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PE’s record in healthcare worth defending

By Angela Humphreys, Bass, Berry & Sims PLC

Private equity has had an overwhelmingly positive impact on healthcare. But after a decade of reinvention in the industry — with no sign of letup — even those interested in finding new ways to deliver care show signs of change fatigue.

In this environment, critics wedded to the status quo are blaming PE for needed changes they don’t like.

In parts of the industry, it is almost an article of faith to question whether PE investment is good for patients. In particular, two recent publications in dermatology have sparked media coverage that drew great attention to this point of view.

A recent article in the New York Times highlighted a paper published on the website of the Journal of the American Academy of Dermatology, bashing PE’s investment in dermatology practices. The JAAD paper suggested that private equity often buys outlier practices that share its focus on profits.

A Viewpoint article published in January by JAMA Dermatology suggested “risks to the specialty” from consolidation of dermatology practices that are “commoditizing the treatment of skin disease.” This article also raised the specter of PE investment leading to pressure to drive referrals of other services that violate healthcare laws and regulations.

What the authors of these papers are missing, however, is the positive impact of the enhanced compliance profiles and clinical protocols that PE firms bring to the physician practices they acquire.

Standardizing practices based on evidence-based protocols improves treatment levels and reduces errors. If standardization is commoditizing treatment, then I would guess many patients would appreciate commoditizing.

And of course, they overlook the signature benefit of PE investment: gaining a capital partner who will invest the resources necessary to grow the practice and enable physicians to focus on their highest and best use —practicing medicine.

PE firms are answerable to their investors, so they have every interest in ensuring the company they want to invest in is strong and in compliance. They bring a laser focus to compliance through a robust due diligence process that includes:

  • a quality-of-earnings analysis to probe the ways a physician practice generates revenue and ensure the practice’s business model is proper and sustainable;
  • an in-depth billing and coding audit to support this analysis; and
  • a thorough review by experienced attorneys of the practice’s legal arrangements, especially with physicians. Physician arrangements are subject to federal civil and criminal laws that prohibit providing financial incentives to physicians for patient referrals.

The due diligence process can result in repayments to government health programs, such as Medicare and Medicaid, if technical violations are discovered.

Moreover, the vigilance of investors doesn’t end with closing.

Compliance issues that are identified during due diligence are corrected on a go-forward basis, and this is monitored by leadership and the board.

In addition, PE firms often establish medical advisory boards at their platform companies to advise physicians on the best clinical protocols to optimize patient care.

These strategies bring an enhanced level of sophistication and best practices to stand-alone physician practice groups.

An investment by a private equity firm provides a practice with much-needed capital, a significantly stronger compliance program and the collective knowledge of the physicians across its sister practices, enabling physicians to focus on patients instead of the business of the practice.

Despite what you may have read, that is a good thing.

Angela Humphreys is chair of the healthcare practice group at Bass, Berry & Sims PLC, the nation’s fourth-largest health law firm. She can be reached at or +1 615-742-7852.

Correction: The recent paper in Journal of the American Academy of Dermatology critical of PE practices in dermatology has not been retracted. The original version of this column said that it had been.