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Physicians selling to private equity (Part 4)

rosen-barry-col-sig-1(This is the last in a four-part series of articles pertaining to the sale of physician practices to private equity firms.)  

The most significant pro involved in a physician’s sale to private equity is the potentially lucrative purchase price, especially for baby boomer owners looking for an exit strategy.

The transaction may also provide access to new capital to support growth, offer management expertise, capitalize on brand recognition, give the practice an ability to build out ancillary services, create cost savings from consolidating back-office functions, achieve other economies of scale, and perhaps allow for more favorable contracts with payors.

The cons of doing such a deal include losing control of the practice and living through a significant change in practice culture. Curiously, private equity firms often leave physicians alone to be physicians, but major decisions, such as hiring and firing or changing office locations, will no longer be made by the previous owners. In fact, it is often difficult for such owners to learn to become employees.

However, perhaps the most significant con to selling to private equity involves wrestling with the question of who is the next owner. Private equity firms will resell the practice, and no one knows who the eventual purchaser will be.

The eventual purchaser may be a very efficient professional manager, which would be a good outcome. On the other hand, the physician practice may turn into a hot potato and be sold from one private equity firm to another, until a private equity firm buys the practice for too much money. Also, the first private equity firm or a subsequent private equity firm may be using debt to finance its purchases, as opposed to investors’ money, and that debt could eventually weigh down the practice in its entirety.

There is also the ultimate risk of physician loyalty. People usually seek out a physician’s services due to the skill and reputation of the physician.  If the private equity firm cannot attract and retain good physicians, then the enterprise will not succeed.

Hospital versus private equity

There are differences between being purchased by a private equity firm versus being purchased by a local hospital system.

The most significant difference is the sale price. Hospital systems are not paying physicians multiples of EBITDA for their practices. Hospitals are prohibited from doing so, because the extra payment may be viewed as a payment for future referrals to the hospital system.

There is an exception to the foregoing if the physician is actually intending to retire after the sale, in which case there would not be future referrals, and, therefore, a hospital system can pay some additional amounts in that situation.

Otherwise, hospital systems sometimes pay signing or retention bonuses. However, generally hospitals only pay for the assets that they purchase, and they sometimes pay for something called workforce in place. Workforce in place is basically a headhunting fee equal to a percentage of the acquired practice’s payroll, paid in consideration of the acquired practice having developed its workforce.

Hospitals and private equity firms will both allow an acquired practice to retain its accounts receivable, and both may advance or reimburse a selling physician for the cost of the doctor obtaining a malpractice tail to cover his or her prior acts.

On the other hand, ongoing compensation may be much more generous from a local hospital system than a private equity firm. In fact, future compensation from a hospital system may even include a raise, recognizing that the hospital system may have better contracts with payors than the acquired practice.

Ongoing compensation from a hospital system might also be based on wRVUs, which would relieve the physician from worrying whether a patient is a Medicaid patient, Medicare patient or has commercial insurance.

Hospital systems, however, have difficulties in paying acquired physicians for the ancillaries that they generate, due to certain legal restraints, notwithstanding that the acquired physicians may have historically profited from the ancillaries that they provided in their own practices.  Nevertheless, hospital systems can be creative in this regard, and can share some of such profits with physicians, provided that certain legal requirements are met.

Often there is more room to negotiate some flexibility in regard to noncompete provisions with an acquisition by a hospital system rather than private equity firms.

While the headaches of management are relieved by a sale to either a local hospital system or a private equity firm, curiously, hospital systems sometimes get more involved in a doctor’s doctoring than private equity firms.

While all local hospitals will not survive, many will, and, therefore, there is greater stability involved in selling to a hospital system versus not knowing to whom the private equity firm will sell the physician’s practice in three to five years.

Barry F. Rosen is the chairman & CEO of the law firm of Gordon Feinblatt LLC, and heads the firm’s health care practice group. He can be reached at 410-576-4224 or brosen@gfrlaw.com. 

 

 

 

 

 

 

 

 

 

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