How private practice plus private equity can help balance an unbalanced system

When structured and executed correctly, private equity can be a powerful vehicle for change at a time when change is what the healthcare system needs.

By Paul Berggreen

The past 30 years have witnessed unprecedented change in the US healthcare landscape along with a seismic shift in physician employment, with independent physicians dropping from 57 percent to 33 percent of the workforce between 2000-2016. Hospital employed physicians cost the system more for the same quality care than private practice physicians, due mainly to Medicare payment differentials of hospital outpatient department (HOPD) vs. ambulatory surgery center (ASC) rates and favorable hospital commercial insurer rates. This is altering physician employment status, thereby affecting job satisfaction, compensation models, tenure and burnout.

As a result, historically fragmented medical groups began consolidating. Initially helpful, those gains have proven difficult to maintain. Physicians strive to recruit quality associates, improve practice efficiency and revenue and remain independent in the face of huge external pressures, all the while putting the patient first while still caring for actual patients. Enter private equity. After nearly a decade of private equity investment in medical groups of many specialties, the verdict on their value to physicians is – it depends.

As many physician groups have learned, if you have met one private equity firm, you have met one private equity firm. The key to a successful partnership is having a common goal.  If done correctly, success will follow a focus on the patient. Private equity firms have operational discipline and financial expertise.  What they do not do is practice medicine. That means avoiding any operational or financial mechanism that has the potential to influence a medical decision, even by degrees of separation. That, plus the physician leadership and involvement required to maintain that culture, is vital. The investing firm must support the common objective that the practice is the entity that will endure long beyond their investment period.

Any partnership in medicine is doomed to failure if it is not equitable.  Equity in a common management services organization (MSO) is one way to realize value growth. When structured and executed correctly, it can be a powerful vehicle for change at a time when change is what the system needs.

The overriding question remains – why partner at all? Why not make the best of a difficult situation and go it alone? To those who have been doing just that for many years, the answer is clear. In order to influence the system, not just a practice, a quantum leap must be taken. Value or risk based care models, population management on a meaningful scale and direct employer contracting are not achievable without scale. The ability to identify and bypass system inefficiencies and the promise of innovation inherent in private practice will continue to be throttled in smaller settings as the rest of the players in the sandbox attain massive size and unchecked power.

The current knock against private equity investments in medical groups reverberates hollow when the layers of the critiques are peeled away. Abuses in medical practices were present long before private equity financing entered the medical arena and will be present long after the next phase, whatever form it may take. The worst impulses of business people – and physicians – are not exclusive to or even tilted toward private equity backed companies, and simply finding a questionable actor and assuming their financing structure is to blame for their actions is naive and incorrect. A shady actor is a shady actor. Period.

The focus of any investment or partnership should be to improve the practice. Rather than relegating physicians to the sidelines in the quest for systemic improvement, we should be encouraging any innovation that is likely to achieve the triple aim: better outcomes, lower costs, improved patient experience. Private equity investments in medical practices, if done correctly, can provide the tools needed to do just that. To expect a five or 15 physician practice to meaningfully participate in that journey is unrealistic, yet that is the stagnant vision that some critics have for physician groups. Positive change is what the medical community needs, and we should not be afraid to grasp it if we can. Standing pat with our hands in our lab coats proclaiming noble intent is just not enough, and taking care of one patient at a time is a great privilege, but assuming the responsibility to care for a population of patients as their trusted physician advisors is the holy grail of healthcare. Let’s not shrink from the task.

(Full disclosure: as recently as 2018 this author was a private equity skeptic. It was only through an unbiased investigation that it became evident what types of financing promoted practice improvement and growth and which were retirement strategies for senior partners. In 2019, Arizona Digestive Health joined the GI Alliance, and the realization of our objectives is well underway.) 

Paul Berggreen, MD, is president of Arizona Digestive Health and 
chief strategy officer of GI Alliance (which is owned by Waud Capital Partners)