Biography: Mahdavi is president at SM2 Strategic
April 10, 2019
2 min read

BLOG: Why private equity matters

Biography: Mahdavi is president at SM2 Strategic
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Just about every doctor I speak with wants to know more about private equity, and larger practices seem to be inundated with inquiries from prospective buyers. Why the sudden interest in medical practices? Well, actually it’s been going on for years; you just might not be aware of the activity beyond the hospital-driven move to integrate private practices into their system and thus “lock in” future business. Take a look at dermatology, anesthesiology and other specialties, and you will see consolidation of individual practices into regional and national entities, funded by private equity investment capital that is seeking new places to invest and generate outsized returns relative to traditional public equity markets. With the stock market sitting near all-time highs and corporate tax policy’s repatriation bringing billions of dollars back into the U.S., there is a lot of money that ultimately wants to be put to work.

There are two clear camps among physicians, with both supporting and opposing viewpoints as to the merit of outside influences and their ultimate effect on medical care. The basic premise of PE is that greater operational efficiency through combining many of the administrative functions at individual practices will lead to cost savings (ie, greater profitability). This hasn’t always proven to be true when non-medical entities combine, such as corporate mergers.

On the other hand, the way that private practice has evolved over the decades has led to thousands of individual business owners who do the same thing but use separate systems to accomplish most daily tasks. This framework almost begs for improved efficiency and, for many of the owners, would come as welcome relief so they can focus on the expertise they have been trained in and allow others to handle the non-clinical functions that weren’t part of their core training in medical school.

Without question, PE is not going away. It’s just getting going in ophthalmology, where approximately 1,000 MDs (out of 18,000 total) now work for a PE-backed enterprise. The economics of supply and demand, coupled with multiple sources of revenue (reimbursed, self-pay and retail), are far too attractive to ignore. That’s why the first wave of firms are paying strong premiums to get involved and establish themselves early. And for the first time, physicians are able to capture a much greater percentage of the value they create in improving the lives of patients. Thus, it’s also far too attractive for doctors to ignore.

Controversial? Of course. Time will tell us whether this is ultimately going to be good or bad for the profession. What do you think?

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Disclosure: Mahdavi reports he is president of SM2 Strategic.