Urologists eye private equity partners

Private equity partnerships as a way to thrive amid health care changes, and private equity firms increasingly see the value of investing in urology practices.

Could it be a match made in heaven?

Experts say private equity can mean big benefits to large urology groups and solo urologists alike. But the real impact of these partnerships on urologists, their patients, and health care in general remains unknown.

Today’s landscape

Private equity firms’ acquisition of physician practices has escalated in recent years. Historically, these firms have focused on dermatology practices but are increasingly eyeing urology, ophthalmology, and gastroenterology groups, according to a recently published article in Annals of Internal Medicine (Jan. 8, 2019 [Epub ahead of print]).

Urology is an attractive investment for private equity, hospital systems, and other investors because demand for services from an aging population is high and the supply of urologists is low. Also in play is the emergence of large urology group practices, which are sustaining and competing with large health care centers and systems, according to urologist Tom Jayram, MD, co-director of the Advanced Therapeutics Center at Urology Associates, an independent group of about 35 providers in Nashville.

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“Most big groups have operationalized specialty urology services in a profitable and efficient way [with]: cancer centers that deliver high-cost, high-impact cancer drugs; female and sexual health clinics, which offer high throughput, cash-based services; and so on. Additionally, many large physician groups have equity in their facilities, real estate, and equipment, which is attractive to investors,” Dr. Jayram said. 

And there’s plenty of money to invest, according to Hector Torres, JD, partner and principal at ECG Management Consultants, a large, diversified consulting services provider in health care.

“There’s about $1.3 trillion of private equity capital seeking to make investments within the physician group sector in 2019 and beyond,” Torres said. “Really no matter where you stand on the food chain as a provider within the urology space, private equity has become increasingly more available and an increasingly more attractive option.”

Next:What's the deal?What’s the deal?

Private equity deals have a common strategy: recapitalization.

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“That means the partners receive an upfront tax-advantaged payment associated with an ongoing salary reduction, while yielding control of the business but not the medical aspect of their practice,” according to Colorado Springs, CO urologist Henry Rosevear, MD, who will present “Mergers, acquisitions and private equity: Choosing a practice model that works for you in a constantly changing environment” at the AUA annual meeting in May.

“In general, private equity groups bring with them management experience and access to capital,” Dr. Rosevear said. (Also see, “Details, details: How deals are structured.")

Smaller urology groups can use private equity to achieve the cost savings associated with merging back office staff and improve a practice’s ability to meet and report on governmental requirements. Still other examples of how smaller practices might benefit include being better able to track, analyze, and manage quality metrics, according to Dr. Rosevear.

Dr. Jayram of Urology Associates says the next tier in consolidation for many large independent practices is to consider a financial partnership to try and grow or stabilize their practice in today’s diverse marketplace.

The “big buyout” is not the sole driving factor for most contemporary private equity transactions, as younger partners will not benefit from this in the long run. Instead, according to Dr. Jayram, large groups today are looking for resources to grow their footprint, improve infrastructure, better negotiate with payers, and manage an increasing burden of administrative and regulatory requirements.

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“It affords independent physician groups a better ability to compete with larger hospital systems, which is ultimately good for all of us. It forces health care costs down and hopefully in turn has a positive impact on quality and value-based care,” Dr. Jayram said.

Next: A big stepA big step

Earl Walz, CEO of Urology Group and Urology Center in Cincinnati, said the 39-urologist Urology Group spent nearly a year educating itself on the option of private equity, then contracted with an investment banking firm, which “shopped” the Urology Group and affiliated Urology Center on the market. During this process, private equity firms looked at the Urology Group’s history and performance to decide if they would be interested in a relationship with the practice.

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It’s a lengthy process of interviewing multiple private equity firms and of firms interviewing the Urology Group, then performing due diligence on potential suitable partners. Walz and colleagues at the Urology Group continue that process today.

It’s hard not to explore the option for growth nowadays. The urologists in the group want to maintain independence, but to do that practices have to scale up and often need capital, according to Walz.

“You could go to a hospital system, but I think their interest is ownership, not partnership,” he said.

Another option is to bring several groups together and finance growth through debt service. But, according to Walz, that’s probably more complicated and riskier than private equity.

Deciding to partner with a private equity firm is a big step. Decisionmakers at practices need to understand and study the private equity landscape. Everyone, including physician partners and board members, need to be on board with the pursuit of private equity, Walz said.

