When it comes to physician practices, it's 'a seller's market' depending on specialty

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It's a good time to sell a practice, depending on specialty, says one investment banker. (rawpixel/Pixabay)

It’s a good time to sell a physician practice, but a lot hinges on the practice specialty, according to one healthcare investment banker.

“It’s becoming a seller’s market,” Jeff Swearingen, founding partner at the healthcare investment banking firm Edgemont Partners said in an interview with FierceHealthcare.

Valuations are strong and there’s still a lot of demand for good practices, which is especially true in “hot specialties” such as gastroenterology, vision care, women’s health and fertility, and orthopedics, Swearingen said.

“All of these different specialties within the physician practice world seem to be undergoing consolidation at different times,” he said.

Right now, the market is seeing hospital-based specialties dramatically slowed in terms of merger and acquisition activity, he said. So specialties such as emergency medicine, anesthesia and hospitalist medicine have cooled, as well as, to a lesser extent, radiology.

Some office-based specialties that saw early interest have also cooled off, including dermatology, where merger and acquisition activity is not as active and practices are not as sought after by private equity firms as they were a few years ago, he said.

“Investors and others have turned their attention to other hot specialties,” he said.

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Gastroenterology is hot. Vision care has been hot for a couple of years and is probably in the mid- to late-stages of its cycle. Orthopedics is “up and coming” and generating investor interest. And practices are seeing the melding of traditional women’s health and fertility specialties, which is kind of a natural add-on to women’s care.

But it’s a bit of a roller coaster. “What we’ve seen is that these specialties are heating up, and at an accelerated pace sort of building to that frenetic level of activity and then falling off at an ever increasingly rapid pace,” he said.

So for specialties that were hot five or seven years ago, the pace built to a high level of activity that is now dropping off.

“They seem to heat up faster and cool off quicker,” he said.

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There’s a strong belief among investors that if they jump in early, they have an inherent advantage, so if they think they are late to the party they may be wary and less willing to pursue a particular specialty, he said.

Practice owners who are thinking of selling should look ahead to next year’s election, he said. It’s already starting to get investors’ attention. Healthcare is a hot political topic, already grabbing headlines in the political debates. It may create an increasingly tougher environment going into the second half of next year when all eyes are on the election. There will be worries about not only who wins the presidential election, but what kind of healthcare reforms the winner may propose. That uncertainty may slowdown healthcare services merger and acquisition activity, and potentially affect physician practice mergers and acquisitions, he said.

“It’s hard to say how healthcare services will play out in the election,” he said. “In our view, if you’re looking to sell you should explore your options now.” Practices should consider starting the process, which can take six to nine months, with the goal of closing in the first half of next year rather than waiting to get too close to the election which could either push deals off or push values down.

Swearingen sees it as a seller’s market. “Just [based on] the level of interest and activity. It’s simply a supply and demand issue. The demand for good, high-quality practices is as strong as it’s ever been. People are eager to put capital to work in the current capital market environment and that’s allowed sellers to really dictate terms and the values have been very, very strong,” he said.

Obviously, low interest rates help, he said. “That’s allowed people to increase their values in the practices they are looking to buy. There’s enough competition out there they really do have to pay top dollar for practices or the practices will go elsewhere.”

“For many of office-based specialties that I mentioned, it’s a very attractive time to look at a sale,” he said.

Many practices are doing transactions with private equity groups or other strategic consolidators to avoid being forced into a transaction with a hospital or with a payer, which is widely perceived as the two least attractive options, he said.

The same factors that have been driving consolidation of physician practices are still in place, he said. Factors that have some physicians looking to sell their practices include uncertain reimbursement practices, increasingly burdensome administrative duties, substantial capital demands for investing in technology and a desire among many doctors to leave administrative burdens behind and return to the practice of medicine.