Private equity firms sell a bill of goods
“They say, ‘We’re going to improve your services, we’re going to bring you tech, we’re going to negotiate better contracts and do all these things for you.’ Ninety percent of it is a lie, because that’s not what they’re going to do. They’re just going to try to increase the bottom line, bolt down a few more practices, increase the gross revenue, and thereby increase the net profit from where it was before, not necessarily because they’re making better lives for the individual providers. They’re just adding more cows to the field, but every cow is the same as far as they’re concerned. They really don’t care about the production of milk,” Dr. Weinstein said.
A few years ago, his practice considered whether private equity would be a good option. His practice, he said, needed to be bigger and more effective and efficient. Instead, his practice formed a partnership with PE GI Solutions (formerly Physicians Endoscopy), a developer and manager of endoscopic ambulatory surgery centers.
In Dallas, private equity firms have increased reimbursements for Texas Digestive Disease Consultants.
“Our practice went through mergers, acquisitions, and now, with private equity coming onto the scene, it’s completely different,” said Kimberly M. Persley, MD, AGAF, a partner with Texas Digestive Disease Consultants and a member of the GI & Hepatology News board of editors.
Dr. Persley
Dr. Kimberly M. Persley
“We were a five-person independent group negotiating contracts, getting cut every other year by some payer because they negotiated a better price with someone else. And having to go through that process every year when all we really want to do is take care of patients. Private equity adds to our group practice by having someone dedicated to negotiating these contracts, and getting reimbursed far more than we ever did prior to our involvement with private equity,” she said.
How it works
In the typical model, a private equity partner purchases the practice and creates a management services organization (MSO), which provides nonclinical services to the practice, theoretically freeing the physicians from the administrative burdens of day-to-day practice.
The practice then becomes the care center managed by the MSO, and the physicians in the practice at the time of the acquisition get stock in the MSO. “They sell a portion of their annual income, so going forward they’re making less money initially, until some of that is being recovered by higher efficiencies. They get an upfront check at a multiple of the income they just sold, and that provides the initial incentive. Then the entity is grown by adding other practices through the same mechanism,” Dr. Mergener said.
After about 5 years, the private equity partner typically sells the MSO to another, probably even larger buyer, and the cycle starts again.
In addition to the upfront incentive that makes practice mergers and consolidation work, the arrangement gives the GI practice access to top-notch administrators, as well as access to capital for investments such as information technology infrastructure, digital health, and data analytics.
He cautioned that it’s crucial for practices to enter the marriage with eyes wide open and be very careful in choosing the private equity partner.
“The goal is to find a partner that has values and a vision that matches the practice’s. In theory, they should be pulling on the same side of the rope, because if it’s a high-quality practice and efficiencies are being improved, more practices should be more likely to join,” which will benefit physicians, patients, and the private equity partner alike, Dr. Mergener said.
Although the private equity construct has been successful in the short term for many practices, it’s less clear what will happen long-term. There is a risk that after 5 years there won’t be a buyer for the MSO at the expected price, which may result in complex financial transactions that could leave the MSO in debt. In such a scenario, physician employees would not be personally liable, but might suffer the consequences of a failing or unsuccessful operation, Dr. Mergener said.
Dr. Mergener’s talk was presented as part of a an ASGE Presidential Plenary held during DDW 2023. He disclosed consulting, honoraria, advisory board activity or stock options from various corporations, but reported having no relationships with private equity.
DDW is sponsored by the American Association for the Study of Liver Diseases (AASLD), the American Gastroenterological Association (AGA), the American Society for Gastrointestinal Endoscopy (ASGE) and The Society for Surgery of the Alimentary Tract (SSAT).
