Cover Story

Private equity offers new option for ophthalmology practice consolidation

Ophthalmologists and ophthalmology practices are steering toward consolidation in a fragmented market, and private equity firms may offer a new option for physicians as the firms look to invest in the field.

Private equity firms, investment management companies that make investments in operating companies or startup companies, have been focusing their attention more on the ophthalmology field over the last several years. For example, in May 2014, Varsity Healthcare Partners, a health care services-focused private equity investment firm, acquired Katzen Eye Group, one of the nation’s largest ophthalmologic and optometric services practices. Through this partnership, the two entities formed EyeCare Services Partners Holding LLC with the goal of consolidating successful vision care services practices and affiliated surgical centers in selected markets, according to a Varsity Healthcare Partners press release.

Because this was one of the first ophthalmology practice consolidators, EyeCare Service Partners Holding has been able to evaluate numerous opportunities and selectively partner with groups in specific markets. The company has successfully expanded into four states through new acquisitions since 2014, OSN Chief Medical Editor Richard L. Lindstrom, MD, founder of Minnesota Eye Consultants, said.

Consolidation is a reality

Lindstrom said Minnesota Eye Consultants realized private equity investment would allow for the practice to partner with other eye care services in the Minneapolis-St. Paul market and potentially other markets throughout the country.

Private equity investment allows like-minded practices to consolidate while maintaining individual brand and independence, according to Richard L. Lindstrom, MD.

Image: Shari Fleming Photography

Consolidation is a reality in the medical field and has been demonstrated in several markets with large hospitals acquiring practitioners, for example, and adding an insurance product as well, Lindstrom said. Mega-practices are also becoming a reality, in which multiple independent practices are consolidated into one large practice.

However, none of those consolidation models was attractive to the partners at Minnesota Eye Consultants, Lindstrom said.

“We were introduced to a private equity model, which had been used in other markets such as dermatology, dentistry and physical therapy but not so much in ophthalmology. But it looked attractive to us because it would allow us to consolidate with likeminded practices. It would allow each practice to maintain their own brand and independence but still share in best practices,” he said.

A partnership with Waud Capital Partners

After analyzing opportunities for nearly 18 months, Lindstrom said the practice chose Waud Capital Partners in Chicago to partner with for the future.

Waud Capital Partners, a 25-year-old private equity firm, largely focuses on the health care sector. The firm began investigating the eye care market more than 3 years ago and for the first 12 to 18 months studied the market in depth to identify its growth potential, Christopher J. Graber, a principal of Waud Capital Partners, said.

The ophthalmology market has good demographic trends, an increasing demand for services due to the country’s aging population and multiple ways to grow, he said.

“Expanding the scope of services, opening locations, building greater density in markets and continuing to refine the basic operating model all present opportunities. There are more procedures moving to the ambulatory setting and out of the hospital setting, which creates opportunity to work with various constituents in the market. Probably as important, we really found a lot of interest among the larger groups across the country to play a leading role in that growth strategy. We found a number of people on a regional basis who had done very well and built very strong organizations,” Graber said.

An expanding field

Minnesota Eye Consultants had established itself as a major service provider in the Minneapolis-St. Paul area, has grown consistently over the years and most important has “built a fantastic clinical reputation not only in the Minnesota market, but on a national basis, and a strong culture that was very aligned with what we wanted to build and accomplish,” Graber said.

Waud Capital and Minnesota Eye Consultants created United Vision Partners with the goal of building a stronger, integrated provider group in the twin cities and expanding into three or four other markets in the future.

Any practice acquired by United Vision Partners would sell some of its value to the group but would receive equity in United Vision Partners, Lindstrom said.

“That diversifies their risk. Now they own a piece of Minnesota Eye Consultants, they own a piece of their own practice, and so while we want them to do well, and they want us to do well, if they struggle a bit and we do great, they still can do OK. It’s sort of a mutual fund of practices that will be created, which does diversify your risk some,” Lindstrom said.

