Eyes on Private Equity
Eyes on Private Equity
January 30, 2020
3 min read

Following the winds of private equity in ophthalmology

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As health care faces continued reform, an aging population and an overall labor shortage, ophthalmology is uniquely positioned to be desirable to investors in the private equity realm, bringing questions and challenges with the opportunity.

This year’s OSN New York, the ‘Open Your Eyes to Private Equity’ workshop allowed us to explore where our specialty stands in this exciting time. In reality, practice growth, consolidation and physician exit options have broadened significantly in recent years.

Today, there are four chief options with lots of variation among them:

  • Traditional, organic growth in which senior physicians bring in partner-track associates to buy into the practice and allow for retirement;
  • More frequently, consolidation with compatible local practices in the area;
  • Less commonly (and least profitable), selling to a local hospital or health system;
  • Lastly, partnering with a private equity company, the latest iteration of a succession plan.

While the benefits of traditional succession and consolidation are fairly well known – as are the pitfalls – the growth in private equity echoes the physician practice management companies (PPMC) of decades past and has some ophthalmologists wary. And while private equity faces some headwinds, the tailwinds may make it the right choice for you.

The Tailwinds

Private equity is blessed with a few tailwinds, some of which we didn’t have in the 1990s with the rise of Physician Resource Group (PRG) and other PPMCs.

John B. Pinto
John B. Pinto

Today, we have a lot of senior ophthalmologists looking for an exit yet little interest among the next generation in owning their own practice.

Still, ophthalmology as a specialty is very high growth. The demand for eyecare is growing at five times the growth in the U.S. population rate. The baby boomer generation needs ophthalmology care and are willing to invest in the best outcomes.

Optometry for ophthalmology labor substitution generates passive income and mitigates the lack of new graduates in ophthalmology. Ophthalmologists report that they do about a third of their clinical practice at optometric levels.

Theoretically, larger organizations can better respond to rising regulatory demands. The last decade has been especially cruel to smaller practices trying to keep up with changing requirements.

The chief benefits of partnering with private equity is that the seller – the physician – gets a payment that is two times higher than the MD-to-MD buy-out and four times higher than selling to a health system. Additionally, the seller becomes part of the larger organization, which has the potential of standing up to today’s challenges, regulatory or otherwise.


The Headwinds

Forty years ago, everyone said private, independent and solo practice is dead. Today, they are saying the same.

However, there can be material diseconomies in large-scale practices. The strongest practices we go to on a consulting basis — the practices that need the least amount of help — have three to four providers. They’re in one location. They have an ASC and an optical. They just need polishing and may not benefit as much from partnering with PE.

In reality, ophthalmology residency training slots have fallen and our surgeons are not being adequately replaced. If you pay a hardworking surgeon enough to slow down, what is the impact of that slow down? PRG doctors reduced their productivity about 10%, which given the economics of a practice, drops the profitability by about 20%, which killed the PPMC bloom in the 1990s.

Eventual health care reform will boost demand but will decrease payments. We believe small practices paradoxically are going to be able to respond to that faster than very large practices.

The Future

We will know in a few years if private equity is an enduring benefit to the profession. After discussions with more than half of the existing private equity firms, our sense is that some of these firms are going down a positive path. And they certainly are not going down the failed path we tried in the 1990s.

In looking at aspects that will aid in success, the best of these firms are undertaking significant vetting of the physicians, avoiding excess centralization and operations, and allowing doctors material say in operations and clinical practice.

If you are considering private equity as a future option, I recommend this simple, two-part acid test:

  • The net payment received at closing carries the majority of physician owners in your practice over their retirement funding finish line.
  • The majority of physician owners are comfortable sharing control of practice operations post-transaction.

As a private practice ophthalmologist, you must decide where your operations and opportunities lie in this new consolidation, succession and development environment. – by John B. Pinto