Read This Before Agreeing to a Private Equity Deal

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An increasing number of physician practices are turning to private equity as a way to monetize. A global private equity report by Bain & Company published in 2019 found that the number of healthcare deals involving private equity increased by 48% from 2010 to 2017. During this period, the value of private equity deals (largely involving the acquisition of physician practices and hospitals) increased by 187% and reached $42.6 billion in 2017.

In the United States, 102 physician practices were acquired by private equity in 2017. According to Casalino and colleagues, many of these deals have been in specialties such as dermatology that are particularly attractive to private equity for their potential for additional revenues from elective procedures and ancillary services. But other specialty practices are increasingly joining with private equity (Ann Intern Med. 2019;170:114-115).

As private equity makes further inroads, those familiar with such deals advise physician practices to become familiar with and get counsel from experts on the many issues that could change their practice environment. Physician practices need a clear understanding of why private equity may be a good option and the issues to consider when weighing that decision.

How Private Equity Works

Private equity firms use capital from an array of funds, such as pension funds and university endowments, to invest in industries such as healthcare, according to Casalino and colleagues (Ann Intern Med. 2019;170:114-115). These firms anticipate an average return on investment of 20% or more. To achieve this, they typically buy large, well-managed (“platform”) practices with the aim of selling a practice within three to seven years of acquisition. Within that time period, they augment the value of the practice by acquiring and merging smaller practices within the platform practice, recruiting more physicians, increasing revenue, and decreasing costs. Revenue that private equity infuses into a practice allows for important business expansion, including expansion of ancillary revenues, spread of fixed costs, and increased negotiating leverage with insurers (Ann Intern Med. 2019;170:114-115).

When acquiring a practice, private equity firms base the price on EBITDA (earnings before interest, taxes, depreciation, and amortization) as a measure of the operating performance of the practice. Typically, they pay eight to 12 times EBITDA for a platform practice and two to four times EBITDA or less for a smaller practice. Upfront compensation for practice owners at the time of acquisition varies but can be as high as $2 million per physician, but afterward their compensation typically is based on market rate salaries. Although contracts are negotiable, 60% to 80% of the ownership of acquired practices typically transfer to the private equity firm (Ann Intern Med. 2019;170:114-115).