The Effect of Private Equity Interests on Healthcare Providers

With private equity's growing influence in healthcare systems, the significance of aligning healthcare providers has never been greater. In this episode of Value-Based Care Insights, we delve into the complexities of private equity interests and their profound impact on healthcare providers. Join Ericka Adler, a seasoned attorney at Roetzel & Andress, as she explores the current trends in private equity and their implications on physicians and healthcare systems. Gain insights into physician employment models, the regulatory landscape, and effective strategies for healthcare transactions.

LISTEN TO THE EPISODE:

 

Daniel Marino:

Welcome to value based care insights. I'm your host, Daniel Marino. When, looking at the healthcare industry, we continue to see quite a bit of trending of physicians moving into either hospital employment that's been going on for a number of years. As well as then. Private equity, alignment over the last couple of years. This is really started to take off. We've had the opportunity to work with many health systems across the country, and a lot of the work that we are focused on is strategic planning and thinking about how we can align with physicians. But what many of the healthcare systems are seeing is, not only are they aligning lining with their physicians in more of a hospital employment type of a structure. But they're having to think through how they could manage the private equity relationship, and especially as we start to see certain specialties like dermatology and cardio cardiology, cardiovascular services, even gi certainly orthopedics all moving to private equity. It's creating a different layer of relationship building, but also of competition. As we start to think about how hospitals either need to work with these private equity groups or compete with them. And then, of course, the physician side, there's a lot of elements to consider as we start to think about what's that right model, whether they move into private equity, or they align with a hospital in some type of an employed type, of a structure. 

Well joining us today is Ericka Adler. She is an attorney, a shareholder and manager of the healthcare practice group for Roetzel and Andress. Ericka has about 25 years of experience, working with individual providers, physician groups, and a lot of healthcare and entities. She spends a lot of time with physicians as well as health systems working through. What's that right model, and how to create an a successful arrangement. Erica. Welcome to the program.

 

Ericka Adler:

Hi, Dan! Glad to be here. 

 

Daniel Marino:

So, Ericka, maybe we could start out with just giving your perspective. You work with many physicians better, many groups around the country, even some health systems. What are you seeing as some of these key trends, as they're working through either employment or working through private equity. 

 

Ericka Adler:

Well, I would say that generally we continue to see some activity in terms of hospitals, acquiring position practices, but certainly nothing compared to what we saw years ago. They're few and far between in terms of those type of transactions. We definitely are seeing a lot of physician practices being acquired by private equity. And we're seeing many physicians becoming employees of hospitals rather than starting, or, you know, trying to join independent practices compared to what we used to see. So really over the past 5 years or more. Now, I would say that's really been the trend that we've noticed in our practice. And you know, we work with thousands of positions. So I think, you know, we have a pretty good temperature on what's going on there. And that's really the trend. 

 

Daniel Marino:

Right well, and you know you saw probably in in, you know, maybe the middle teens of the 2 thousands where there was a greater trend towards employment. And you know again the number of independent practices that have certainly dwindled. Are you seeing more of the transactions now happening with private equity versus happening with employment, or, you know, is it is it specialty? Or maybe it's market specific. What are you seeing in that arena? 

 

Ericka Adler:

Well, I would say that most of the contracts that we're reviewing for doctors coming out of training are definitely leaning towards employment. Whether it's hospitals or other types of groups, you know. Not a lot of them are really super excited sometimes to go to independent practices. It can be hard for independent practices sometimes to compete in terms of compensation, benefits. And a lot of young doctors today don't seem quite as eager about the idea of, you know working their way up the ranks to become partners. Now, that's not necessarily true of everyone, but definitely it's more the trend that that I'm seeing when I talk to my doctors in terms of, you know overall practice acquisitions. 

We definitely see private equity is buying up those practices. And physicians, you know, may have experience already, leaving a practice after it was acquired. And they may, you know, leave when they find out a new practice is being acquired. So for some, you know, it's an experience that they don't want, they're not looking for. A lot of them are looking for the flexibility to be able to, you know, change jobs, leave practices, and sometimes, when you're working for a practice that's owned by private equity. That's not quite as easy as working for an independent practice or for a hospital. I would say that you know we're seeing certainly regional trends and specialty trends, but those continue to change over time. So. 

 

Daniel Marino:

Yeah. 

 

Ericka Adler:

You know some trends, for example. You know, dermatology and aesthetics remain very, very popular. Private equity is kind of buying them up across the country, whereas in certain parts of the country we see different specialties like cardiology, orthopedics are particularly popular, and we don't see those type of transaction in other parts of the country. So I think it just depends on, you know, private equity competing in certain parts of the country to get to certain practices before their competitors do. And maybe that's why the focus is regional. But you know it, it's just a ongoing trend moving at the same pace around the country. So. 

