From Boutique to Big Box Store
The ob/gyn we spoke with, now working in North Carolina, joined a large obstetrics practice just three months before its partners voted to sell it to a PE-backed venture. As a new hire, Dr. M (who asked for anonymity because his comments focused largely on former colleagues) wasn’t eligible for the lump-sum payment, but he figured that banding together with other doctors in his state would improve payer contracts and make it easier to participate in value-based contracts.
Dr. M didn’t anticipate how hard it would be to lose the ability to make business decisions — like choosing a vendor or launching an infusion clinic so pregnant patients experiencing nausea didn’t seek emergency care. Merging practices brings standardization that tends to lift low performers but restricts the flexibility of high performers, he says. “It’s like going from being a boutique specialty store to being bought out by Walmart. We were doing everything in-house and doing things well. It cheapened our brand.”
Dr. M also didn’t like having salaries capped. He figured his fellow physicians were leaving as much as $200,000 on the table each year despite seeing as many as 35 patients per day.
I think there are people who are happy just going to work and getting a paycheck, but if you are in medicine to take care of patients and be in business, private equity ownership is a frustrating thing.
After three years, Dr. M left to become a “locum tenens” provider, a temporary worker paid at a premium by a hospital to fill a critical workforce gap. While there is a baseline level of job insecurity inherent in being a locum provider, they usually command high hourly rates for short-term work, giving providers flexibility but potentially disrupting relationships between patients and providers. “Locums is inherently bad for obstetrics,” he says, and some doctors may avoid it because they can’t foster long-term relationships with patients, but he believes younger patients view doctors more interchangeably and prioritize having timely access to any doctor rather than a specific one. “They’re not necessarily as sentimental as their parents were,” he says.
Dr. M thinks locums jobs may be increasingly attractive to physicians with young families who want substantial time off and to new residency graduates who don’t want to work as employees in large provider groups but have trouble identifying smaller independent practices. As for his old colleagues, he says, “I’m not mad at them that they joined with private equity. I am more frustrated by the fact that they felt like they had to.”
Trying to Sidestep Private Equity
Not all medical specialties draw interest or upfront cash from private equity firms. Since the No Surprises Act went into effect in 2021, preventing hospitals from charging out-of-network rates for the services of emergency physicians, anesthesiologists, and other emergency care providers who opt out of insurance networks, PE firms have had less incentive to invest in their practices.
Marco Fernandez, MD, an anesthesiologist and former president of Midwest Anesthesia Partners, the largest group of independent anesthesiologists in Illinois, turned down such offers when they came in because he doesn’t like how PE-backed anesthesia groups tend to assign cases to certified nurse anesthetists and make physicians their supervisors. “We wanted to do our own cases and take care of our own patients,” he says. “If we’d sold or joined a staffing company, we’d be managing as many as 10 surgeries at once. It would make us glorified rescuers, running in for emergencies and filling out paperwork,” he says. “It’s a different level of stress.”
Retaining hospital contracts for the then-300-physician group became much harder when PE-backed staffing companies using such models stepped into the market, offering a less expensive service. “Within a two-week span, we lost two contracts,” Fernandez says. Some physicians in the group opted to join PE-backed ventures or become hospital employees. The remaining 100, who wanted to retain their model, now primarily serve ambulatory surgery centers or work in three hospitals as locum providers. Similar disruptions are playing out in other markets, leading to delays in surgeries.
Fernandez worries that not having the same anesthesia staff in facilities will impede communication and quality improvement, but he hasn’t found hospitals willing to subsidize a physician-centric approach. In 2022, he joined three other anesthesia groups in forming the Association for Independent Medicine, an advocacy organization that’s been calling for greater regulatory oversight of PE ventures and protections of clinicians’ decision-making. Another organization, the Coalition for Patient-Centered Care, is pursuing a similar mission, in part by asking state and federal lawmakers to apply antikickback and fraud and abuse laws to PE acquisitions of physician practices.
Partnership Is Crucial
The experiences of these physicians, while purely anecdotal, suggest private equity investment can be advantageous if the partnership is structured in a way that aligns physician and investor interests. “A lot of the bad case studies you see involve private equity firms turning physicians into employees whose income is tied to what they generate, mirroring what health systems do,” says Robert Aprill, a partner with Physician Growth Partners, an investment banking and advisory firm that represents physicians in transactions with PE firms. There’s higher satisfaction when investors tie compensation to practice profitability and add value by helping clinicians gain access to data and discounts on supplies, he says. “Private equity can become a vehicle to create super groups across state lines.”
Physicians have to be flexible, Patel says. “Whenever you sell to private equity, it’s not a lifetime achievement award where you walk away with a check. It’s a growth model. That’s where I see private equity deals fail. Both sides aren’t willing to grow together.”
If a partnership goes awry, there can be severe consequences for physicians. Toussaint says that half of the partners at his former practice were gone at the time he spoke with us, and that there was a “mind-boggling” amount of litigation happening. While MSOs typically pick up the cost of a defense, such expenses cut into the profitability, and thus the resale value, of the business. Towsen has also seen instances in which doctors departing from PE-backed ventures had to hire lawyers and forensic accountants to protect their interests.
Keep the Exit Pathway Clear and Well Lit
Too often physicians get distracted by the lump sum that private equity firms offer and sign away rights via letters of intent before showing them to a lawyer, says Randal Schultz, JD, CPA, a health care lawyer with Lathrop GPM in Kansas City. He encourages his clients to capture what matters most to them in contracts, including the hours and years they are expected to work, the terms of compensation that can and cannot be altered, and, perhaps most important, the circumstances under which they can exit without being subject to a noncompete clause or a clawback of the initial payment. “If you get terminated without cause, or they breach the contract, you should be able to walk away without any restrictions,” he says.
PE firms often understand and will try to exploit physicians’ risk aversion, Toussaint says. They know that clinicians with children and tuition bills in their future may be hesitant to start practicing in a new area. In addition to uprooting a family, they’d be subjecting themselves to additional background checks and licensing paperwork. “It’s really time-consuming and draining,” he says.
Ericka Adler, JD, LLM, who leads the health law practice at Roetzel and Andress in Chicago, encourages physicians to think about how they will continue to practice if things go south. “I’ve seen doctors who were terminated from their practices after selling it be subject to a noncompete clause,” she says. Adler also sees a lot of young doctors who are very opposed to working with a PE firm. They want an exit pathway written into their contracts if the practice they join decides to sell to one, so they can move on to a practice that isn’t PE-owned or PE-managed.
Invest in Yourself
Toussaint hopes physicians will consider a third way: capitalizing themselves. “If you have a good management team for your practice, tell them to borrow money to pay partners who want to retire. Then use some of that money to stay true to your growth strategy,” he says.
Now in academia, Toussaint warns the residents he trains to preserve their freedom at all costs. “I tell them your entire life as a doctor has been trying to get in — to the best high school, the best college, and the best medical school. Now your goal when you are negotiating these contracts is to figure out how the hell to get out.”