It is a beneficial deal for both junior and senior partners in the practice, Lindstrom said, because senior partners now have an opportunity to increase the value of their stakes and junior partners no longer have to take on debt.

Capital at the ready

To continue to grow a practice, a funding source is needed. Traditionally, Minnesota Eye Consultants borrowed money from banks to expand services, build ASCs and hire new doctors, Lindstrom said.

“We want to continue to grow. ... For our partners to achieve that growth rate, we have to borrow money. Most banks require that debt to be personally guaranteed. I have young partners who are personally guaranteeing debt that was greater than their net worth. They were naturally a bit uncomfortable. We were looking for a capital source, and that has worked out very well because we now have zero debt, and our partners are not guaranteeing any debt on their personal net worth statements,” he said.

The goal over the next several years is for United Vision Partners to expand in markets with similar demographics to the Minneapolis-St. Paul region and build delivery models in which high-quality practices can join under the umbrella of United Vision Partners, Lindstrom said.

Ultimately, the goal will be that United Vision Partners will be acquired by another private equity firm or it could go public with an initial public offering.

If the company goes public and has success, Lindstrom said it would increase the value of the equity for partners who traditionally would sell their assets in a private transaction.

“In a private transaction, you would be selling your assets to another physician for one to three times earnings before interest, tax, depreciation and amortization (EBITDA). If you’re doing a private equity transaction, it can be four to eight times EBITDA. In a public marketplace transaction, however, it can be 10 to 20 times EBITDA. There is an opportunity for an individual doctor to increase the value of the equity they’ve built in the practice,” he said.

Prior consolidation attempts

The last widespread attempt at consolidation in the ophthalmology field was in the 1990s with the concept of physician practice management companies, which were characterized by firms such as Physicians Resource Group, OSN Practice Management Section Editor John B. Pinto, president of J. Pinto & Associates, said.

Rather than being a private equity play, it was an aggregation of practices that folded them into a classic service center roll-up in the public markets. Physicians Resource Group consolidated an initial 10 practices and many more followed, Pinto said.

John B. Pinto

“Ultimately, the enterprise model in the ’90s was fairly flawed. These companies took a centralized approach toward their management of constituent practices. Duties that would ordinarily be handled locally by practices were swept into a national management center and not done very effectively or efficiently. The providers were quite often bought out in their entirety, so there was really a lack of gain sharing. There wasn’t a sense of shared destiny. There were some very poor market choices; they were buying practices in all kinds of markets that didn’t make a lot of sense,” Pinto said.

Consolidation in the future

The firms that make successful investments will likely adhere to several practices to enable their partners to perform well in the new partnership. A decentralized model and an appreciation for the profound complexities of the marketplace may make several of these investments profitable between private equity firms and ophthalmology practices.

“My prediction, though, would be that many of these will fail. ... Even though private equity movements are all the rage today, this is not going to eliminate other models or segments of the profession. Twenty years from now, we’ll still have private practices, even some small and solo practices. We’ll still have a lot of practices that are health system-based,” Pinto said.

If demand for eye care continues to increase by 5% each year and the provider base remains flat over the next 20 years, it will be fascinating to see if private equity does indeed make an impact in the ophthalmology field, Pinto said.

“I believe that, ultimately, at least for the next 20 years, physicians are going to have the upper hand. If you mention that Dr. Smith is considering a job 10 years from now and has two choices where he can work with a large conglomerate practice with 100 providers with 5% to 20% of cash flow being paid to the investors, or alternatively, can work for a private independent practice where all profits can go to the doctor and owners, that private independent model is going to have the potential upper hand in having access to ophthalmologists,” he said. “The most successful private equity companies over the next decade will be those that effectively solve this problem.”

Risks of private equity

Private equity investment for a large practice can be beneficial for senior partners or ophthalmologists who are close to retiring and ending their careers, but they may be a bit more questionable for those who are just beginning their careers, OSN Retina/Vitreous Board Member Jay S. Duker, MD, of New England Eye Center, said.

