Private equity investments in physician practices and overuse

May 10th, 2019

Over the past few years, more and more physician practices have been bought by private equity firms. While these investments were previously concentrated in a few specialties (eye care, pain management, dermatology and dentistry), firms are now expanding to buy practices in orthopedics, urology, gastroenterology, radiology, and primary care.

According to a recent Bloomberg Law article, private equity firms are on track this year to set a record for most deals made buying physician firms. “Deal activity is projected to eclipse over 1,200 deals by the end of 2019, compared to 1,059 deals in 2018,” according to the article.

What’s behind this pattern of private equity investment? And what does it mean for doctors and patients? 

Private equity firms are recognizing that there is potential for profit by buying and consolidating private practices. By putting several individual practices under one company, firms can reduce administrative costs and gain market power to negotiate higher reimbursement rates with insurers — which means more profit.

Private equity firms are also tapping into some physicians’ frustrations trying to stay financially sustainable in an increasingly complex health system. From adopting new health care information technologies, to achieving quality measures, to figuring out reimbursement rates, there are many business-side factors physicians have to think about when running a practice, which can involve hours of administrative work and additional costs. Turning to private equity for an “injection” of capital can be tempting.

However, there are reasons for both doctors and patients to be wary of private acquisitions. When profit is your top priority, quality can suffer. A recent study in the Journal of the American Academy of Dermatology found that dermatology clinics backed by private equity were are more likely to do an excessive amount of well-reimbursed procedures, many of which are likely not necessary. The publication of the study was immediately followed by an industry effort to suppress the findings. The same pattern of overuse to maximize reimbursements was found in investigations of private equity-owned dental practices

Private acquisition of firms may also lead to higher prices for patients, because they will be able to demand those prices from insurers. “The consolidation of various parts of the healthcare industry has been shown to increase prices and decrease choice, and if you’re lucky, quality stays about the same. This is just the next wave of that consolidation,” said Dr. Barbara McAneny, current President of the American Medical Association.

For primary care clinicians who are overwhelmed by business worries and are considering a private equity buy-out, Dr. Halee Fischer-Wright, President of the Medical Group Management Association (MGMA), offers a warning in a Modern Healthcare op-ed. “All private equity is really offering is capital and some business expertise, and doctors rarely consider the true cost of that capital,” writes Fischer-Wright. 

Private equity firms often make deals based on an expectation of profits which are hard to hit, even the added capital and business expertise. If they don’t hit these targets, firms can take over more ownership of the firm than was initially agreed upon, leaving doctors with little say in what goes on in their practice. 

Patients want to trust their clinicians and clinicians want to do the best thing for patients, but with private equity takeovers, profit will come before patient care. Doctors and patients should be aware and concerned about increasing private equity investment in physician practices.