Medical Practices Are Hot Ticket for Private Equity Deals

The market for acquisition of medical practices by private equity firms has shown significant growth in recent years.

According to

, $29.6 billion was invested in healthcare in 2014 by private equity funds in the form of healthcare buyout deals globally. That’s a significant increase from $16 billion in 2013.

Bain & Co.’s 2015 Global Healthcare Private Equity Report

And the trend is expected to continue, albeit with a slight shift.

“Over the last few years it’s been very specialty oriented in maybe the dermatology, pain, anesthesia, dental practice kind of arenas,” says Deborah Dorman-Rodriguez, a partner at

, and the leader of the healthcare practice group. “And now there seems to be an interest in primary care.”

Freeborn & Peters LLP

That interest could be peaking as payment models change.

A Growing Interest

Dorman-Rodriguez explains that with healthcare payment models changing at the government program level, both in Medicare and Medicaid, toward value-based care rather than fee-for-service, the interest by private equity firms has been piqued.

“[Private equity firms’] perspective is that the types of practices, and the physicians who know how to manage care and know how to deal with data and understand the status of their patients are the folks who are really going to succeed in a value-based arena as payment models begin to change,” Dorman-Rodriguez says.

The forecasted shortage of primary care physicians could make these medical practices even more attractive. Dorman-Rodriguez hasn’t any data to confirm this, but speculates that if the shortage as forecast comes to fruition, it could make primary care physician practices even more attractive.

“It will be interesting to see if that evolution, in terms of the desire for primary care practices, escalates in relationship to any shortage that happens over the next few years,” she says. “That’s a really interesting point.”

Who’s the purchaser?

Private equity deals involve a purchase by privately funded groups, and Dorman-Rodriguez points out that these groups come in all sizes and shapes. For physicians, it’s important to know who’s interested in purchasing your practice. For example, is it a well-capitalized group that has enough money to invest in the practice and “stick it out” for an extended period of time?

“That’s why a lot of folks are interested in watching this,” she says. “Some of the deals I work on include individuals and funds that have never been involved in healthcare before.”

But everything is about timing. Dorman-Rodriguez explains that there’s a lot of room for innovation in healthcare in ways that probably weren’t observable four or five years ago. She sees much room for creativity and innovation in the approach to value-based care, and is not surprised at the interest in that aspect of the healthcare system.

“It’s a large percentage; a large GDP overall,” she says of the healthcare sector. “So people who are involved on the financial side are going to take interest in that.”

Benefits of Dealing

Dorman-Rodriguez says that physicians looking to monetize equity in their practice can do so through private equity deals. And depending on how the deal is structured and what the physician’s role is, post-close, they could find themselves free from debt and relieved of much of the regulatory and administrative burdens of running a medical practice.

“I think in some ways private equity deals give some flexibility on what the physician’s involvement is, post close, that may not be available in other types of deals, because that can be negotiated,” she says.

For example, do the physicians want to be considered employees post close and no longer involved in the management of the practice? Or do they want to retain some percentage of ownership interest? Private equity deals are often a little more malleable in terms of the physician’s level of involvement post close, she said.

Plus, says Dorman-Rodriguez, it does still seem to be a seller’s market.

“If a physician or a small group has the right financial advisors and the right attorneys, they can market themselves to a wide variety of types of private equity entities and funds, and negotiate what they want their world to look like,” she says.

Due Diligence

The risks, says Dorman-Rodriguez, just as with any deal, depends on how the deal is structured, and with whom. Physicians could find themselves facing financial issues if they don’t select a well-funded fund.

“It’s like selling your house or any other type of business,” she says. “If you take the first knock on the door, you might find yourself wondering, have I done the best deal for myself? Independent advisors can help physicians get the best deal and the best structure for them.”