By now, most of us have come to understand, at least topically, what private equity (PE) deals mean in ophthalmology. We know that for providers, selling a practice to a PE firm offers the security of cash up front and can remove the administrative burden of running the practice. PE firms tell us that they are able to create efficiencies through economies of scale, negotiate better contracts, and standardize our practices, leading to better and more efficient patient care. Although many or all of these things can be true in any given deal, it is important to understand the PE viewpoint. Although many of us have spent time building and running practices, we have not had the opportunity to peak behind the PE curtain. As the number of deals between ophthalmology practices and PE continue in the post-pandemic landscape, it is critical for our patients and for ourselves to gain a better understanding of who we are making these deals with.
The Last Ten Years
PE activity is not only growing in ophthalmology; the trend is seen throughout the health care industry, with firms investing in everything from health care startups to hospital systems. Across the industry, the number of mergers and acquisitions has more than doubled this past decade with the PE activity, in particular quadrupling in that time frame (Figure 1). This represents a record number of PE deals in health care, totaling $88 billion in value.1Why is this trend accelerating? On a macro level, the pace of deals started to accelerate after the Affordable Care Act when hospitals started to align themselves with physician groups. This provided hospitals with greater reach into their markets and more leverage in negotiating with payers. During that time PE became an attractive alternative for providers, and consolidation has been looked at as a way to insulate from potential headwinds such as lower reimbursements and disruptors like Amazon and Apple.2 Another major reason the PE deal frenzy continues is the current financial market. High-net-worth investors that think the stock market is overvalued or that are looking for alternative investments are investing their capital with PE firms.3 With interest rates being at all-time lows, these firms are also able to tap into the debt markets. This allows PE firms to be in an ideal position with significant amounts of equity to invest and debt markets offering them the ability to access low-cost leverage.4
U.S. private equity (top) and mergers and acquisitions (bottom) deal flows in health care.
The Rise of Private Equity in Ophthalmology
Bain & Company describes the goal of PE in the following way: “All PE firms want to create value as quickly as possible — to grow revenue and take out cost — and a strong playbook helps to accomplish that.”5 When looked at through this lens, it makes a lot of sense that PE's playbook includes ophthalmic practices. Our practices are attractive because the aging population coupled with expanded health care coverage offer robust demand for services.6 We are often independent of hospital systems and own alternative revenue streams such as surgery centers and optical shops. As a field, we are also fragmented in a way that allows for PE firms to acquire varied size groups and create a portfolio of practices making it easier for them to streamline processes (such as billing and purchasing) and improve efficiencies through standardization.2
Value and the Potential Mismatch Between PE and Physicians
We know that PE firms want to “create value.” We should understand that this value is not necessarily linked to value-based care, value to our patients, or even value to us as the providers in the practice. The goal of PE firms is to create value for their investors, and there are a number of different ways this value can be created. First, firms can look to grow revenue. For example, when a firm acquires a retina practice and a general ophthalmology practice, they can then cross-cover locations to offer services that may not have been offered at a particular site. One can argue that in this way, we are also improving access to care for patients. Recently, however, The Department of Justice has shined the spotlight on PE firms that have acquired medical practices and achieved growth through more nefarious means, bringing cases against firms that have violated the False Claims Act and the Stark Statute.7,8
Cost-cutting is another way for PE firms to create value. One way in which we have seen firms do this, especially in field like dermatology and orthopedics, is to use lower cost physician extenders in practice. Keeping physicians in the operating room while physician extenders manage the clinics likely makes economic sense, but the argument can be made that this may come at the cost of the quality of care patients receive. In dermatology, this scenario has led to higher rates of unsupervised physician extenders performing medical procedures.9 Activities like this have caused physician groups to call for greater scrutiny of PE deals.10
We know that some physicians in a practice selling to a PE firm do “better” than others. Much of this relates to where a physician is on the career timeline. A sale to PE is an understandable way to exit a practice with a nice payout or to create a way to wind down a physician partnership. For younger physicians, however, this can create conflict. The conflict can come up-front when younger physicians may not benefit from the initial payout as much as senior partners do. After this initial phase, conflict can come from multiple sources. To understand this, we must first understand the PE firm's timeline. The PE firm's goal is to increase value by adding revenue, cutting costs, adding debt, and doing so in the shortest timeline possible.3 The average PE holding period for an investment like this is 5.6 years before they sell the practice and exit their investment.11 Although the younger physician may have had input on the initial sale and the PE firm that they would be working with, there is very little likelihood that they will have any input on who their next owner will be, which can have a negative impact on the practice culture and day-to-day experience for the physicians and their patients. The other concept that gets overlooked is that the equity that younger physicians have in these deals is only worth something if liquidated at the right time. In the mid-1990s we saw physician practice management companies raise billions of dollars, purchase numerous physician practices, then go bankrupt.12 We could see a repeat scenario like this if PE shareholders see lower-than-expected returns (ie, from lower reimbursements) or a lack of secondary buyers for the groups the firms have collected (especially in context of the amount of debt taken on during these transactions). If this were to occur, then the equity that physicians hold in their practices could be worth much less than they had expected.