 

Daniel Marino:

Well, and I do think to a certain extent it is market driven. We had the opportunity to work with the health system in the Northwest a really good, really good affluent payer area and the pair mix was really good. The reimbursement from the payers. The way that the contracts were structured were pretty favorable. Well private equity realized that right? So what they started to do was they aligned with this independent orthopedic group. And at 1st the health system didn't really think it was that big of a deal they're like, well, okay, you know, we'll just form this new relationship with them. Well, about a year, year and a half into the deal, private Equity now decided that they're going to build their own ASC. Which now all of a sudden started to shift a lot of this, these resources. These surgeries that were previously being done either in the inpatient arena or through the health systems’ ASC, now they're going to be doing it in their own group. So the big fear is, what's next right? Is there another is private equity going to expand and take, as you said, dermatology, or maybe GI, or something in that regard. How do you manage through that, you know. Is it? Is it really trying to form that relationship with the private equity group and to think about, okay, if we can't beat them, we might as well join them? Or do you sort of put your eggs in the basket? And you say, Okay, let's go out there and try to build a stronger employment relationship with these, with these independent physician groups? 

 

Ericka Adler:

Well, I would say, I've seen a combination of both. You know, some hospitals have tried to make strides in terms of developing relationship with practices, whether owned by private equity or not. And that's really by strengthening the relationship with the physicians. So private equity may acquire a practice. But in many cases it's still run locally by the very same position that have been on the medical staff for many years. So they continue to maintain and try and strengthen those type of partnerships. On the other hand, certainly hospitals are not loving all the practices being acquired, especially hospital-based practices, radiology, anesthesiology, emergency room medicine. So I've definitely seen hospital contracts between independent groups in those specialties. And the hospitals where there are provisions in there, not allowing assignment to a buyer, or other types of provisions that you know require permission, etc. And that's specifically to interfere with the possibility of those groups being acquired. Additionally, there are groups within those specialties that have been forced to become employees at hospitals. We see that around Chicago right now. Radiology, anesthesia hospitalist groups, emergency medicine in particular. Because those are the groups that most impact the hospital and hospital based services so definitely see a lot of groups like that being forced to become employees. And you know, I think the hospitals are trying to develop employment relationships that are appealing. They care a lot more about keeping those doctors happy, so they won't abandon the hospital and find employment elsewhere. So I think it really has changed what those employment relationships look like and I do think it's been directly forced in some ways by private equity coming into the marketplace. 

 

Daniel Marino:

Yeah, I absolutely. I absolutely agree. So when you think about it from the physician standpoint, and I think you know a lot of your of your legal practices sounds like it's working with the physicians and with the provider side. What are the physicians thinking through? Right? I mean, I guess you're, you know, if you're an independent group, and let's say you know your dermatology group, and you have. I don't know 8 locations. You may have 60, 70 providers, you're at the maybe the tail end of your career. Do you think about the approach of you know selling within and grooming your provider partners? or what comes into play as you start to think about maybe they're aligning with the health system and becoming employed or private equity? 

 

Ericka Adler:

I think you know that's a great question, and I always have that as my 1st discussion with my clients who are thinking of selling. For some doctors it's just very important that they make sure their patients are being taken care of, that they transition their care and that could involve, you know, transitioning to another physician or a hospital buyer, or even private equity, if someone was interested. I think you know, for those doctors, they're not necessarily looking for a payday as much as kind of a smooth transition, making sure that their practice survives. You know what whatever they've built. For many physicians, though, and this doesn't mean they care about their patients any less. If they're close to retirement they are looking for a retirement strategy. They may have physicians in their practice, but those physicians, as I mentioned are sometimes less interested than in the past. In buying a practice in operating and managing a practice. And sometimes, if the practice is very successful, they can't afford the practice, right? So for those types of, you know, Sellers, they're interested, obviously, in spending the last 3 to 5 years before they retire in getting a pay day, making sure that their patients are transition, that their loyal employees are transition, and in in making a good deal, and for some of them, you know especially given some changes that are going on in the marketplace. They are trying to maybe jump in before the opportunities go away as well. So we're seeing a lot of that right now. A little bit of desperation, maybe. For some doctors that are seeking to be acquired. So you know, I think there's a lot of goals, and you know I don't want to fail to mention that it's hard to be a doctor and to run an independent practice. It can be done. There's a lot of great resources. We work with a lot of amazing independent practices. And I would say, in the past year we've helped start a lot of practices and help doctors take their practices back. So I don't want anyone to think those trends aren't happening. But there it is hard. There are so many rules and regulation administrative hassle and for some doctors they've really just had enough. So that's also another reason that's pushing people to sell. Whoever the buyer might be. So there's a lot of factors involved. 

