MGMA17: Pros and cons of selling a practice to private equity

Twitter icon
Facebook icon
LinkedIn icon
e-mail icon
Google icon
 - Joseph Kahn, attorney with Hall Render
Joseph Kahn, attorney with Hall Render

Private investors are becoming increasingly active in healthcare acquisitions, which may maximize the purchase price when practices decide to sell, but there are downsides to these transactions compared to be absorbed into a hospital or health system.

Joseph Kahn, an attorney in the Raleigh, N.C. office of Hall Render, the largest healthcare law firm in the U.S., has a simple explanation in his presentation at the Medical Group Management Association (MGMA) conference in Anaheim, Calif. for why private equity acquisitions in healthcare have been on the rise: “that’s where the money is.”

“Practices have looked for other partners and most traditionally, those partners have been hospitals but private equity has, over the past five to ten years, recognized a value proposition they believe they can bring to the table,” Kahn said to HealthExec.

The motivation behind these transactions can be different from a deal involving a hospital. Private equity isn’t concerned with maintaining access to a particular specialty, Kahn said, or aligning with a charitable mission like a nonprofit hospital or health system. These firms are more often looking to scale up in a particular specialty area, rather than building a multispecialty organization, to build up a portfolio which they can later sell.

For investors new to the healthcare space, the regulatory structure can be a shock. Kahn said it can be “a pretty steep learning curve” for restrictions like physician self-referral laws.

“There are activities from a marketing side, from a business development side, that frankly, you’d be negligent if you didn’t employ certain strategies in just about any other business sector, but those strategies can land you in jail in the healthcare sector,” Kahn said. “Educating folks to those restrictions and parameters is one of our top obligations.”

Dealing with profit-minded investors is one of the downsides to these deals from the perspective of the practices. Kahn said there can be additional pressure on the “bottom line” after a private equity acquisition. Physicians and practice leaders may also find they have less input on governance of the practice after private equity becomes involved.

Some of the upsides deal with financial benefits to the physicians which had an ownership stake in the practices. Private equity firms may not have to worry about all the same referral risks as hospitals, meaning they can offer a higher purchase price. Physicians may also be offered equity in the arrangement, such as a holding company with shares reserved for former owners of the acquired practices.

“If that network were ever sold, they might be able to participate in the proceeds,” Kahn said. “Generally with a hospital model, they’re out from an ownership standpoint. They’re usually just employees only.”

There can be advantages on the operational side, as well. Kahn said private equity firms may bring “significant capital” after closing on an acquisition to upgrade facilities and equipment. If a firm has more experience in healthcare, they could bring greater efficiency and greater physician satisfaction by reducing administrative burden.

The general message is there are additional opportunities for practices when private equity firms come calling with a buyout offer, but they enter into these talks knowing the downsides as well.

“Selling to a hospital system is not necessarily their only option,” Kahn said. “If they’re interested in exploring those opportunities, they need to go in with an educated baseline so they can negotiate from a position of strength.”