Why private equity is right for some, not all, practices

November 8, 2019
Keith Loria

Keith Loria is a contributing writer to Medical Economics.

Private equity firms’ acquisition of physician practices has escalated in recent years, and urology practices are currently garnering great interest due to an increased demand for services from an aging population and a low supply of urologists.

Private equity firms’ acquisition of physician practices has escalated in recent years, and urology practices are currently garnering great interest due to an increased demand for services from an aging population and a low supply of urologists.

Victor Houtz and E. Scot Davis shared their contrasting opinions on urologists teaming with private equity partners at the LUGPA annual meeting in Chicago, with a point/counterpoint debate. Houtz is chief operating officer of New Jersey Urology, which last year teamed with private equity firm J.W. Childs Associates and praises the benefits of the partnership. Davis, who is CEO of Arkansas Urology and has more than 20 years in physician practice management, is not completely in favor of private equity.

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Usually in private equity cases, a urology practice will receive an upfront tax-advantaged payment associated with an ongoing salary reduction while yielding control of the business but not the medical aspect of the practice. And while that new capital can be used to improve the practice to compete with larger hospital systems, some argue that because the private equity firms are going to demand a much higher level of performance and higher level of organizational discipline, it might not be worth it.

 

Questions to consider

Houtz and Davis started by explaining some important questions need to be addressed before deciding to go the private equity route, including “Why are you doing it?” “What aren’t you doing it?” “What is the value to the practice?” and “How does it impact the culture?” Each answered these questions weighted by their particular opinion.

Davis, who was in a physician practice management company earlier in his career, said the private equity model today is similar to his previous experience in growing a practice, though there are some differences. He questioned whether private equity firms truly offer security and autonomy, which is what the private equity companies promise. In reality, he said, urologists probably lose control over their day-to-day operations.

Conversely, Houtz explained why losing some autonomy may be of the best interest to the practice group.

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One question Houtz and Davis debated was whether a private equity arrangement benefited all of the partners or a specific subset. “One challenge is that more senior physicians who are looking to retirement may cash out and then could quit or slow down their production,” Davis said.

Houtz explained that his group requires a certain production level from physicians, with penalties attached, to keep this from becoming a problem.

However, Davis countered that in the basic private equity model, physicians create EBITDA (earnings before interest, tax, depreciation and amortization) by giving away their income for a period of time. And the model is too young-just 3 years-to determine if this is viable for the future. He doesn’t have any empirical evidence, but said it should give pause.

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Another question the executives debated was whether private equity impacted the quality of care. Houtz emphatically stated it doesn’t, but Davis expressed concern that at the end of the day, private equity firms are looking for money and if a certain threshold needs to be hit, that could ultimately affect quality.

Davis admitted he’s not diametrically opposed to private equity and can see the value for certain groups. But in his practice, he said he doesn’t feel there’s value now, although there could be value in the future. He encouraged others to consider that before making any decision going forward.

Houtz also said he feels private equity isn’t the best choice for every urology group and agreed that multiple factors needed to be considered.

Regardless of whether one was persuaded one way or another, at the end of the presentation, The debate ended with one key answer to the question, “Is private equity right for you?” The answer: “It depends.” It isn’t for everybody, but it might be for some, and the two speakers armed attendees with items to consider before stepping into a private equity discussion.