“For the people who own the practices and are retiring or are near retirement, it’s quite beneficial because they get a payout for long years of building a practice. I think that for physicians who are coming out of training and looking for a place to work, this is a little bit more of the corporatization of medicine. There are great examples of where that has worked very well. Kaiser Permanente comes to mind, where there’s corporatization of medical care, but the doctors seem happy, they’re well paid, and the system works efficiently,” Duker said.

Jay S. Duker

But the question is whether private equity will be able to do this as well. Physicians ultimately answer to their patients first, but they have other “layers” to answer to as well, such as insurance companies, government regulations and hospitals.

“If you add a for-profit layer onto that, I think that may in some ways skew the delivery of care. That’s a general statement — that doesn’t mean it absolutely will happen,” he said.

From a strictly business perspective, consolidation of fragmented businesses often makes sense. But, in many ways “all medicine is local,” Duker said.

If a large corporation buys out a practice and it has a large, multi-state vision care system set up, what is efficient and works well in downtown Boston may not work the same for the delivery of care in rural Maine, Duker said.

Economies of scale

However, consolidation is all about economies of scale, OSN Glaucoma Board Member Savak “Sev” Teymoorian, MD, MBA, of Harvard Eye Associates, California, said. Consolidation and private equity investment will offer advantages for these groups when it comes to payers or purchasing new, needed equipment, but will also make things difficult for a solo ophthalmologist.

“With consolidation comes the economies of scale. If you’re a solo guy, it becomes difficult to compete. There’s a lot of new technology in ophthalmology that almost becomes gold standard as part of your care, such as an OCT. If you’re in solo practice trying to acquire equipment with such high expense, it’s very difficult to do. It’s hard for the solo practitioner to stay up to date just on the medical side of things. It can be done, but it’s very difficult. That’s where the economies of scale and the capital will help in purchasing that equipment,” he said.

Savak “Sev” Teymoorian

Additionally, if a private equity firm takes majority control of a practice, it can be a difficult transition for some ophthalmologists to make. These individual care providers would no longer have the majority stake in what’s going on with their practice and the company as a whole, Teymoorian said.

Generally, this may not be much of an issue, but if something goes wrong in the practice and with the company, then not having the majority say in its future and direction may be difficult to accept, he said.

“The physicians still have to assume the duties of whatever their contracts are. Whatever the contract demands of the physician, they’re the ones that will be doing the work, but they may not be the ones necessarily speaking on their own behalf if an issue arises,” Teymoorian said.

Advantages for young physicians

Consolidation and investments from private equity firms could have some advantages for established physicians and physicians just beginning their careers, Teymoorian said.

“Being a part of these larger groups can add value if you’re an older physician, and it can help out in terms of an eventual evaluation and buyout. For a younger doctor, it just allows for more of a secure setting when you’re talking about the future landscape of management, which is changing so quickly,” he said.

Depending on how private equity firms manage their investments, for some physicians this new trend will be a “wonderful next stage” of their careers and for others it will be just as frustrating as the consolidation efforts were in the mid-1990s, Pinto said.

“I advise clients all the time who are considering moving into this new direction with their practice. There really is not a pat answer if it’s a good or poor thing to do. The factors are multiplex. It’s the stage of practice you’re in, how well or poorly you’ve done at running your own practice. Many doctors who are still in the middle of their career are frustrated by the galloping complexity of running a private practice and are seeing this as not a career exit but an operations exit of being able to get out of that. Some clients are just so iconoclastic and independently minded, independence oriented, that they would likely bridle under an overseer organization. So, there are many considerations when kicking the tires on a proposal from one of these firms,” he said. – by Robert Linnehan

Disclosures: Duker, Pinto and Teymoorian report no relevant financial disclosures. Graber reports he is an employee of Waud Capital Partners and has a financial interest in United Vision Partners. Lindstrom reports he is a partner in Minnesota Eye Consultants and has equity in United Vision Partners.

Click here to read the POINTCOUNTER, "Do you believe private equity investment will be more successful than the physician practice management companies’ attempt at consolidations in the 1990s?"

