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Physician Practice Management and Private Equity
Market forces have always influenced the private practice medical community. This is especially true in gastroenterology, which is one of the most fragmented industries in the United States. Due to challenging market consequences, medical practitioners are having problems managing their businesses effectively. In the last decade, hospitals have acquired physician groups increasing the number of practices they own by 63% from 2012 to 2016. By the year 2015, around 29% of medical practices are owned by the health system or hospital. And this number is continually increasing. Today, it is estimated that more than 70% of physicians are training to be employed in hospitals throughout their careers. Hospitals benefit significantly by the employment of physicians, while employed physicians work more hours and see fewer patients than those with independent physician practices. If this trend progresses, physicians face increased work hours in order to maintain current salaries.
The Call for Change in Practice Management
Competition and problems in management have always led to consolidation in many major industries. However, consolidation doesn’t always work. It’s hard to remain independent and competitive in the current market. To succeed, physicians have to create significant changes to improve their systems and processes. Another common reason for failure is lack of capital. Many physician practices today need capital to grow. For these reasons, it is very challenging for independent practice to survive.
Challenges Independent Physicians Face in the United States
- Lack of understanding in revenue cycle management
- Reimbursement issues and challenges
- Referral concerns
- Lack of scale to effectively optimize services
- Administrative burden for the physicians
- The absence of managerial metrics and dashboards
- Underpaid management teams
- Struggle to create a good relationship with hospital systems
- Harder to recruit new physicians in rural groups
- Need for capital to invest in IT systems, new associates, and ambulatory surgery centers
What is Private Equity?
Private equity refers to investments made to companies that aren’t listed on the public stock exchange. Most private equity firms raise their funds from limited partners. These partners get funds from different sources such as pension funds, university endowments, and wealthy people who want to put their money in investments for a higher return. Often, the markets that attract private equity investments are those that are highly fragmented. Investments by private equity in medical practices have been increasing this past decade. Its seen as a great solution to help physicians feel more independent in contrast to getting acquired by a health system. Furthermore, the capital from private equity can be used to improve their practice by funding new technology, hiring new associates, and building better infrastructure.
Private Equity and Physician Practice Management: The Basics
Private equity investors often reach out to invest in companies with good finance, such as a regular cash flow stream. This is calculated through earnings before interest, taxes, depreciation, and amortization or (EBITDA). EBITDA helps investors compare profitabilities within different businesses. It helps them create better financing and accounting decisions. But more importantly, it gives a clear and raw sample of your earnings.
EBITDA is considered a proxy for cash flow. It is also often an indicator of the company’s profit and ability to generate cash. When valuing companies, private equity investors often base their valuations on a multiple of the company’s EBITDA. So, if a company has 1 million dollars, it can be valued through a multiple of 5 x, then sold for 5 million. These variation multiples vary depending on several factors such as growth rate, market dynamics, market size, future growth, and more.
Things To Consider When Partnering With a Private Equity Firm
If you’re a physician looking to take your practice to the next level, private equity should always be on your list of options. A good partnership with the right private equity firm can bring loads of benefits. It can also be the catalyst for success for your business.
Partnership requirements – Ensure that the private equity fund will have the resources to help your medical practice maximize its value. Analyze how their approach will suit your business needs.
Growth strategy – Focus on private equity firms that help through organic growth. Too much debt can be risky once the economy slows down and the interest rate increases.
Private equity experience – Choose a private equity firm with tons of experience. It takes a highly experienced firm to fully understand the field. This means that your potential private equity firm should have deep industry sector experience which can be useful for your business. So, always partner with firms that know the health care industry inside and out – and have more than a decade of practice management experience.
Review the private equity firm’s track record – Look at their performance for the short and long term, and for businesses your size. Do they have high turnovers among its partners? That could be a red flag you should watch out for. Look for track records of success and patterns of failure.
The private equity partner you choose is important to the future of your business. So always make sure you are choosing the partner that is capable of delivering what you want. Someone who also has taken this path before you and has real knowledge about the industry.
The Impact on Health Care
It’s too early to analyze the impact of private equity on the quality, cost, and convenience of health care overall. However, there is no denying that private equity provides physicians with capital investments, better billing practices, new vendors, and better overall executive leadership.
What To Expect in The Future
Over the last decade, we have seen how medical practices such as gastroenterology have evolved and focused on investment. Indeed, private equity firms are proving to be very valuable in healthcare. If this continues, we’ll see more physicians join these strong growing groups. This will present several opportunities for growth and financial stability. However, it’s still important to be careful when creating arrangements that would be beneficial for both firms and practice. The long-term effect of private equity on healthcare is still unknown. It’s understandable that many physicians are skeptical about them. Because of this, the role of private equity needs to be further studied.
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