The Private Equity Model in Medicine is Flawed

It can be hard for trainees in the job market to make sense of the current state of affairs. Everyone knows private equity companies have been gobbling up practices around the country in an ever-consolidating market, but the implications of this trend are another matter entirely.

Most people willing to talk openly about private equity and radiology, for example, are those not working for private equity in radiology. The messaging from those in the industry is usually a vague hey come on over guys the water is fine. And there are several reasons for this. One big one is that many of these deals are fresh, and the partners who’ve sold their practices to private equity are still in the vesting period for their buyout and contractually obligated to continue working and not undermining the groups they’ve sold. There are nondisclosure agreements in play, and folks are not gonna be posting about how terrible a decision it was on Facebook while simultaneously recruiting to keep the practice afloat amidst an exodus of associates. Even unhappy associates are unlikely to badmouth their group publicly, certainly while employed but often even after leaving due to bad karma/small world effects.

However, discussion in private tells a different story.

One of the perks of writing online (and working for a large, democratic, independent, 100%-radiologist-owned practice) is that I get to talk to a lot of people.

And for residents, fellows, and those wondering how things are going, here’s my impression: the private equity model in medicine is fundamentally flawed.

(I should clarify before we go on that private equity is a financing model and not an operational certainty, though PE-firms do have a well-deserved reputation for corporate-bad-acting in the name of short-term profits even when doing so damages the underlying business’ long-term prospects).

((I should also mention the opposite isn’t necessarily true either: just because a practice is independent doesn’t mean that it is therefore honest, well-run, or democratic. Every potential job should be evaluated on its own merits)).

(((And lastly, plenty of other practices, including academic ones, have been using the same techniques to increase revenues at the expense of the academic and patient care missions. If growth and profit are the primary metrics for a healthcare enterprise, then high-quality care and intangibles like good teaching will invariably suffer.)))

The Pitch

The only doctors who can reliably benefit in a private equity transaction are those senior partners close to retirement who can take their money and retire. They often do this by destabilizing that group for the long term and undermining the profession.

There are good reasons some doctors might make less money in the future, such as in order to increase access and improve health equity or to spread the zero-sum Medicare pie more evenly between different specialties.

However, sacrificing autonomy and paying a large fraction of revenues to a corporate overlord is less likely to be one of the good ones.

I want to be clear that not all groups that have sold to PE have done so in an opportunistic fashion just to cash out, there are many lines the PE folks use to entice groups to sell.

For example, they may argue that they will be able to make up for their cut by negotiating higher rates under a bigger corporate umbrella with a larger market share. (While theoretically possible, this is usually not the case. Reimbursement rates are generally falling, and negotiated rates rarely go up sufficiently if at all to make that math work out. In particular, the No Surpises Act, if current challenges fail, will cause substantial downward reimbursement pressure).

They also will argue that they can leverage IT infrastructure, “AI,” and other goodies to make your practice more efficient. (But ultimately the increased efficiency is mostly related to radiologists simply reading more cases per day. That’s the kind of efficiency that corporate America is used to. Squeezing more.)

Other times they may use market dominance to aggressively compete for contracts and force groups to assimilate (i.e. the Borg method). This is especially true for second-order acquisitions in a metro after a private equity firm has already captured significant market share, allowing the firm to mop up more groups and hopefully achieve local dominance. Even in areas without a substantial PE presence, firms can sometimes use their relationships with health networks or imaging center chains to exert a lot of pressure, particularly when contracts are up for renegotiation. The general trend of healthcare consolidation has made this easier.

The Sale

So what happens in a private equity sale? Recently, that has meant that a group has sold a controlling share of itself to the private company in exchange for a monetary sum that typically vests over a period of time (e.g. five years). A significant portion of that money (e.g. 20-50%) isn’t cash but is instead “equity” (an ownership stake in the form of stock) in the parent company. That equity is always a minority stake and never results in control. The “shares” a physician holds are a different class than the “shares” the PE-owners hold, and that makes all the difference.

The partners who get the benefit are also on the hook for the vesting period. If you don’t stay, you don’t get all the money. They also have a contractual obligation to keep the group running and reproduce the financials that gave rise to the sale. And this is important because keeping the group running is not always an easy feat, especially if the partners were already pumping the rank-and-file for higher productivity in order to look better before selling.