Choosing a partner means finding a good blend of personalities, culture, trust, and comfort.

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“During the interview process, you begin to gain a feeling of a relationship-a partnership-that the two groups can work with each other in a very collaborative way,” Walz said.

Next: Private equity benefits, drawbacksPrivate equity benefits, drawbacks

Private equity offers physician groups three key organizational attributes: economic value in the purchase price, ability to influence the strategy of the organization post-transaction, and incentive and alignment mechanisms for physicians post-deal, according to Torres, who heads ECG’s mergers and acquisitions advisory practice and spent 6 years managing a private equity fund in New York.

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But there’s no free lunch, according to Torres.

“When an independent urology group partners with a private equity firm, there are a lot of pros, and there are also a lot of considerations. The considerations are, the private equity firm is going to demand a much higher level of performance and therefore a much higher level of organizational discipline in order to attain the growth objectives that are laid out in the proposed partnership,” Torres said. “The private equity firms are used to a very accelerated timetable. They’re very used to being held and holding other people accountable to the attainment of those objectives.”

Private equity benefits can vary according to where a urologist is in his or her career. Older doctors might be looking for the upfront cash payment for retirement, Dr. Rosevear said.

“Because of the tax-related issues with how these deals are structured, most physicians will be financially positive if they leave the practice within approximately 10 years of the deal,” he said.

Younger physician partners can benefit because private equity groups usually are responsible for risks associated with large capital purchases, while physician partners receive revenue associated with ancillary income without having to purchase shares, according to Dr. Rosevear.

Due diligence is key to making these partnerships successful.

“The partner is very important. The medical group has to do its due diligence on what that private equity group’s track record is and how similar investments in their portfolio have matured. The best partner understands when stability and structure can be more profitable and impactful than a short-term flip,” Dr. Jayram said.

It’s important to make sure the practice’s goals align with those of the private equity firm, according to Torres.

“One of the aspects with private equity is there is a finite life cycle for the investment. The private equity firm by nature and by structure is designed to invest over a 3- to 5-year timeline and hopefully realize a return for its limited partners in that timeline,” Torres said. “That means that typically some decisions can be made with a very short-term perspective.”

Physician groups need to understand a private equity firm’s perspectives on short-term strategies to maximize economic gain.

“I think that’s really important to learn what they’re willing to explore and deploy and how a group’s physicians feel in terms of being able to align to that strategy,” Torres said.

Private equity might sound like a timely option for urology practices, but there isn’t much proof that it is.

Little research exists on the impact of private equity or venture capital infusion into American medicine, according to Lawrence Downs, JD, advisory committee and board member of the Physicians Foundation Center for the Study of Physician Practice and Leadership at Weill Cornell Medicine in New York and chief executive officer and general counsel to the Medical Society of New Jersey. The Physicians Foundation Center funded the recently published Annals of Internal Medicine paper.

The next step, he said, is to analyze real-world outcomes of practices that have private equity partners compared to independent and hospital-owned practices.

“How do these practices contrast and compare on cost and quality? That’s one of the reasons we established the Physicians Foundation Center-because there are really not researchers looking at that and we think it’s important to answer those questions in an empirical way,” Downs said.

Research should start appearing in peer-reviewed journals in the next 12 to 18 months, according to Downs, and will be available at www.Weill.Cornell.edu under The Physicians Foundation Center for the Study of Physician Practice and Leadership.

“It’s unclear at this point whether those consolidations increase the cost of care or if they produce higher or lower quality. Those are some of the things we’re studying,” Downs said. 

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“Those are some of the questions that physician should be looking at when they’re entering into arrangements. Is there enough autonomy built in where physicians have an adequate leadership role in that practice to continue to make sure they do the best they can for patients?"

Next -Details, details: How deals are structured

Details, details: How deals are structured

Private equity deals vary, but in general, private equity groups buy 100% of the practice and then offer a guaranteed percentage of revenue to the physician partners for compensation. Physician partners often can purchase equity in the business and share equally in any downstream equity event, according to Dr. Rosevear.

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“There are really two types of investments that private equity firms make in physician groups,” said Torres. “The first is what we call the platform investment, and that is typically done with a much larger single-specialty independent group. For example, a private equity firm would go out to the market and find a very large, well-capitalized independent urology group and make that investment as their first investment in the sector.”

The firm, according to Torres, might then use the platform as a vehicle to make ongoing acquisitions of smaller, independent, highly fragmented urology practices-a strategy called bolt-on investment.