Ophthalmologists and ophthalmology practices are steering toward consolidation in a fragmented market, and private equity firms may offer a new option for physicians as the firms look to invest in the field.

Private equity firms, investment management companies that make investments in operating companies or startup companies, have been focusing their attention more on the ophthalmology field over the last several years. For example, in May 2014, Varsity Healthcare Partners, a health care services-focused private equity investment firm, acquired Katzen Eye Group, one of the nation’s largest ophthalmologic and optometric services practices. Through this partnership, the two entities formed EyeCare Services Partners Holding LLC with the goal of consolidating successful vision care services practices and affiliated surgical centers in selected markets, according to a Varsity Healthcare Partners press release.

Because this was one of the first ophthalmology practice consolidators, EyeCare Service Partners Holding has been able to evaluate numerous opportunities and selectively partner with groups in specific markets. The company has successfully expanded into four states through new acquisitions since 2014, OSN Chief Medical Editor Richard L. Lindstrom, MD, founder of Minnesota Eye Consultants, said.

Consolidation is a reality

Lindstrom said Minnesota Eye Consultants realized private equity investment would allow for the practice to partner with other eye care services in the Minneapolis-St. Paul market and potentially other markets throughout the country.

Private equity investment allows like-minded practices to consolidate while maintaining individual brand and independence, according to Richard L. Lindstrom, MD.

Image: Shari Fleming Photography

Consolidation is a reality in the medical field and has been demonstrated in several markets with large hospitals acquiring practitioners, for example, and adding an insurance product as well, Lindstrom said. Mega-practices are also becoming a reality, in which multiple independent practices are consolidated into one large practice.

However, none of those consolidation models was attractive to the partners at Minnesota Eye Consultants, Lindstrom said.

“We were introduced to a private equity model, which had been used in other markets such as dermatology, dentistry and physical therapy but not so much in ophthalmology. But it looked attractive to us because it would allow us to consolidate with likeminded practices. It would allow each practice to maintain their own brand and independence but still share in best practices,” he said.

A partnership with Waud Capital Partners

After analyzing opportunities for nearly 18 months, Lindstrom said the practice chose Waud Capital Partners in Chicago to partner with for the future.

Waud Capital Partners, a 25-year-old private equity firm, largely focuses on the health care sector. The firm began investigating the eye care market more than 3 years ago and for the first 12 to 18 months studied the market in depth to identify its growth potential, Christopher J. Graber, a principal of Waud Capital Partners, said.

PAGE BREAK

The ophthalmology market has good demographic trends, an increasing demand for services due to the country’s aging population and multiple ways to grow, he said.

“Expanding the scope of services, opening locations, building greater density in markets and continuing to refine the basic operating model all present opportunities. There are more procedures moving to the ambulatory setting and out of the hospital setting, which creates opportunity to work with various constituents in the market. Probably as important, we really found a lot of interest among the larger groups across the country to play a leading role in that growth strategy. We found a number of people on a regional basis who had done very well and built very strong organizations,” Graber said.

An expanding field

Minnesota Eye Consultants had established itself as a major service provider in the Minneapolis-St. Paul area, has grown consistently over the years and most important has “built a fantastic clinical reputation not only in the Minnesota market, but on a national basis, and a strong culture that was very aligned with what we wanted to build and accomplish,” Graber said.

Waud Capital and Minnesota Eye Consultants created United Vision Partners with the goal of building a stronger, integrated provider group in the twin cities and expanding into three or four other markets in the future.

Any practice acquired by United Vision Partners would sell some of its value to the group but would receive equity in United Vision Partners, Lindstrom said.

“That diversifies their risk. Now they own a piece of Minnesota Eye Consultants, they own a piece of their own practice, and so while we want them to do well, and they want us to do well, if they struggle a bit and we do great, they still can do OK. It’s sort of a mutual fund of practices that will be created, which does diversify your risk some,” Lindstrom said.

It is a beneficial deal for both junior and senior partners in the practice, Lindstrom said, because senior partners now have an opportunity to increase the value of their stakes and junior partners no longer have to take on debt.

