Physician Dynamics in Private Equity Transactions

Most physicians are aware of private equity partnerships and understand them quite well; others are eager to learn more. As physicians’ knowledge of the economic and non-economic aspects of private equity (PE) arrangements grows, mindsets and perspectives relative to PE affiliation vary. Some physicians take a negative view of private equity affiliation, some take a positive view, and most are somewhere between.

Among the many private equity-backed companies, most are specialized within a limited boundary of disciplines. All have similar features, but a variation in structures and outcomes requires physicians to understand those variations to clear misconceptions and acknowledge their limitations. Helping physicians understand these variations is imperative, as many misconceptions exist. In this chapter, we go inside the heads of physicians for insight into their perspectives on private equity affiliation.

PHYSICIAN OPTIONS RELATIVE TO PRACTICE STRUCTURE

Private equity’s entry into the healthcare industry, especially over the past couple of decades, has changed the paradigm for physicians and their options for practice structure. A discussion of private equity and physicians’ perspectives begins with a broad definition of the basic employment options, professional services, and other affiliation scenarios. The following are the options:

1. Remaining fully private within a physician group, merging with other private practices.

2. Hospital affiliation, either through direct employment or a professional services agreement (PSA).

3. Private equity partnering

4. Hybrid models based on all or some of the above structures.

Physicians who have a choice in how they structure their medical practice may change that structure over the course of their career. Rarely would a physician affiliate with a private equity-backed firm when just starting in practice; however, he or she may join a group that is already affiliated with private equity.

Often physicians who start in private practice eventually evolve to hospital/health system affiliation, usually within the employment framework, and sometimes through a physician service agreement (PSA). Increasingly, groups with PSAs employ hybrid models that are typically carve-outs of specific practice elements accompanied by a private equity-backed affiliation. A vital component of these innovative structures must be total compliance with regulatory requirements and structures, both economic and otherwise.

It is almost inevitable that physicians in private practice will eventually arrive at a major crossroads in their career path. The first choice is hospital or health system employment or a professional service agreement (PSA); the second is a private equity affiliation. Another possible route is a hybrid structure between a hospital/health system and private equity affiliation.

The physicians’ mindset, their perspectives on their careers, how they practice, and the potential financial ramifications of all these conditions are imperative to consider and select. As noted in various scenarios, none of these options is right or wrong.

The decision with whom to partner should be based on the physician’s education, research, and overall comfort level, with no full acceptance or rejection of any model. Each of these four options or any variable has a history of successes and failures. None of these models or variables is a totally right or wrong choice, including private equity affiliation.

What key points should physicians consider when ultimately deciding how best to structure their practice? Some merely allow their group or network colleagues to make the decision, opting to “go with the crowd.” Although this decision may be best for “the crowd,” it may not be the best choice for long-term sustainability; therefore, it is critical that physicians understand the private equity model, the hospital employment and/or PSA model, and the range of variables in between. Again, the decision for any model is not black and white; it is gray.

How does a physician or related group decide whether to affiliate or opt to remain fully independent and private? Does it matter where that physician is in his or her career path (age, years to practice, etc.)? What structure provides the most (or least) security? What specialties work best for private equity affiliation?

What about quality and clinical freedom to practice medicine based on the structure, whether it is private equity, hospital affiliation, or private independent practice? Is private equity only for the older physicians’ (i.e., 10 years or less remaining to practice) career situation? These questions deserve serious thought and answers.

Excerpted from Private Equity and Healthcare: Leadership, Economics, and Trends for the Future by Max Reiboldt, CPA.