that would happen to a physician's practice from a clinical standpoint when they were acquired by an outside private equity firm?
Eric: We've already talked about it in past episodes and we've stressed how this is a different investment approach by private equity relative to what happened in the 90s. 90s investment was very intrusive into the culture of a practice both on the business side but also to an extent on the clinical side. It's not that somebody was telling physicians how to practice medicine explicitly saying you need to treat a patient this way, you can only do surgery in these cases etc. It was more nuanced than that but it had negative effects and tremendously negative effects on medical practice and how physicians viewed outside investment in their in their practices. This is a very different time now. This is a very deferential investment culture and it's very growth oriented. They're not looking to change day to day operational stuff, not looking to change day-to-day clinical stuff. A great example of that was the emphasis in the 90s on controlling the supply chain, on finding lower-cost medical supplies including implants for ophthalmologists the relevant thing there would be implantable lenses or drugs for retina specialist whatever that is, but dictating the supply chain making the physician practices that were acquired buy a certain type of supply through the global parent company that was ultimately cheaper and ultimately made the global parent company more money but it wasn't the physicians choice, it might not be the product that they're comfortable with, it might not be the product that they feel is the best for their patients and it was just intrusive it was not fair to them and created a negative culture. We're not seeing that now, we're seeing extreme deference to physicians in that area and in other areas across the practice.
Andy: Just to add to that, as Eric said when an outside investor comes in and takes control the supply chain and limits the physicians choices on what brands they can be using obviously that's going to create some negative tension and really the private equity investments now, they're focused on making the physicians, their physician partners, champions of the platform. They need their physician partners to go out and give a good referral to for future acquisitions. These platforms are growing through acquisition growth and they need to have a good reputation of “no we're not limiting your options on supply chain in fact we're doing just the opposite of that”. We are going in and if you need a piece of expensive equipment that you weren't able to acquire in the past that's going to expand the services you offer your patients we're gonna be that financial backer that can help you with that equipment purchase and that's gonna create opportunities for growth. That's gonna help you want to go to your other physicians in the area and say yes you should look you should look at it partnering with these guys they've done wonders for a practice.
Chris: So what I'm hearing is it's not that they're the private equity firms are just yielding to these demands from physicians, they're actually selfishly changing the way they're influencing clinical because it actually helps them in their business to win more deals and to have a better, once they acquire a practice that it's actually a better practice so it actually works to their benefit.
Eric: It's a win-win, in the past they try to get ahead and they ended up shooting themselves in the foot by doing that. Now they've realized that the way to get ahead is to is to serve the physicians. That's been really successful so far and more historically you can look at the success of some of the ambulatory surgery center companies that have had that model from the beginning and amsurge is a great example they've had the model of being extremely physician deferential and they've done that for a long time and they've been extremely successful and a lot of these firms now are looking to replicate that type of approach for practice acquisitions.
PF Insights is sponsored by Physicians First Healthcare Partners, the investment bank for physicians. If you’re a physician and curious about the market value of your practice give us a call for a personalized valuation. Reach out at 615-647-6885
Chris: Let's shift gears a little bit and talk about orthopedics and spine practices. We talk a lot about ophthalmology on the podcast because that's really where a lot of the heat is right now but actually orthopedics and spine is still a hot vertical. So I wonder what what do you expect out of those verticals this year?
Eric: We really like to think about where this is going next. We want to be on the front end of that. We talk to people in the industry, investors call us to pick our brain about what we think is next and we ask them what they think is next and we think it's orthopedics and spine. Importantly spine care, it doesn't just come from orthopedic surgeons, it also comes from neurosurgeons, very heavy component of spine care and interventional spine. We think that those areas are the next areas for major private investment in the physician practice and ASC areas for a couple of reasons and they're really the same reasons that investors have been interested in dermatology and now are interested in ophthalmology and that is great market trends, people aging into this type of care, the demand for this care accelerating and at the same time a continued and accelerating physician shortage which really encompasses all the surgical specialties but is very prevalent in these ones as well. It's a great supply and demand scenario that investors like. All this stuff is relatively recession proof, if people need this stuff done they're going to get it done and the global migration in our health care system towards lower cost of care ambulatory care and ophthalmology has benefited from that tremendously over the past 20 years. Now orthopedics and spine is starting to benefit from that more and more and will continue to benefit more from that in the future. The major thing that's going to happen, we're pretty confident is that Medicare is going to approve total joint replacements for payment in the ambulatory care setting in ASCs and when they do that that is going to be a huge win for physicians, it's going to be a huge win for patients because of the lower cost and the higher quality that they can get in ASC and it's going to create a great investor opportunity and investors are very excited about that. They've already started looking for good opportunities in orthopedic and ortho neuro spine. Andy and I are trying to be on the forefront of this. We're already talking to physicians and those specialties, already talking to investors looking forward to starting to put those deals together. I bet two or three years from now we're gonna be having the conversations we're having about ophthalmology now about orthopedics and neuro ortho spine.