Given the uncertainty brought about by the COVID-19 pandemic, we do not know what the next 10 years will look like in regard to ownership and the delivery of care in ophthalmology. As the first wave of PE firms begin to exit, we will likely continue to see the shift away from more traditional hospital-physician alignment to alternative types of integration such as the sale of these initial investments to large health care payors (look at Optum's purchase of DaVita Medical Group as an example) or larger PE firms. The concern is that the corporatization of healthcare opens the door for maximizing profits at the expense of patient care. Some of our colleagues in dermatology have called for banning the sale of their practices to private equity firms until they have more meaningful data on how these transactions impact quality and affordability of care for patients.13 Although this type of action may not be feasible, it does at least point to the fact that we must continue open and transparent conversations about PE's role in our field and staying engaged in these conversations to protect the field and our patients.
- Shattering of Industry, Global Silos Drives Healthcare Deal Activity. Pitchbook. https://pitchbook.com/newsletter/shattering-of-industry-silos-drives-us-healthcare-life-sciences-deal-activity. Published April 12, 2019. Accessed November 26, 2019.
- PE Investment in Physician Practice Management ‒ What's to Come in 2019?BakerHostetler. https://www.bakerlaw.com/alerts/pe-investment-in-physician-practice-management-whats-to-come-in-2019. Published February 13, 2019. Accessed November 23, 2019.
- Konda S, Francis J, Motaparthi K, Grant-Kels JMGroup for Research of Corporatization and Private Equity in Dermatology. Future considerations for clinical dermatology in the setting of 21st century American policy reform: corporatization and the rise of private equity in dermatology. J Am Acad Dermatol. 2019;81(1):287–296.e8. doi:10.1016/j.jaad.2018.09.052 [CrossRef] PMID:30296541
- MacArthur H. Bain & Company's Global Private Equity Report 2018. Bain & Company. https://www.bain.com/insights/global-private-equity-report-2018. Published February 26, 2018. Accessed November 24, 2019.
- MacArthur H. Bain and Company. Global Private Equity Report2017. https://www.bain.com/insights/global-private-equity-report-2017. Published February 27, 2017. Accessed November 23, 2019.
- Patel SN, Groth S, Sternberg P Jr, . The emergence of private equity in ophthalmology. JAMA Ophthalmol. 2019;137(6):601–602. doi:10.1001/jamaophthalmol.2019.0964 [CrossRef] PMID:31046063
- United States Files False Claims Act Complaint Against Compounding Pharmacy, Private Equity Firm, and Two Pharmacy Executives Alleging Payment of Kickbacks. United States Department of Justice. The United States Attorney's Office, Southern District of Florida. https://www.justice.gov/usao-sdfl/pr/united-states-files-false-claims-act-complaint-against-compounding-pharmacy-private. Published February 23, 2018. Accessed November 24, 2019.
Family Dermatology PcC Agrees to Pay United States More Than $3.2 Million to Settle Alleged False Claims Act Violations. The United States Department of Justice, Office of Public Affairs. https://www.justice.gov/opa/pr/family-dermatology-pcc-agrees-pay-united-states-more-32-million-settle-alleged-false-claims. Published April 21, 2015. Accessed November 24, 2019.
- Hafner K, Palmer G. Skin Cancers Rise, Along With Questionable Treatments. https://www.nytimes.com/2017/11/20/health/dermatology-skin-cancer.html. Published November 20, 2017. Accessed November 24, 2019.
- Court EAmerican Medical Association to investigate whether private-equity-owned practices put profits over patients. MarketWatch. https://www.marketwatch.com/story/responding-to-doctors-concerns-american-medical-association-will-investigate-role-of-private-equity-and-other-companies-2018-06-18. Published June 18, 2018. Accessed November 24, 2019.
- Private Equity Spotlight – May 2016. Preqin. https://www.preqin.com/insights/spotlight-newsletters/private-equity-spotlight-may-2016/14428. Published May 13, 2016. Accessed November 24, 2019.
- Baker-Schena L. Private Equity and Ophthalmology. Eyenet Magazine. 2019;(Nov):39–44.
- Sharfstein JM, Slocum J. Private Equity and Dermatology – First, Do No Harm. JAMA Dermatol. 2019July24. doi:10.1001/jamadermatol.2019.1322 [CrossRef]. Online ahead of print. PMID:31339511