Dear colleagues and friends,
Dr. Charles Kahi
The Perspectives series continues! Few current issues in Gastroenterology practice are as passionately debated as those associated with private equity. In this edition, our own Dr. John Allen and Dr. Marc Sonenshine explain private equity’s evolution in the GI field, dispel misconceptions, and dissect the central question of whether it is right for your practice. Thank you for your support, and I hope you will find the discussions enlightening and relevant to your practices. As always, I welcome your comments and suggestions for future topics at ginews@gastro.org.
Charles Kahi, MD, MS, AGAF, is a professor of medicine, Indiana University School of Medicine, Indianapolis. He is also an Associate Editor for GI & Hepatology News.
Yes
But, at a minimum, you should absolutely lean-in, listen, and learn.
Dr. Marc Sonenshine
The physician leadership team at Atlanta Gastroenterology Associates has been focused on developing strategies and partnerships that strengthen our ability to thrive in our marketplace while also fending off threats to our mission. The path to forming the managed services organization (MSO) United Digestive (UD) through our agreement with the private equity firm Frazier Healthcare Partners was arduous and required a significant investment of resources and time. Like at Atlanta Gastroenterology Associates, many influential leaders within our field, also supported by their physician partners, have concluded that the investment of a private equity firm to build an MSO led by professional business executives will reduce the administrative stresses looming over the traditional independent gastroenterologist business model. Now, and after almost 2 years as a member of UD, I unequivocally believe my ability to provide timely, high-quality, and affordable care to my community is currently more stable and in a stronger position for the future.
Like we did in deciding whether to establish a formal relationship with a private equity–backed platform group, here are some critical questions you should explore and answer:
-What advantages and disadvantages will being a part of a private equity–backed MSO group bring to our patients, our practice, our team, and our providers?
-What forces threaten our practice’s ability to remain viable and pertinent in both the near and long term? And, how can our group ward off these threats?
-There are many private equity firms interested in our practice as well as already established platform groups. How do we decide which is best?
-If remaining completely independent is not a sustainable long-term option, why not just become employed by a hospital, join a strategic partner, or form/join a multi-specialty group or accountable care organization (ACO)?
In the first 2 years, UD has answered many of the questions and executed on desired priorities. Our management team helped us to navigate the chaos of COVID, and UD still remains on target to meet many annual budget goals as well as end of the year financial targets. Processes and enhanced technologies like real-time dashboards provide immediate insight into all aspects of our business, allowing for more analytical decision-making. Our payor and vendor negotiations yielded stronger returns than anticipated leading to material earnings. The revamped patient services center improved clinic utilization rates, reduced patient call wait times, deployed an online patient scheduling option, and employed medical assistants for handling clinical phone matters.
Most importantly, not one change at UD has negatively affected our clinical autonomy and decision-making. The MSO and its management team has steered all medical-related issues to our chief medical officer and physician executive committee. Moreover, there was much less consternation amongst partners when the time arose for significant capital expenditures (i.e., upgrading our endoscopic equipment, instituting a new electronic health record and practice management system, or surviving the cash-flow crunch during the beginning of COVID), as our annual compensation was not affected.
A few broader points to consider that pertain to private equity activity in physician services (i.e., not specific to gastroenterology or UD):
- Private equity firms invest money in private companies with the expectation of superior financial returns. Their principals are searching for opportunities with significant upside and potential to generate the necessary earnings for such returns. In fragmented fields, there is potential to use MSO relationships to consolidate providers into a larger organization. Then, economies of scale will create benefits through sharing and saving costs, increased leverage in contract negotiations, and augmenting organic, de-novo growth through the addition of new lines of services. Make sure you understand the overall business strategy, how your addition impacts the overall MSO, and how you may personally benefit.
- It appears that many groups are overly-focused on the deal multiple, yet understanding the comprehensive value of a deal goes far beyond the multiple. A complete evaluation must also explore the principles of the compensation model, rollover equity, compounding interest, tax deferral strategies, utilization of debt, and potential earn-out terms. Experienced legal counsel can shed light on these issues.
- The timing in one’s professional career may cloud the perspective of whether partnering with a private equity group through an MSO is wise. However, I would argue the more important perspective is the judgement of the trajectory of your current practice versus adopting a new business model. If a practice can skillfully withstand the headwinds of the regulatory challenges, fierce competition for patient referrals from hospitals plus new provider entrants, and continued downward pressure from payors, then remaining independent may be reasonable. On the other hand, there is great value, security and protection of being within an organization with sizeable financial and experiential capital with like-minded colleagues.
- Many independent practices are also often approached by local and national hospitals. Relationships with hospitals are popular as they too offer professional management teams lessening administrative burdens, often secure referral networks and higher contractual rates for services rendered. Unlike with a PE deal, these partnerships may limit patient choice, almost inevitably increase patient cost, and do not include equity for the provider.
While there are many questions that need to be answered for each practice considering joining a PE backed MSO, what is clear from my experience is that there are enough benefits to such a partnership that it should be explored to understand how it might improve your ability to serve your patients and secure a long term “home” for your practice, providers, and employees.
Marc Sonenshine, MD, is a partner in United Digestive and the chairman of medicine at Northside Hospital, Atlanta.