After a sale, the PE owners eat first. The initial buyout amount is typically a multiple of a capitalized share of group revenue. The bigger the fraction sold, the larger the number (e.g. 30%) the new PE owners take from operating revenues (and therefore the less available to the doctors actually doing the work). If the partners were aggressive in maximizing the buyout windfall, the less they’ll earn going forward in salary.

The Profits

In the world of operations management, a company can increase its profits by increasing revenues and/or decreasing costs. When you take over a new business, increasing revenues may be a goal, but it’s not a guarantee and rarely something you can achieve out the gate in an otherwise reasonably functioning enterprise. Lowering costs though? Well, that’s some easy math.

The low-hanging fruit is to “streamline” operations and increase efficiency, which in radiology mostly amounts to each radiologist reading more RVUs, hopefully also for less pay. You could lose/fire some people and keep patient volumes the same, or have the same number of people do an increasing amount of work instead of hiring to handle growth. When non-partner rads quit and you can’t recruit, then you automatically earn higher profits as the same amount of work is divided among the remaining rads on staff. Congrats.

Decreased pay and increased work are the hallmarks of value extraction in the corporatization playbook (and certainly not unique to the PE-financing model).

But, ultimately, this is where the math breaks down.

This is not a silicon valley start-up where you hope to hit a home run with crazy multiples or a unicorn IPO. These are mature service businesses in a highly regulated industry. There’s simply isn’t enough operational wiggle room for a company to take a big revenue percentage off the top without changing the function or structure of the underlying business in undesirable ways. There are no exponential profits like through selling software. Doctors earn money linearly through patient care. You earn more money by doing more work. There is no free lunch.

I have yet to see or hear of an example where true efficiency gains have offset the haircut or where billing improvements have led to substantially better collections (radiology practices, in general, have not been the dominant perpetrators of unsavory practices like surprise billing). There may be examples out there, but if there are, those positive details are being kept under even better wraps than the negative ones that have managed to filter through.

No one goes into medicine because they want to practice dangerously high-volume care.

The Death Spiral

Value extraction is not the same thing as wealth creation. A good business doesn’t just take a slice of the pie, they make the pie bigger. Practices can grow organically, but it is no easy feat for a mature practice to grow at the level required to please equity investors. And investors must get their returns.

Right now there are more job postings on the ACR job board than there are graduating trainees. There is quite literally a shortage of radiologists, and many new graduates are shying away from PE practices when they can. In order to compete, PE firms have begun increasing pay and shortening “partnership” tracks in order to stay competitive, but ultimately these moves will only further erode the profits they need to make to keep the enterprise rolling and pay down their debts.

I’ve been doing some recruiting for our practice recently and in doing so talked to multiple people from all across the country who are trying to bail from private equity managed practices. The stories are different and yet all the same.

Partners who regret that sale, who often felt forced to sell due to local factors when other groups had already sold or who bought the line that they needed to get big to survive.

Groups that were promised that under the new umbrella, reimbursements would rise and that it was those higher revenues and magical unicorn fairy dust efficiency gains that would pay for the rent-seeking of their corporate overlords and leave their groups healthy for the future.

Groups that then didn’t see those promises come to fruition but did have an obligation to keep their groups afloat during the vesting period even after working conditions worsened and young radiologists left, creating a death spiral where the job gets worse and worse leading to more call and higher productivity demands and–of course–more difficulty recruiting. This perpetuates until either the group can’t fulfill their contracts and they lose the business or, as will be happening increasingly soon, the partners flee for retirement or other greener pasture independent groups for the next stage of their careers.

The Future

(/ what is a young doctor to do?)

You should do whatever you want.

But since you’re here, here’s what I would do: If you are a young grad and want to lay the foundation for a long-term career, I would suggest avoiding these practices when possible. At the minimum, you must find out about turnover, find out why people left, and ideally talk to those people for an honest assessment. These are things you should be doing for any potential job but are especially important in the recent acquisition setting.

Even terrible jobs don’t sound terrible when they’re being sold.

The model is flawed, and things are going to get worse in these practices before they get better. As of right now, there are certainly PE jobs out there that are day-to-day solid, and they might stay that way. But recent history has shown that we shouldn’t take the future for granted.

