Private equity first dipped a toe into the physician practice management (PPM) market more than a decade ago. Since then, the PPM space has been on the receiving end of a steady stream of institutional money. It was, after all, a stable investment and, given an aging population, a relatively recession-resistant one at that.
Or so we thought. Turns out, PPMs aren’t exactly pandemic-proof. With restrictions limiting medical care to only those services deemed emergent, single-specialty PPMs providing elective care – including dental, optometry, and physical therapy – were among the more dramatically impacted investment sectors.
Of course, it’s easy to blame everything on a pandemic. The sophisticated sponsor, however, knows that even prior to covid, PPMs were beginning to show sizeable cracks. Investor unfamiliarity with nuanced regulatory and sub-sector specialty dynamics were not only creating operational headaches, they were leading to flat or diminishing margins.
The result (of all this) is a coming two-part sell-side wave.
The first wave will be independent, at-risk practices selling to survive the fiscal impact of covid-era operational challenges. The second wave will be driven by sponsors who have realized the complicated dynamics of the sector (further exacerbated by covid) and are looking to rid themselves of highly-leveraged investments facing extended periods of flat or declining revenue.
Both waves present opportunities for sophisticated buyers who are well-versed in the nuances of PPMs and who have the available dry powder to take advantage of fire sale prices. But PPM buyer beware: even sophisticated sponsors will need more acute expertise now, than they did in the pre-covid world. Why? Three reasons:
Operating in the covid-era will mean a constantly evolving regulatory landscape, with continuous changes (pushed by state licensing boards) on the types of procedures to be performed, physical plant or PPE requirements, patient volume limits, and so forth. Operators will need to leverage their relationships with licensee employees and owners to stay abreast of these changes and respond appropriately with either operational changes or advocacy at the state board level. And, in addition to response and advocacy, there’s compliance. Compliance with new licensing requirements, new remote services business lines, new workforce management requirements, and changing practice guidelines will not only be the yeoman’s work of PPM operations, it will be (or, at least, should be) a key consideration for any new buyer. (This is particularly true given a renewed government interest in enforcing guidelines regulating the corporate practice of medicine.)
The bottom-line here is that buyers will need to be acutely well-versed in a complex regulatory landscape. And they will need to explore the impact of said regulations on revenues and operational management much earlier in the diligence phase than they would have pre-covid. And they’ll likely need additional expertise to do so.
Operational and financial considerations
Covid has changed the financial and operational dynamics of the sector – necessitating a change in how sponsors evaluate a target. They’ll need more transparency into PPM financials and underlying operational drivers to understand the more-complex-than-usual revenue cycle, provider costs and liquidity issues. They’ll need to understand how diminished patient volume impacts collections, including changing patient payment rates (i.e. the shift from a commercially insured patient base to government payors). Beyond understanding internal financials, sponsors will also need to consider the impact of government funding. The receipt and use of government loans and grants will complicate financial analysis, especially in light of the still-shifting guidance regarding fund use, the necessity of repayment, and the need for detailed accounting.
Buyers will have a more complicated than normal diligence lift for which they’ll need more enhanced visibility into potential target financials within a more compressed timeline. Before entertaining any deal, sponsors will need to ask (and answer) a whole host of new questions: What are the additional covid-related financial implications we need to understand? Do we have the visibility into target financials in order to enable that analysis? Can we really tackle this heavier lift – or do we need to supplement traditional diligence with additional expertise?
Just because a state has allowed dermatologists to reopen, doesn’t mean patients will come. Covid – and the absence of a curative treatment or vaccine – means substantive changes to patient behavior, many of which we don’t yet fully understand.
The patient paradigm has changed. As a result, buyers will need think about the implications on traditional revenue streams and practice management techniques. Sponsors will need to focus on out-of-the box analysis and creative (and iterative) scenario planning.
Covid has wreaked havoc on the healthcare system, but it has also created a window of opportunity for sophisticated sponsors to find bargains. Distinguishing between bargains and busts will require far more diligence, expertise and creativity. And that, in turn, will require buyers who as intellectually invested in the PPM space as they are financially.
Jason Madden is a managing director at Accordion, the private equity-focused financial consulting and technology firm.
Joshua J. Freemire is a member of Epstein, Becker & Green, P.C. and provides health regulatory and related advice to sponsors and portfolio companies throughout the investment life cycle.