The last 10 years have been a time of tremendous change in U.S. healthcare. One of the key drivers of this change has been growing investment from private equity into both larger healthcare companies and, more recently, into specialty medical practices.
Although this activity is reported on and sometimes scrutinized, less often is any focus given to the positive impact that this inflow of capital has had, both for doctors and patients.
According to public reports, private equity acquisitions of healthcare-related businesses have risen from an estimated annual deal value of $41.5 billion in 2010 to more than $200 billion in 2021. PE firms have pumped more than $750 billion into U.S. healthcare during the past 10 years and this money has had an impact. These funds have helped unlock lifesaving treatments, such as mRNA vaccinations, helped to level the playing field between doctors and payers and created thousands of new jobs by funding research and development in the life sciences and expanded care in medical practices.
Copious data on private equity’s healthcare investments has been compiled by the Washington, DC-based American Investment Council, and the venture capital/private equity research site, PitchBook. The numbers tell a compelling story. Since 2012 private equity funds both large and small have invested $280 billion in more than 1,800 life sciences and medical devices businesses. More than 250 deals in 2020 plowed private equity money into outpatient clinics, ambulatory surgery centers and urgent care centers. All this has expanded access to care, funded new technologies, and made healthcare businesses more efficient by eliminating duplicative administration costs.
Even America’s Health Insurance Plans (AHIP), the lobbying group for insurance payers, acknowledges in a recent report, that private equity firms consolidate smaller healthcare entities to increase their market power and leverage in setting reimbursement rates with payers. AHIP regards this as a bad thing, pushing for federal scrutiny of even the smallest transactions, and portraying physician practice mergers as a threat to care. In fact, the main threat these practice mergers represent is to the massive profits of healthcare payers like the ones AHIP represents.
Dr. Matthew Zimm, a Pennsylvania ophthalmologist who concluded a private equity partnership in 2022, said the benefits for a practice like his were clear. “In the end, this is an individual decision. It is not for everyone, but trends in the healthcare market suggest that private independent practices are not the future. Doctors faced with the increasing complexity of practice have the choice to join a health system or work with a Managed Services Organization (MSO). My peers have had way better experiences working this way (with an MSO) and so far I am also.”
Even payers recognize the benefit of consolidating healthcare delivery businesses for greater efficiency. In 2011, UnitedHealth Group, one of America’s largest health insurance companies, created Optum. It is a subsidiary that provides pharmacy services and healthcare delivery. In the past 10 years, this UHC-Optum model of vertically integrated payer and care has sparked a pattern of healthcare acquisitions resulting in transactions fusing Aetna and CVS, Cigna and Express Scripts, and Humana with Kindred. Surely these megamergers would not occur if there was no value to be gained in this kind of consolidation.
And research suggests that the benefit is not limited to strengthening the financial leverage of the practice. A September 2022 JAMA Health Forum investigation compared 578 private equity-acquired dermatology, gastroenterology and ophthalmology physician practices with more than 2,800 similar independent practices. The study found from 2016 to 2020 that internal spending (such as on new equipment), reimbursement, new and unique patient volume and total patient encounters all increased substantially at the private equity-acquired practices. This suggests that PE-owned practices were more profitable but also more accessible, providing increased care and choice for patients.
Clearly, private equity investment in healthcare practices is having an impact on patients and payers, but what about the physicians? During the pandemic, the media has been filled with stories of healthcare workers that are stressed and struggling. Research bears this out. According to a Medscape annual survey of more than 12,000 U.S. physicians, before COVID-19 in 2020 a total of 69% of doctors reported being “largely happy at work.” However, in the 2021 report, only 49% expressed happiness with their work environment.
There are three key benefits to medical practices attracting private equity investment: better technology, expanded facilities and economies of scale offering more leverage when dealing with vendors and payers.
The doctors that Physician Growth Partners represent are partnering with an organization for the rest of their careers—not in search of a quick buck. All are focused on maintaining excellent patient care—delivered in a way that preserves doctors’ voices, decision making and patient scheduling.
Take Dr. Zimm as an example. He had spent nearly 15 years building a strong eye care and cataract surgery practice in Northwest Pennsylvania. A third-generation doctor, he had a better understanding than most of how to successfully run a practice. Still, Dr. Zimm recognized that he had done as much as he could on his own. “The administrative burdens of being a doctor get bigger every year. Insurance companies put roadblocks in our way when we are trying to focus on the patient. Hiring, firing, contracts, negotiating with suppliers. The level of bureaucracy we deal with now is ridiculous. My grandfather started practicing in the 1950s and what he had to do compared to now . . . well, it’s a whole new ballgame.”
Working with a transaction advisory firm, Dr. Zimm negotiated a partnership with Sunvera Group, a Michigan-based eye care platform that is a unit of Ridgemont Equity Partners. “I think the wave of the future is to have doctors dealing with the patient while leaving the back-office work to professionals that specialize in that. Just a short time into our partnership we are already seeing the structures that Sunvera has in place that are making the transition easier. Wheels are turning to help us learn about how to build and grow the practice with input from me.”
Getting access to new technology so they can offer new capabilities and services is very important to most doctors, and especially those who work in demanding specialties like cardiology or urology. New technologies and techniques can lead to better patient care, improved outcomes and professional growth for physicians. However, doctors often aren’t willing or able to invest $500,000 or more in the latest equipment. Private equity capital makes these advances possible.
Another benefit of private equity investment is the opportunity to expand care into new and underserved areas. Orthopaedic Specialists of Austin (OSA), a Texas-based clinic with seven physician shareholders and three locations, sought out an arrangement with Growth Ortho, a PE-backed platform that was building out in several different regions. OSA specifically wanted a partner that could expand its ability to care for the greater Austin community while offering clinical autonomy and the opportunity to move into other markets in Central Texas. Now, nearly six months after the transaction closed, they are pursuing a strategy of provider recruitment, de novo geographic expansion and seeking opportunities for additional practice acquisitions throughout the state.
Gaining economies of scale is another key benefit when private equity investment is considered. This happens with the kinds of administrative and operational support that many private equity firms excel at implementing. For example, a consolidated back-office group can help a practice bill more efficiently and completely for the services provided, secure lower costs on supplies, and eliminate duplicative paperwork.
Dr. Zimm cited the drive for efficiency as a major motivation for his decision to link up with a private equity-backed platform. “There is a massive shortage of ophthalmologists in the U.S. It’s estimated that the country will be 5,000 or 6,000 short by 2030. We must work smarter with what we have. Over the years my team and I have built our clinic to focus on great results, but it means we also must focus on new technology and fight for surgical time. There are massive administrative demands on us and that’s where I saw we really needed to get help if we are going to stay at the forefront with our practice.”
Private equity investment can provide medical practices and specialty groups with more leverage to negotiate with hospitals and insurance payers, both of which have historically held much greater bargaining power. With more business strength and operational efficiency backing them up, doctors can maintain their focus on patient care and perhaps be more satisfied in their work as a result.
All of these factors show that private equity investment in healthcare practices can drive better working conditions for doctors while helping them improve patient care and offer more advanced services.
As CEO and Managing Partner of Physician Growth Partners, Michael Kroin leads transaction execution and strategic development for independent physician practices and groups.
Ezra Simons is a healthcare investment banker and investor. He is co-founder and Managing Partner at Physician Growth Partners (PGP), a boutique sell-side investment banking firm focused on representing independent medical groups in transactions with private equity.