 

Daniel Marino:

If you're just tuning in on Daniel Marino, you're listening to value based care insights. I'm here today talking to Ericka Adler. Ericka is an attorney, shareholder, and manager of the Healthcare Practice group of Russell and Andras, and having a fascinating discussion around the trends related to either employment or providers moving to private equity. So, Ericka, one area I do want to dive into because there's been a lot of a lot of information, a lot of news that have come out around the regulatory changes, the legislative changes that are occurring with some of these transactions. Many states are really watching what's occurring. And in particular, there's been information that's come out. That basically is said when private equity is taken over a medical group, the quality has decreased. And I'm not sure that's in fact, the case. But you know, nonetheless, I think it's caused the legislative community to begin to review these transactions and potentially scrutinize these transactions either during or after they've occurred. How is that impacting some of the deals that you're seeing across the country. 

 

Ericka Adler:

Well, I would say that in those States where these type of laws have passed, and you know, every year there's more and more I think there's about 14 now. It affects certainly the timing of a transaction, because approval might need to be obtained before a deal can close. And also there's a risk that you put a lot of time and energy in bringing a deal together, and then it potentially is denied. So there's, you know, there's a little bit of concern about how involved Regulators are going to be, what concerns they will express. Not knowing what they are, it's almost impossible to address those you know ahead of time. We do know that they are concerned about quality. And again, I don't know that there is a true reason to be concerned about that. But what I understand to be the biggest concern is whether there's interference in independent decision making be made by the doctors. Whether the doctors are being influenced, whether it's ordering of tests, ancillaries, prescriptions, etc, by the policies that are put in place by non-physician, private equity owners so. 

 

Daniel Marino:

Right. 

 

Ericka Adler:

You know. What I anticipate is, we'll be hearing a little bit more as these kind of investigation into potential transactions occur. We'll be hearing about the particular concerns. It'll give us a little bit more guidance on what they're looking for. You know, based on some lawsuits that have already occurred. We know that there's a concern about corporate practice of medicine and overly interfering in physician decision making. So already I can tell you that a lot of the transactions that we see happening now as compared to a couple of years ago. Are very sensitive to that. We see a lot more wording about the need for physician- led governance within a practice, certain decisions being left to physicians so that nobody could challenge who exactly is making those decisions that we suspect would lead a regulator to be concerned about corporate practice of medicine. So I think you know, that's at least from my perspective, what's really important, but to the extent that you know, private equity is interfering with access to healthcare, the cost of healthcare, the quality of healthcare competition in healthcare. That's another big piece of it. We're looking at anti-trust concern. I would expect that. You know we're we'll know a little bit more in a couple of years after some of these transactions are investigated. And don't forget. A lot of these transactions are limited. To the size of the deal, right? So they're not necessarily going to capture some smaller practice sales. But maybe those really large one that could really influence a local or regional area of a State. 

 

Daniel Marino:

Well, and it's interesting when you, when you look at some of these deals and some of the investigations of the scrutiny that's occurred. Some of it has been state run. Some of it has been federally run from the FTC. Right? I mean, there's been some big mergers that have occurred, either through different provider groups coming together, different health systems coming together. So I would think to really begin to look through that, boy, That's got to be a bit of a challenge for you as the legal counsel providing that level of support. But at the end of the day I mean, I guess you have to identify the appropriate intent, and you have to provide the appropriate structure. So it's not challenged. And you're able to address some of these concerns, or had them off at the pass. If you will. 

 

Ericka Adler:

Definitely. I mean, some of it is just kind of a vague understanding that, you know, legislators will have the right to dig into any information they want, so we don't know what they're looking at, but certainly from the anti-trust perspective. Some of the waivers that previously have been available. I don't know if waivers the right word, but some of the lack of scrutiny that have previously applied to healthcare transactions has gone away, so we know that they are going to be starting to look at some of these healthcare deals. And again, I think it's really the larger ones that are going to draw a lot of the attention. But you know there's a lot of private equity buying up lots and lots of little practices that could go under the radar until they start to really impact. You know, a large number of physicians or a large amount of revenue. So we'll have to to see what happens. 

 

Daniel Marino:

Yeah. So when you, when you, when you look at some of these deals that are occurring between private equity and the physician groups, you know, and I always kind of fall back on. Okay, what's the value proposition? Right? So if I'm a physician group and I'm thinking about aligning with the private equity organization or a healthcare organization. I mean, each of them offer something a little bit different. Does it typically just rely on the senior partners to kind of guide that decision and alignment around, say, private equities value prop? 

