News & Analysis

When Will PE Give Up on Physician Practices?

Headshot of Brian Ackerman, partner at Ascendient

Brian Ackerman

A yellow DEAD END sign, shot from below, stands against a partly cloudy sky. Photo by Pixabay via Pexels.

For several years now, we’ve been watching private equity firms gobble up growing numbers of physician practices, and one question has always gnawed at us: What’s the business plan? If health systems struggle to make money on employed physicians, why do PE firms believe they can do better?

A new study may provide some sort of answer – while raising troubling new questions.

From 2016 – 2020, three specialties made up the bulk of PE acquisitions: dermatology, ophthalmology, and gastroenterology. As reported in the April issue of Health Affairs Scholar, researchers found that most of those practices (51.6%) were re-sold within three years, and in almost every case (97.8%), the buyer was another PE firm.

In other words, PE hasn’t figured out how to make money on the business of medicine. Firms are simply churning their investment by selling to other firms.

Authors Yashaswini Singh, Megha Reddy, and Jane M Zhu worry that “PE’s abbreviated investment timeline and exit incentives may deter long-term investments in care delivery and workforce needed for high quality care.”

That’s a worry we certainly share. We’ve done provider planning and medical staff development for many years, so we know that health systems look at their employed physicians as a long-term, mission-critical investment. With a different mission and different timeline, PE firms have little incentive to make their practices better. Why invest in new technology or physician recruitment if you’re planning to cash out in 36 months?

The Roll-Up Strategy

Instead of better, the PE approach is all about bigger. “Between investment and exit, PE firms increased the number of physician practices affiliated with the PE firm by an average of 595% in 3 years,” researchers found.

In that sense, PE seems to be following a classic “roll-up” strategy, aggregating many small players into a combined entity that’s big enough to cut costs, eliminate competition, and command higher prices. Two of those three goals are unlikely to work in the healthcare setting, however.

Cost-cutting does look achievable because physician practices offer clear economies of scale in billing, purchasing, and most of all, information technology. So, that’s a start.

But what about eliminating competition? I’d argue that goal makes no sense for specialties such as dermatology, ophthalmology, and gastroenterology, where the waiting time for an appointment is already interminable. Likewise, physician roll-ups will have little power to raise prices because of healthcare’s unique payer structure and governmental role. Even the biggest physician group can’t negotiate Medicare reimbursement rates, and regulators are keen to challenge any provider consolidation that threatens higher prices.

So, I still have to wonder: What’s the end game? Small PE firms can buy up multiple practices and sell to larger PE firms, but eventually the shell game has to end. Eventually, someone has to figure out how to make money from these massive physician practice conglomerations. Remember, nearly 100% of PE firms exit their physician investments by selling to another PE firm. That tells me that no one has yet achieved the scale that might make the roll-up model work.

Roll-ups often end with an initial public offering, but I don’t see that happening here. Are we really going to trade shares in gastro practices the way we do gas companies? Seems unlikely. Likewise, I can’t imagine that any PE firm would be allowed to sell its physician groups to a health system (like HCA) or insurer (like United Healthcare). The scale of such a deal would be innately anti-competitive.

The Past Is Future

We’ve actually been here before, in a way. Back in the early ‘90s, when healthcare policy seemed headed toward 100% managed care (and managed competition), many physician practices responded by merging into very large groups that would be better suited to the new environment. But the expected changes failed to materialize, and the big physician groups were largely unraveled.

I see much the same thing happening here. I think PE firms will start unrolling their roll-ups once they discover that cost-cutting isn’t enough to achieve a sustainable profit. If the typical investment cycle lasts three years, per the latest research, then I think we might start to see the “great unrolling” in another two cycles – six years, in other words.

That might be worth keeping in mind as you think about your budget and timeline for provider planning.