Of note, the PE funding model allows these companies to do things, at least in the short term, that lead to growth or at least a good-on-paper job. They can and do use debt (borrowed money) to grow the business: to buy more practices, invest in infrastructure, etc. Many of these well-paying desirable-seeming positions are not funded by operations but by debt, meaning that the company has borrowed money to artificially pay well for jobs that would otherwise be unaffordable based on the revenues of the business itself. This may not be sustainable.

That sort of leverage is how companies scale rapidly. Recently, we have come to the point in the cycle where debt is being used to prop up struggling service lines. Soon, we may get to the point where cash flows can’t cover existing loan obligations and more debt is needed to pay off the old debt (i.e. The Ponzi stage).

For example, desperate to hire mammographers, PE practices have been offering generous employee track positions. These are probably both temporary and unsustainable. As a young rad, you might make a lot more money in the short-term immediate future taking one of these jobs, but the deal will stay just as long as it needs to for recruitment and not a moment longer. A reimbursement change to digital breast tomosynthesis a few years from now or a slash in technical mammo reimbursement probably won’t change your salary much in a democratic group, but it likely will if you’re picking a job based on chasing the biggest number you can find.

While finishing up training, you also may have no idea what it feels like to earn that extra high salary either. If you don’t mind jumping ship in a year or two for healthier volumes or a real say in the direction of the practice, then you can take that risk. But if you’re hoping to establish roots somewhere, then some extra money upfront may not be the right call for you, especially when you consider the non-competes these practices universally utilize (the biggest existential threat to a corporate practice is its doctors quitting and reforming a new practice under their noses).

It’s not that one choice or the other is wrong; it’s that you need to have your eyes open, understand the situation, and make the right choice for yourself.

Again, there’s no free lunch. Many independent democratic groups simply can’t sweeten the pot for individual hires the way a group hiring employees can. When you own your practice, the company’s profits are your profits. When you’re an employee, your pay is the biggest cost for the company, and physician salaries are the biggest expense for any corporate-style practice (academics included). The goal is to pay you the least amount possible that the job market will tolerate. Right now, the job market is hot and pay is pretty good. But markets change.

In addition to the obvious operational problems of the death spiral, buying growth hasn’t been cheap.

For example, the credit agency Moody’s recently said that the country’s largest radiology practice, Radiology Partners, has a debt load of around $3.2 billion due between 2024-2028: “The practice’s liabilities over the summer remained at roughly 8 times its earnings before interest, taxes, depreciation, and amortization.”

That’s a lot of leverage and a significant “execution risk” as Moody’s points out. It may not be possible for a company like RP to service this debt on earnings alone, and it may well need to raise more money to pay off its previous funding.

You see where this is going.

These companies will need more money than ever at the same time that their underlying businesses may become more unstable than ever. The big reason some lucrative specialties are in this situation is that it’s been so easy to raise capital and so easy to take on debt, two things that may not last forever. If the credit markets tighten, it may not be possible for companies to borrow said money when they need it. If earnings are flat or falling thanks to regulatory and reimbursement changes, no one may be interested in pouring good money after the bad.

The fact: no one knows what’s going to happen in the next decade.

While the easiest profit for a PE firm is to replace higher partner salaries with lower associate ones, that still requires that you are able to find enough people willing to work for lower salaries. Instead, with the current job market, they’ve often been forced to offer higher salaries. Higher salaries mean fewer profits unless the job really sucks. 

What you’re left with is a job that might have the right numbers on paper but at great risk for a lot of empty promises on the ground.

Ultimately, these are trends, not destinies. Not every PE-backed group is bad to work for and certainly not every independent group is good. And I definitely can’t fault any young rads for taking temporarily good jobs that might not work out long-term when their older colleagues are the ones that helped create this mess in the first place.

What I can say is that–philosophically–I don’t think accountability to non-physician third-parties can lead to sustainable high-quality patient care, and the majority of young radiologists agree. If you feel compelled to take a job due to local factors, then so be it: just know what you’re getting into, and be prepared for the job to change–potentially substantially–over the next few years.

Healthcare is very complicated, and it’s no longer as isolated an industry from general economic trends and market forces as it used to be. The storms are harder to predict and more challenging to weather. Every middle man is an extra layer of complexity, and that complexity should add commensurate value to be justified. I have yet to see a convincing argument that this is the case.