 

Ericka Adler:

No, I mean, I think there's a lot of factors that are taken into account. I mean, we always need to understand kind of you know what what the goals are, and the lawyers only do so much right. We can help structure the deal. And do the document. You know, physicians really have to prepare to be able to sell their practice, and that should start quite a long time before they even consider doing a deal. They need to have a very strong financial team. They need to make sure their practice is compliant and they're not going to discover they're violating Federal or state law when they go to sell so there's a lot of preparation. Do they know what debt they have out there? Do they know if they're even running in a an efficient practice, you know, are they gonna get what their practice is worth. So I I would say that the senior partners certainly run you know the decision making. But I I'd never like to see that done in a vacuum without appropriate guidance. 

 

Daniel Marino:

Well they should, they should engage some of the junior physicians, too, right? Because at the end of the day. 

 

Ericka Adler:

I think so. I mean, look, you know, practices are run based on governance documents, and it is the owners who have a vote, and certainly we would hope that they would consider what some of the other younger doctors think. But to be honest, they don't usually involve them in those decisions, because a lot of them, the minute they hear they may leave right, and the value of a practice is to the number of providers and the expected revenue that they're generating. You lose one or 2 doctors. You might have just lost a few 1 million dollars in purchase price. So it it's actually pretty confidential. And they sign documents, you know, to that effect as well. So there are a lot of different reasons and strategizing. When you go to sell that you keep as few people in the loop as possible until you're ready. 

 

Daniel Marino:

Until you're ready to go. Yeah, you don't want to create sort of a firestorm and a bunch of concerns. So if thinking back on some of the some of the conversations you've had, some of the deals you put in place. If you were to highlight, say, I don't know 4 or 5 key things that are important for a provider group to consider as they're making a deal with private equity or considering an employment. Can you? Can you identify a few of those. 

 

Ericka Adler:

Sure. I mean, I think the 1st thing is to understand what you're looking for. And do you want to keep practicing, are you looking for a pay day?  

 

Daniel Marino:

Right kind of what the end date is? 

 

Ericka Adler:

Yeah, exactly. You know, if you sell to private equity, you're going to be an employee for usually 5 years. Is that really what you want. Were you thinking you wanted to just practice for another 6 months or a year, and that has a big impact on who the potential buyers are? As I mentioned, I would spend the time to get yourself in shape, otherwise you could waste quite a lot of money going through negotiation, only to find that you're an unappealing target. Or that you have quite a lot of things wrong with your practice that you weren't aware of, and unfortunately, under Federal and State law. Once you find out what you've done wrong, you have to fix it. Or you get more trouble. So sometimes they're opening a can of worms. So I think that's really important. Also, if you really do want to sell, you need to consider what would make your practice more profitable typically a. A solo practice with a doctor wants to retire is more appealing to another practice or a hospital less appealing to private equity. So do you want to plan on kind of building up your practice before you sell. So just all this kind of goes with advanced thought and advanced planning and talking with your advisors. 

 

Daniel Marino:

Well, absolutely, and I think, having the advisors around you that can help through work through some of the strategic reasons and the approaches are all key, I mean, without that type of planning, then, you know, certainly you're not going to be prepared for whatever ends up coming down the pipe.  

Well, Ericka, this has been great. I want to thank you for your time. And you know, obviously it continues to be an area that we all watch closely. I know, in in our consulting practice we work with many hospitals who are thinking about how do they better align with their with their physician partners. Obviously thinking about private equity, but also the physicians focusing on what direction they want to take. If any of our listeners are interested in connecting with you, or maybe talking with you, finding out a little bit more information, any thoughts on how they can get a hold of you. 

 

Ericka Adler:

Yeah, they can reach out to me at Eadler@ralaw.com anytime they want, or they can try calling me. I engage regularly with doctors, just talking about these kinds of things, and answering questions. So happy to talk to anyone who wants to know more. 

 

Daniel Marino:

Yeah, well, this is great. You are a wealth and knowledge, and I know in working with you over the years, you know, you've helped numerous physicians, and have been a fantastic resource to them and to us as well, too. So want to thank you Ericka. This has been fantastic. Really appreciate you coming on the show and sharing your insights. 

 

Ericka Adler:

Oh, thanks for having me always a pleasure. 

 

Daniel Marino:

And to you, our listeners. We want to thank you for tuning in until our next insight. I am Daniel Marino, bringing you 30 min of value to your day. Take care. 

 

About Value-Based Care Insights Podcast

Value-Based Care Insights is a podcast that explores how to optimize the performance of programs to meet the demands of an increasingly value-based care payment environment. Hosted by Daniel J. Marino, the VBCI podcast highlights recognized experts in the field and within Lumina Health Partners