Chris: Andy anything else you would add of that in terms of orthopedics and spine?
Andy: No, you said it all. (laughs)
Chris: Yeah so we're at the crest of the wave right now in terms of ophthalmology and we're a little bit further back on the the the slide upward for orthopedics and spine.
Eric: We're almost not even started yet. There's been one major acquisition made in spine and probably one or some might say zero acquisitions made in orthopedics depending on how you look at it. We're just at the very beginning of this and we're looking for the best groups to do this with first. Absolutely and the investors are looking for that too and are very enthusiastic, so we would love to have forward-looking conversations with people in those specialties. There might not be an opportunity available right now, probably only opportunities available for the best groups but love to talk to physicians about what this might look like and how they can prepare what they should be thinking about now.
Chris: Andy let's talk a little bit about “I'm too small to sell or more specifically I'm too young in my career to sell”. A lot of people think when a physician sells their practice it's because they've got a short career runway, they've got five years left and they need to do succession planning and planning for retirement and that sort of thing and capitalize on what they've already built. Talk to me about, is that all we're seeing out there in terms of opportunity for people late stage in their career? or does it go back further so like if I'm a physician say I have 20 years left in my career, what are the options out there?
Andy: You're right, that is a myth I will call it that we run into. A lot that physicians are under the impression that these type of practice acquisitions are reserved for physicians getting towards the latter end of their career and it is a succession plan and it's really handing off the baton from a senior physician to a private equity firm on the way out and that's just not true. There's a lot of different structures to these acquisitions and much like the ambulatory surgery center partnerships that have been going on for twenty or thirty years now some of these practice acquisitions take the same form of being just slightly over a majority maybe a 51% acquisition where there's a lot of retained ownership on the physician side or maybe that retained ownership is in the form of equity in the global platform company that's being built. Instead of giving physicians, handing over the control and feeling like that they know they're no longer owners they're on their way out now it's really an investment for growth from both sides, the resources that these private equity investors can bring to the table can really give these physicians the opportunity to grow through further practice acquisitions or through like we said earlier allowing them to purchase equipment given and let them offer new services to their patients and let the physicians participate in this continued growth. That really is a reason for a physician who has 10, 15, 20 years left to take advantage of this opportunity that's for them as well.
Eric: The only thing I would add to that is that a lot of physicians have very high performing associates in their practice and in some cases these associates have been talked with about partnership opportunities or maybe they've even been promised a partnership opportunity in the future and it's important for the current partners not to view a deal with private equity as throwing all that out the window. This is an important part of the continuity of these practices and because of that the investors have created mechanisms for associates to buy in and have equity ownership of some kind, become some type of a partner in the practice or the global ophthalmology company going forward. So there's still those types of opportunities available for young doctors just out of training or young doctors still in their associate years who are wanting to become partners after one of these deals is done.
Andy: We always talk about how one of the biggest worries of a private equity firm coming in is that the physician partner is going to go through an acquisition and walk away. Well an equally big fear is that once there's a new private equity control in the practice that the associates are going to walk away because they feel like they don't have an opportunity to get a piece of equity going forward that they've been working for the first half of their career, but they do still have those opportunities through the mechanisms Eric's talking about.
Chris: That's all the time we have for this episode, thanks for listening be sure to visit the website at http://www.physiciansfirst com to get more information articles and podcasts just like this one about investment in physician practices and surgery centers. Eric, Andy good to see you guys as always and I'll catch you on the next one.