Capital at the ready

To continue to grow a practice, a funding source is needed. Traditionally, Minnesota Eye Consultants borrowed money from banks to expand services, build ASCs and hire new doctors, Lindstrom said.

“We want to continue to grow. ... For our partners to achieve that growth rate, we have to borrow money. Most banks require that debt to be personally guaranteed. I have young partners who are personally guaranteeing debt that was greater than their net worth. They were naturally a bit uncomfortable. We were looking for a capital source, and that has worked out very well because we now have zero debt, and our partners are not guaranteeing any debt on their personal net worth statements,” he said.

PAGE BREAK

The goal over the next several years is for United Vision Partners to expand in markets with similar demographics to the Minneapolis-St. Paul region and build delivery models in which high-quality practices can join under the umbrella of United Vision Partners, Lindstrom said.

Ultimately, the goal will be that United Vision Partners will be acquired by another private equity firm or it could go public with an initial public offering.

If the company goes public and has success, Lindstrom said it would increase the value of the equity for partners who traditionally would sell their assets in a private transaction.

“In a private transaction, you would be selling your assets to another physician for one to three times earnings before interest, tax, depreciation and amortization (EBITDA). If you’re doing a private equity transaction, it can be four to eight times EBITDA. In a public marketplace transaction, however, it can be 10 to 20 times EBITDA. There is an opportunity for an individual doctor to increase the value of the equity they’ve built in the practice,” he said.

Prior consolidation attempts

The last widespread attempt at consolidation in the ophthalmology field was in the 1990s with the concept of physician practice management companies, which were characterized by firms such as Physicians Resource Group, OSN Practice Management Section Editor John B. Pinto, president of J. Pinto & Associates, said.

Rather than being a private equity play, it was an aggregation of practices that folded them into a classic service center roll-up in the public markets. Physicians Resource Group consolidated an initial 10 practices and many more followed, Pinto said.

John B. Pinto

“Ultimately, the enterprise model in the ’90s was fairly flawed. These companies took a centralized approach toward their management of constituent practices. Duties that would ordinarily be handled locally by practices were swept into a national management center and not done very effectively or efficiently. The providers were quite often bought out in their entirety, so there was really a lack of gain sharing. There wasn’t a sense of shared destiny. There were some very poor market choices; they were buying practices in all kinds of markets that didn’t make a lot of sense,” Pinto said.

Consolidation in the future

The firms that make successful investments will likely adhere to several practices to enable their partners to perform well in the new partnership. A decentralized model and an appreciation for the profound complexities of the marketplace may make several of these investments profitable between private equity firms and ophthalmology practices.

PAGE BREAK

“My prediction, though, would be that many of these will fail. ... Even though private equity movements are all the rage today, this is not going to eliminate other models or segments of the profession. Twenty years from now, we’ll still have private practices, even some small and solo practices. We’ll still have a lot of practices that are health system-based,” Pinto said.

If demand for eye care continues to increase by 5% each year and the provider base remains flat over the next 20 years, it will be fascinating to see if private equity does indeed make an impact in the ophthalmology field, Pinto said.

“I believe that, ultimately, at least for the next 20 years, physicians are going to have the upper hand. If you mention that Dr. Smith is considering a job 10 years from now and has two choices where he can work with a large conglomerate practice with 100 providers with 5% to 20% of cash flow being paid to the investors, or alternatively, can work for a private independent practice where all profits can go to the doctor and owners, that private independent model is going to have the potential upper hand in having access to ophthalmologists,” he said. “The most successful private equity companies over the next decade will be those that effectively solve this problem.”

Risks of private equity

Private equity investment for a large practice can be beneficial for senior partners or ophthalmologists who are close to retiring and ending their careers, but they may be a bit more questionable for those who are just beginning their careers, OSN Retina/Vitreous Board Member Jay S. Duker, MD, of New England Eye Center, said.

