Should Physicians Sell their Practices to Private Equity Investors?

Should Physicians Sell their Practices to Private Equity Investors?

Private equity firms are eating up physician practices, and they are not slowing down. According to a recent report from the American Antitrust Institute (hereinafter the AAI Report), private equity acquisitions of physician practices increased from 75 deals in 2012 to 484 deals in 2021. In some urban areas, a private equity firm might own 30% or more of the physician practices, which reduces competition and as studies are showing, increases prices for consumers.

Private equity ownership of physician practices is a relatively new phenomenon, and there is a lot we don’t know about the impact of this trend. However, of the reputable studies that have been conducted thus far, “no study has found significant improvements to health care quality, efficiency, costs, or access as a result of PE [Private Equity] acquisition.” See Erin C. Fuse Brown and Mark A. Hall, Private Equity and the Corporatization of Health Care, 76 Stan. L. Rev. at 19 (forthcoming 2024).

The goal of private equity investors is to have a quick turnaround in profit generation and sale of the enterprise. That is, PE investors want to acquire as many physician practices as they can, make them profitable within five to seven years, and then sell off their investment at a profit to the next willing buyer. According to the AAI Report, to make a physician practice profitable, the PE investor must find a way to increase the practice’s “EBITDA” (earnings before interest, taxes, depreciation and amortization). To increase EBITDA, the PE investor will “look for quick ways to cut costs and increase revenue.” Cutting costs usually involves cutting workers or replacing highly paid (and highly qualified) staff with lower paid (and less qualified) staff. It could also mean reducing supply costs, closing facilities, or reducing hours of operation. PE investors usually increase procedure prices, may also pressure physicians to perform more profitable procedures and may engage in aggressive billing and collection practices to increase revenues. AAI Report at 13.

These changes by PE investors can adversely impact patient experience and quality of care. Indeed, some recent studies have shown that consumers of traditional health care providers, such as physicians, are dissatisfied with their care. Specifically, one study found physicians listen to their patients for an average of eleven seconds before interrupting. Other surveys show that the vast majority of consumers want the traditional health system to be more involved with wellness activities such as healthy eating and exercise, but currently there is a disconnect. Another U.S. survey by the Harris Poll found that 19 percent of respondents complained about the medical system’s s lack of focus on preventive care and wellness.” The Harris Poll found that the most common ways the U.S. healthcare system is falling short for consumers relate to getting appointments, costs, and the system being focused on treating acute problems rather than preventative care and wellness. Arguably, much of this dissatisfaction can be attributed to the corporatization of health care, much of which is being driven by PE investments in health care organizations.

Of course, as one recent article points out, no one is forcing physicians to sell their practices to PE investors. Something is driving them to give up some of their control to usually unlicensed owners of health care companies. And that something is the daily challenge and expense of running a private practice and the fact that working for a hospital or health system as an employee is not appealing. In the face of these two, more traditional options, the idea of selling a physician practice to a private equity buyer can seem quite attractive. For the physician, a lot of the burdensome tasks of managing a practice is offloaded to the PE firm while they can still practice medicine and have more control over their work environment than they would in a hospital setting. However, according to the American Medical Association, the top reason physicians sell their practices to any entity is that they need higher reimbursement rates to remain financially viable. Selling to a PE firm gives the physician more negotiating power with insurers to get better rates, as well as access to capital to keep up with the high cost of doing business. Id.

So, should a physician sell their practice to a PE firm? They certainly can and it is completely understandable as to why they would do so. But they should include legal counsel to ensure they are getting the best deal and maintaining as much clinical control as possible. Competent legal counsel can scrutinize employment and acquisition agreements to ensure that laws that prohibit the unlicensed practice of medicine (such as Corporate Practice of Medicine and state fee splitting laws) are not violated and that the principles behind those laws are honored. That is, PE firms should not be pressuring physicians to adjust their clinical judgment in the name of profits. If PE firms want to be involved in health care, the instruments that guide those relationships, such as the acquisition and physician employment agreements, should incorporate the “social contract” of health care: that is, an expectation that safe, effective, and equitable services will be made available to a community. That may be a lofty goal, but to the extent that physicians aim to achieve both financial stability and high-quality patient care, physicians must keep health care’s social contract alive. Partnering with competent legal counsel, such as the Center for Health and Wellness Law, LLC, can further that effort.

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