August 30, 2017
6 min read

Heads or tails: Will headwinds or tailwinds prevail for private equity firms buying ophthalmic practices?

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“Physicians Resource Group Inc. is the nation’s leading provider of physician practice management services to ophthalmic and optometric practices. PRG develops integrated eye care delivery systems through affiliations with locally prominent physician practices in strategic geographic areas across the United States. PRG acquires the operating assets of these practices and develops the practices into eye care networks by providing management expertise, marketing, information systems, capital resources and ancillary services such as surgery centers and optical shops.
— 1995: PR Newswire

“Throughout the country, solo practitioners and group practices are looking for partners with the necessary capital and organizational expertise and experience to help them innovate and grow.”
— 1998: The American Association of Family Practitioners

“In walks private equity, which is incredibly disruptive, but indeed a vehicle to assist in this consolidation effort. It is a high-risk/high-return venture that differs from that of the physician practice management companies of the past. While the window of opportunity may only be for the next few years, it is indeed something I encourage my colleagues to get educated about.”
— 2017: Elizabeth Yeu, MD, OSN Cornea/External Disease Section Editor

“A private equity firm makes investments in startup or operating companies. ... Private equity firms acquire a controlling position and then look to maximize the value of that investment. ... Private equity firms make longer-hold investments in target industry sectors where they have expertise. ... Private equity firms take on operational roles to manage risks and achieve growth.”

“The fable told by the private-equity industry is that many companies are poorly managed and cost-savings could be wrung out. But in reality, very few private-equity owners are willing to play the role of both disruptive innovators and patient capitalists. They are interested in quick windfalls. What makes the entire business model viable is that companies can be bought and sold several times with borrowed money, using the subsidy of a tax break on the interest each time.”
— Josh Kosman

In 1995, I was in the bedroom, the birthing room and the nursery as an adviser to Physicians Resource Group, the red-headed, “Hey, your baby’s ugly” poster child for great ideas gone bad. A couple of years later, I was also in the morgue.

PRG was part of a swarm of so-called physician practice management companies, or PPMCs, that tried to colonize virtually every medical specialty, along with large multispecialty practices.

I still remember my first discussion with one of the venture capitalists involved with PRG’s debut:


Me: “Thanks for asking me to help. I’ve made a career out of turning good practices into great ones.”

Michael the venture capitalist: “Son, I’m not sure you understand our business model. We’re not about improving practices. We’re about buying ’em, packaging ’em and selling ’em as fast as we can. And then getting the hell out.”

So you will forgive me if my enthusiasm is a little immunized against the current bloom of 25-plus private equity companies now romancing the profession.

All the same, I am willing to suspend belief and give the benefit of the doubt to the new crop, the “neo-PPMCs.” That is even after speaking with more than half of the firms now entering this space and seeing that many of them are heading down the same rabbit hole we did in the 1990s. They are cleaving in the main to the same overcentralized management systems and underappreciate how very, very small reductions in doctor incentives sharply leverage their productivity downward.

Let’s think about this sympathetically, not just through the eyes of the ophthalmic profession, but also though the wallets of the private equity crowd, and consider for the benefit of both sides the headwinds and tailwinds that will be experienced in their efforts over the next several years to redeem our failings 20 years ago.


1. An ever-larger percentage of ophthalmologists are looking for an exit strategy. It is going to get easier and easier to find deals to do.

2. The demand for eye care is soaring at about five times the U.S. population growth and two times the gross domestic product growth of America because we are all getting old, fast.

3. About a third of every general ophthalmologist’s schedule is filled with OD-level patients, and there is an overabundance of optometrists. The ability to apply OD-for-MD labor substitution will mitigate the gap in MD production.

4. Rising regulatory demands are forcing doctors to band together. This force can be countered with the collective regulatory compliance clout of larger organizations, including ophthalmologists banded together by their private equity partners.


1. The most prominent in-built flaw with the present private equity (PE) transaction modeling is this:

  • To generate profits for the PE company, owner MDs must take a post-transaction income cut, which with the current PE model is more than offset with a five times profit or higher upfront payment.
  • As an example, a practice with a 38% profit margin, which would ordinarily be paid entirely to the owners, now becomes 30% for the doctors and 8% for the PE company.
  • That is fine, until either a) profit margins fall (see No. 2 below) or b) the practice wants to hire replacement doctors who are able to get much better job offers than 30% of their collections in today’s market. And we are only getting started with the run-up in associate doctor salaries. And we still have not experienced the full intent of the seismic revenue-lowering shift from fee-for-service to fee-for-value.


2. The second flaw is the observed truth that when you take a hard-working senior surgeon and give him nearly enough money to retire, he nearly retires. He slows down enough to kill his company. This was the softest underbelly of PRG. Doctors would reduce their productivity by 10%, which translated into a 20% profit drop, which stopped the company cold.

3. A third flaw is an underappreciation for the enterprise complexity of running an ophthalmic practice. I once had the semi-retired ex-administrator of a 500-bed hospital in Denver quit a modest $10 million practice (which she saw as a “nice, quiet emeritus position”) because the latter was “way more complicated.” And though practice growth may be linear, practice management complexities grow logarithmically.

4. The bloom of baby boomer patients is unfortunately mirrored by a bloom of boomer eye surgeons. But residency training slots have fallen steadily over the last generations. So boomer surgeons are not being replaced at an adequate rate, and as a result, the cost of new MD associates is rising. They are going to take positions offering $300,000 as a base salary, not neo-PPMC jobs at 30% of collections.

5. Health care is a regional business, by and large. Regional health systems are positioning, even as you read this, to control the insurance premium dollar and steer patient cohorts to their desired (employed) providers. Imagine you are a private equity company. You operate in 20 markets, each with its own health system-employed provider base. In some of your markets, your docs are on the verge of losing contracts unless they join with the local health system. But health systems do not pay 5× to 12× multiples for practices — they pay the street value of tangibles plus give the docs an employment contract. Or they simply develop their own eye departments de novo. Bottom line: Whoever controls insurance dollars controls the game.


In the last 2 years, I have advised a few of the emerging PE companies, talked to many more of them and have vetted PE offerings being made to private practice clients. At the end of the day, I believe the majority of the current crop of PE companies now active in the ophthalmic space will have their heads handed to them, just as we did in the 1990s.

I believe that most of the “neo-PPMCs” have a business model that will eventually blow up, just as ours did 20 years ago. They do not appreciate the complexity of the business and are flying around in a sky with more headwinds than tailwinds.


All the same, a few will crack the code. One or two of the current market entrants will likely prevail and be around a decade from now. If you think you have good judgement, try to pick who that will be and make a deal.

The two-point acid test

Consider here, for free, the advice I routinely give my paying clients. It is perfectly fine to proceed with a transaction so long as two conditions are met:

1. The practice owners will be taken over their lifetime personal financial finish lines with the irrevocable payment they receive up front.

2. The owners are no longer emotionally attached to their practice and will not be upset if their management company disappoints.