Pitfalls of Private Equity Takeovers

You may have heard about this absurd story in the NYTimes a few months ago: An academic journal pulled a legitimate article comparing practice characteristics of groups that take on private-equity funding and those that do not. Why? Because a PE firm put the squeeze on their editor, that’s why:

In an interview, Dr. Hruza [the incoming president of the American Academy of Dermatology and board-member of United Skin Specialists, the largest PE-backed derm practice in the country] said he did not ask that the paper be taken down. He did, however, confirm that he expressed his concerns to Dr. Elston, the editor, after it was posted. Two days later, Dr. Elston removed the paper.

From the reporting in the times, this situation is absurd. If people have quibbles with the conclusions of a peer-reviewed article, then they should write a commentary. You don’t get to line-edit someone else’s manuscript.

Dermatologists account for one percent of physicians in the United States, but 15 percent of recent private equity acquisitions of medical practices have involved dermatology practices. Other specialties that have attracted private equity investment include orthopedics, radiology, cardiology, urgent care, anesthesiology and ophthalmology.

PE firms are following the money. However, their primary objective of extracting profit doesn’t necessarily equate with an understanding of how to actually run a successful, responsible, and sustainable medical practice.

Dr. Konda, [the paper’s lead author], said he first grew interested in the topic when several of his trainees went to work for private equity-backed practices and told him of clinical environments that emphasized profits at the expense of patient care.

 

With that preamble, check out this interview with radiologist and former PE analyst, Kurt Schoppe, MD on Radiology’s Nearest Threat, Commoditization, and the Misguided Notion That You Will Be Paid for Everything You Do.

 

Lots of excellent responses, but these three quotes give you a nice flavor of private-equity takeovers in broad strokes:

One of their favorite marketing lines is “physician-owned or physician-operated.” That’s really a misdirection because, frequently, they set up a holding company under which the physician group is a wholly owned subsidiary. Yes, the physician group is owned and operated by physicians, but it is not controlled by physicians because, as a wholly owned subsidiary, the parent corporation, or the holding company, is going to have absolute control. That holding company is not majority-owned by the physicians. The wording on the contracts is going to be such that the PE firm or the corporate entity is going to have control over the parent entity when it needs it.

What I’m getting at is no matter what the marketing says, no matter what they are telling people when they are selling services, these entities must make money for their owners/investor as their primary objective. Changing the economics of radiology group ownership is not fundamentally about the patients or saving money for the payers. They do these things to make money for their investors. This is not a negative judgement, it’s just a fact. If physicians want to sell their practice, if someone is only 4 or 5 years from retirement, and they only have a 4- or 5-year hold on their contract after they sell their group, well, that is just logical. From a purely personal economic point of view, it makes sense for them to sell, because they are not looking at a 15- to 20-year timeline.

The people who need to look out for this are the people in training, the people coming out of training, and the younger physicians in the group who have a 15-, 20-, 30-year timeline. If your goal when you came out of medical school was caring for patients, positively affecting the health care environment, or doing things for the greater good, I think you are better able to do that as a physician group in which you decide, as a group, how much money you need to make, what sacrifices you choose to make, and for whom you will charge less. If you cede control of your decision-making to a group that will only be motivated by its ability to make returns for its investors, you’ve put someone else in that conversation who does not necessarily share your values and ethics as a physician.

Anyone joining a hot-bed field like dermatology or radiology needs to understand the business model of your chosen profession and evaluate the health of both the practice and local market you consider joining.

While partners may get short-term windfalls in some buyout scenarios, non-partner employees are the primary profit source. Spending time in a partnership-track without eventually being a partner is a waste if the position becomes untenable and you need to start fresh somewhere else.

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