The Takeaway

All of this is not to say that as an individual you can’t have a good experience working for a particular group regardless of their financing or operational structure (even if the underlying business model is flawed).

And, there can be real perks to being an employee or contractor.

This is likewise not to say that you can’t be taken advantage of and treated poorly by an independent group. This absolutely does happen, and I want to be clear that physician ownership is unfortunately not synonymous with healthy group culture.

This is merely to say that the need to provide profits to a third party for whom profit is their modus operandi introduces unavoidable friction to running a healthcare business that appropriately balances high-quality patient care, physician reimbursement, and a sustainable work model.

And the next few years should be interesting.


Sam 01.23.22 Reply

Good points Ben. And I agree. One additional one to make is that the ‘older’ doctors may not necessarily want to cash out, but simply not walk away from their business. Someone has to own it/buy it. Many ‘younger’ doctors don’t want to own/run a business (practice). I imagine they don’t want to make the monetary investment, financial risk, long term commitment and responsibility. Everyone want to be compensated well with no risk and responsibility. But as you said, there is no free lunch. As an employee you ‘work for the man’ whoever that is…PE group, hospital, independent physician group. I believe many independent physician groups would prefer to sell to new physician owners. I’m just not sure there are enough interested in ‘buying in’.

Ben 01.23.22 Reply

I think that is especially true of some independent clinicians who sell their practices to local health systems. (I also think, based on anecdotal stories, that many of these practices are unfortunately probably not worth buying, especially at the prices some retiring docs want to sell them).

I do think that is a pretty rare explanation in my field of radiology though (which I admit makes up the bulk of my deepest familiarity).

M 01.24.22 Reply

I’m a young radiology resident and very interested in buying into a solid, independent radiology practice with hard assets if the culture and the numbers are right, in that order. I think most my colleagues would feel similarly, but my hot take has been that many do not know where to begin (or that they should even seek a starting point) to learn about the business of radiology and how their career moves can be affected by future practice changes.

The lack of transparency from older radiologists doesn’t help.

If young radiologists are systematically trained to be educated on their career options and the related economics, they can be more judicious in their respective choices. In other words, more of us would seek to buy into good practices and there would be more criticism of bad practices that could influence bad PE-owned groups to straighten their acts a bit. It seems like a good number of residency programs are guilty of “selling out”, which may be affecting this part of training.

tl;dr – Finance in medicine shouldn’t be part of the hidden curriculum.

Ben 01.24.22

Many good independent practices no longer have imaging centers in this era of consolidated healthcare (i.e. many big hospitals are part of health networks with their own outpatient imaging and don’t want to compete with their own radiologists for business; many groups have had to sell off these centers to secure those contracts). On the other hand, the buy-in for a group without hard assets is often laughably small, so that part is nice. You can take that money and invest it yourself.

That said, I wholeheartedly agree. This (+ the basics of business and personal finance, accounting, operations, and even marketing) is practical knowledge that should be part of the training process. Instead, it’s basically left up to the chance that a resident might be exposed to a savvy attending at some point.

It probably doesn’t help that many academic rads themselves are insulated from the underlying economics of their practice outside of RVU benchmarks.

Brian Wilson 01.23.22 Reply

This article is 100% on point. I know of multiple people in the RP ecosystem and this is spot on based on some deep convos I’ve had with them.

Old Radiologist 01.25.22 Reply

Very well written article and truthful. The bottom line is that there is NO FREE LUNCH unless you are the government and can print more money. This article should be in Radiology and AJR and be read by as many trainees and radiologists as possible.

Kavi Devulapalli 01.30.22 Reply

This is a fantastic overview. This model has impacted radiology in many parts of the country. It certainly has impacted stand-alone outpatient interventional radiology practices which are growing in number each year. I think every trainee and young rad should read this article. Well done.

Paul Hsieh 01.31.22 Reply

As as “older” radiologist in an independent practice, I really appreciated this analysis. I quoted Dr. White in my latest Forbes column:
“Does Your Doctor Work For A Private Equity Company — And Should You Care?”—and-should-you-care/

Daniel Corbett 03.07.22 Reply

Hi Ben,
Well written article. I hope you don’t mind but I shared a link on Aunt Minnie. :)

Phil 01.02.23 Reply

Well done. More to the story. Some of what you predicted is already happening. Might be worth chatting sometime

HaroldPiene 04.18.24 Reply

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