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How Private Equity Firms Can Optimize Their Investment in Physician Practices

In recent years, private equity investors looking to increase their healthcare portfolios have started to move downstream from the acquisition of larger hospitals and long-term care facilities to focus on smaller physician practice groups. Private equity groups see significant potential in this segment for the types of scalable roll-ups that can improve back-office efficiency and cut costs.

Physicians are also seeing the benefits of private equity investment. In many cases, the affiliation with a consolidated group under a private equity umbrella can reduce physician burnout by providing doctors with a higher quality of life, more control of their schedule, better pay, and better coverage for the practice. Because COVID-19 created financial and operational stress on independent practices, an infusion of capital from a private equity group can be a financial lifeline.

Here are a few ways to optimize private equity investment in physician practices at each stage of the deal.

Pre-Deal Preparation

The strategy for private equity investors in this market is typically to invest in and consolidate multiple practices in an area to generate the kind of operational scale that can lead to significant improvements in efficiency and reductions in costs.

When identifying physician practices to acquire, private equity groups should target groups that have high patient and staff satisfaction, growth potential, strong payer mix and financial strength, and physicians that will buy into the private equity firm’s vision and strategic plan for the group.

Often, private equity groups underestimate how different each practice can be when it comes to the practice’s culture and administrative functions that drive revenue, such as information technology, electronic health records, billing, compliance, and payer and supply chain contracts.

During the planning stages, it’s important to understand both the synergies and the potential friction points that can arise when integrating physician groups. Even at the pre-deal planning stages, the parties should be mapping out a process to smoothly integrate the practices into one new system for the larger group. Both the private equity investor and the physician group need to fully understand the existing operational aspects of the practice like practice culture, provider compensation plans, staffing, payroll, and payer and supplier contacts so that the parties have a clear picture of how things are going to change once the deal goes through.

Executing the Deal

The deal execution stage is when the private equity firm and the physician practice establish their partnership and finalize the relationship going forward. At this stage, due diligence helps private equity firms identify risks and quantify the magnitude. It can help assess the quality of earnings and determine the appropriate amount of available working capital. If exposure items are identified, the deal team can develop solutions to mitigate the risk and can collaborate on opportunities for future value creation.

All the operational aspects identified in the pre-deal preparation will be incorporated into an integration roadmap that will help the parties understand how the practice will operate once the transaction is complete. Projected synergies that are identified as a result of the transaction should be documented so that they do, in fact, become reality.

Post-Deal Optimization

Many teams assume that the deal is finished once the papers are signed. In fact, the task of achieving identified synergies and optimizing the operations of the combined entity is an ongoing effort for months and years to come. During the first 35 days after the transaction, the leaders from the private equity firm and physician group should meet daily to identify and resolve any issues related to the acquisition. Additionally, for the first 90 days, leadership should meet weekly to review the post-acquisition workplan to assure that the clinical, administrative, and financial systems are operating as planned. Key performance indicators should be identified and monitored along with synergy realization, tracking, and reporting. Thereafter, the leaders from the private equity group and physician practice should meet at least quarterly to review progress and results and adjust plans accordingly.

KSM Can Help

Whether you’re a private equity investor considering an investment in physician practices or if you’re running a medical practice that might benefit from private equity investment, our team of experienced healthcare consultants is here to help. From strategy development to quality of earnings assessment to tax structuring and more, we can provide the help your deal needs. We’ve been in your shoes – managing multiple physician group acquisitions – and we’re ready to help simplify and optimize your transaction. Contact us to learn more about how we can help you.

George Batalis Partner, Healthcare Consulting
Mark Benninghoff Director, Healthcare Consulting

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