In this video, Gary W. Herschman, JD, discusses the increase in physician transactions with private equity firms and four major reasons for this trend.
“The first driver of this is the ability to monetize the true value of a physician practice,” Herschman, an attorney in the health care and life sciences practice of Epstein Becker Green, told Healio.
Herschman noted 90% or more of physician groups have corporate agreements detailing the amount a physician receives when he or she retires, which is usually a flat amount. However, a private equity transaction “monetizes the true value of the practice in the market,” according to Herschman.
“By doing a transaction, the true value of the practice is calculated by a potential partner or buyer and then, usually, 70% to 80% of that is taken out as cash at the closing, and the other 20% to 30% is rollover equity that the physicians have moving forward to stay aligned,” Hershman said. “So, you can imagine that by doing that, it’s more monetarily advantageous for the physicians.”
He added physicians are starting to see the advantages of joining a larger organization, which include substantial capital for growth and the assistance of professional corporate leadership teams in addressing challenges, such as reimbursement reductions and the shift to value-based care.
“The third reason is economies of scale,” Herschman said. “Being part of a larger organization allows for economies of scale using this sophisticated corporate infrastructure and capital to support a lot of groups and obviously, that’s important. Manage care contracting expertise, health care information technology expertise, [human resources] compliance and benefits consulting — all of that regulatory compliance is all under one big corporate infrastructure.”
The final reason that private equity transactions is on the rise among physician practices is due to the “fear of missing out,” according to Herschman.