“For the people who own the practices and are retiring or are near retirement, it’s quite beneficial because they get a payout for long years of building a practice. I think that for physicians who are coming out of training and looking for a place to work, this is a little bit more of the corporatization of medicine. There are great examples of where that has worked very well. Kaiser Permanente comes to mind, where there’s corporatization of medical care, but the doctors seem happy, they’re well paid, and the system works efficiently,” Duker said.

Jay S. Duker

But the question is whether private equity will be able to do this as well. Physicians ultimately answer to their patients first, but they have other “layers” to answer to as well, such as insurance companies, government regulations and hospitals.

PAGE BREAK

“If you add a for-profit layer onto that, I think that may in some ways skew the delivery of care. That’s a general statement — that doesn’t mean it absolutely will happen,” he said.

From a strictly business perspective, consolidation of fragmented businesses often makes sense. But, in many ways “all medicine is local,” Duker said.

If a large corporation buys out a practice and it has a large, multi-state vision care system set up, what is efficient and works well in downtown Boston may not work the same for the delivery of care in rural Maine, Duker said.

Economies of scale

However, consolidation is all about economies of scale, OSN Glaucoma Board Member Savak “Sev” Teymoorian, MD, MBA, of Harvard Eye Associates, California, said. Consolidation and private equity investment will offer advantages for these groups when it comes to payers or purchasing new, needed equipment, but will also make things difficult for a solo ophthalmologist.

“With consolidation comes the economies of scale. If you’re a solo guy, it becomes difficult to compete. There’s a lot of new technology in ophthalmology that almost becomes gold standard as part of your care, such as an OCT. If you’re in solo practice trying to acquire equipment with such high expense, it’s very difficult to do. It’s hard for the solo practitioner to stay up to date just on the medical side of things. It can be done, but it’s very difficult. That’s where the economies of scale and the capital will help in purchasing that equipment,” he said.

Savak “Sev” Teymoorian

Additionally, if a private equity firm takes majority control of a practice, it can be a difficult transition for some ophthalmologists to make. These individual care providers would no longer have the majority stake in what’s going on with their practice and the company as a whole, Teymoorian said.

Generally, this may not be much of an issue, but if something goes wrong in the practice and with the company, then not having the majority say in its future and direction may be difficult to accept, he said.

“The physicians still have to assume the duties of whatever their contracts are. Whatever the contract demands of the physician, they’re the ones that will be doing the work, but they may not be the ones necessarily speaking on their own behalf if an issue arises,” Teymoorian said.

Advantages for young physicians

Consolidation and investments from private equity firms could have some advantages for established physicians and physicians just beginning their careers, Teymoorian said.

PAGE BREAK

“Being a part of these larger groups can add value if you’re an older physician, and it can help out in terms of an eventual evaluation and buyout. For a younger doctor, it just allows for more of a secure setting when you’re talking about the future landscape of management, which is changing so quickly,” he said.

Depending on how private equity firms manage their investments, for some physicians this new trend will be a “wonderful next stage” of their careers and for others it will be just as frustrating as the consolidation efforts were in the mid-1990s, Pinto said.

“I advise clients all the time who are considering moving into this new direction with their practice. There really is not a pat answer if it’s a good or poor thing to do. The factors are multiplex. It’s the stage of practice you’re in, how well or poorly you’ve done at running your own practice. Many doctors who are still in the middle of their career are frustrated by the galloping complexity of running a private practice and are seeing this as not a career exit but an operations exit of being able to get out of that. Some clients are just so iconoclastic and independently minded, independence oriented, that they would likely bridle under an overseer organization. So, there are many considerations when kicking the tires on a proposal from one of these firms,” he said. – by Robert Linnehan

Disclosures: Duker, Pinto and Teymoorian report no relevant financial disclosures. Graber reports he is an employee of Waud Capital Partners and has a financial interest in United Vision Partners. Lindstrom reports he is a partner in Minnesota Eye Consultants and has equity in United Vision Partners.

Click here to read the POINTCOUNTER, "Do you believe private equity investment will be more successful than the physician practice management companies’ attempt at consolidations in the 1990s?"