Physician Groups: Exploring Today’s Opportunities Afforded Through Private Equity

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Over the past few years, private equity (PE) has increasingly emerged as a favorable option for both liquidity and growth agendas among physician groups. Although PE focus in certain specialties has varied over the last decade, overall interest has broadened and intensified as merger and acquisition (M&A) activity within the segment continues to rise due to strong industry dynamics. Today, more and more physician groups are considering PE’s general thesis as a preferred succession strategy to traditional buy/sell agreements or health system affiliations. Moving forward, transaction opportunities abound and both parties stand to benefit.

What are the primary factors driving PE interest?

The ever-changing health care landscape and heavily fragmented physician group sector continues to create attractive opportunities for health systems, national health care companies and PE, driving a high level of transaction activity. According to Irving Levin Associates, annual M&A activity among physician groups has increased more than 300 percent since 2014.

Physician Medical Group M&A Total Transactions by Year

While numerous factors are driving this growth for certain specialties, the overarching themes contributing to the increased activity specific to PE include the following:

  • Favorable changes in demographics driving growth in volume
  • Highly fragmented markets in attractive specialty areas
  • Changing reimbursement models and a shift toward outpatient care
  • Opportunities to expand ancillary services
  • Increasing availability of synergies under buy-and-build strategies

As service models, reimbursement and overall health care delivery have evolved over the years, so has PE’s interest in certain specialties. While transactions are still getting completed across most specialties, valuation and focused interest can be fleeting in some cases, so it’s important to remain cognizant of market activity. In today’s environment, physicians are likely to benefit the most within emerging or newly consolidating specialties.

Primary Sectors Attracting Investors

However, some specialties, such as dental or ophthalmology, although mature in terms of consolidation, likely have plenty of additional M&A runway remaining due to lower reimbursement risk. For other specialties, it may be important for physician groups to act swiftly in order to hit the consolidation period at the right time, especially considering the ever-changing health care and macroeconomic environment.

How can physician groups benefit from a PE transaction?

When it comes to evaluating a potential partnership with PE, there are a number of options for physician groups to consider. It’s critical to have the primary objectives laid out early on, prior to embarking on the process of finding the right PE partner. Valuation and deal structure usually come to mind early, but there are a host of other considerations to evaluate, such as alignment of growth objectives, culture fit, level of practice management and physician autonomy and overall long-term strategy.

Depending on the outcome of a physician group’s determination of objectives, and ultimately its pairing with a PE group, there are a number of areas/outcomes where physicians stand to benefit. These may include:

Valuation

  • PE transaction valuation, especially among the more attractive specialties, regularly exceeds, and in some cases far exceeds, that of traditional health system buyouts and/or physician buy/sell agreements. These traditional transaction options tend to fall short when it comes to achieving a premium value for the physicians who have invested so much into the development of the group.

Liquidity/Structure Options

  • Depending on a number of variables between the PE group and the physician group, there are wide-ranging liquidity and structure options to evaluate. In some cases physicians may be looking for a 100 percent sale; however, the most popular route tends to be a sale of the majority of the ownership of the physician group, where physicians can “take some chips off the table” and receive significant cash at closing, while retaining or “rolling over” some minority ownership in the physician group. Whether senior or newly minted physician owners, this provides physicians with an opportunity to diversify their personal investments and offers potential for additional incentive/growth equity going forward.

    Depending on the strategy of the PE group, there is the strong possibility of a subsequent sale of the physician group to a different buyer four to seven years later. This is especially true of PE groups employing a buy-and-build strategy using scale, synergistic efficiencies and the potential to build a larger combined physician group by acquiring smaller physician groups at lower transaction multiples. Because of the potential for growth under PE ownership, the subsequent sale to another buyer in the future can sometimes be as lucrative to the physicians who now own a minority piece of the group, as the first transaction was for the physicians who owned 100 percent of the original physician group.

Access to Capital

  • For physician groups looking to grow (whether organically or through acquisition), PE provides an excellent resource for additional capital. This could include capital for geographic expansion, diversifying service lines, hiring supplemental management, strategic acquisitions or investing in infrastructure, equipment or technology.

Additional Resources

  • Outside of capital resources, specialized PE groups can offer additional specialty and subspecialty expertise, expanded industry contacts to augment growth strategies, back-office efficiencies and scale/leverage for contract negotiations and purchasing costs.

Risk Mitigation

  • With regulation, reimbursement and the overall health care landscape constantly changing, partnering with PE and monetizing some ownership value at the proper time can be an exciting personal diversification strategy, especially during a strong market. This helps to lower the risk of the group’s physician owners and reduces the valuation effect of potential future changes to the health care or economic landscape.

Lifestyle/Responsibilities

  • Despite selling a majority ownership stake, physicians can often still be intimately involved with the operation of their practice in partnership with the PE group. Most PE groups prefer to be hands off with regard to how physicians prefer to run their practice. Typically, PE is primarily there to help strategize on growth/efficiencies and facilitate business decisions involving capital investments, service line or geographic expansions, add-on acquisitions, etc. As such, with these additional resources to lean on, many physicians may see reduced stress/responsibility in these areas and can focus more heavily on practicing medicine.

The degree to which these potential benefits affect each physician group is likely to vary based on factors specific to both parties involved in a transaction. However, there are both ample opportunities to pursue an attractive transaction with PE and some clear differentiators between PE and traditional buy/sell agreements or health system affiliations.

Today’s market for physician group M&A and interest from PE is especially strong, creating an opportune time for physician groups to take advantage. However, even if physician groups are not immediately looking to pursue a transaction, they should take a hard look at their strategic options within today’s health care M&A environment and consider how best to strategically position themselves for future opportunities.

Contact Austin or your trusted BKD advisor if you have questions.

Austin Propst co-leads the health care M&A practice of BKD Corporate Finance, LLC, a subsidiary of BKD CPAs & Advisors. BKD Corporate Finance provides investment banking services that include M&A, affiliations, company sales and debt and equity financing.

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