Increasingly Bancroft has been asked for help when clients are considering investing in physician practice management. We believe the PPM market presents some particularly good opportunities that are worth investigating. Given a PPM team with over 50 years of experience in healthcare private equity, Bancroft is able to give our clients the kind of in-depth analysis and knowledgeable advice they need to make these important decisions.
The private equity backed physician practice management (PPM) market has shown continuous growth, and deal activity is expected to continue growing. Fueled by increased market interest, several marquis deals (such as Optum’s acquisition of Reliant Medical Group, a 500-provider multispecialty physician group and the $9.9 billion acquisition of Envision Healthcare by private equity firm KKR) and favorable market tailwinds of an aging population and consumer access to health insurance, the sector has seen continued transaction volume growth. Kaufman Hall notes that the 250 announced merger and acquisition transactions in the physician group sector in 2018 represented a 51% increase from the 166 transactions announced in 2017. From 2012 through 2018, the compound annual growth rate (CAGR) in the number of announced transactions has been almost 24%.
The Drive for Investment
There are a multitude of factors driving the increase in PPM investment. As physician groups seek to level the playing field with large, well-capitalized health insurers and health systems, monetize a founder’s equity, or build a larger, high-quality platform, they need funding to fuel that growth. PE investment can assist physician practices in recruiting new talent that might not have been available otherwise. Physicians are also finding that it is becoming more complex to manage a physician practice, with an increase in compliance and regulation and a decrease in reimbursements. Well-funded PPMs offer a lot of advantages; they can collect data on what works and what doesn't, demonstrating to insurance companies why their practice is preferable.
The drive for PPM investment is also spurred by the industry trend toward value-based healthcare, which compensates physicians for keeping patients healthy—rather than the traditional fee-for-service model. Small practices often lack the capital to keep pace with the reporting requirements, complex billing, and technology investments that are necessary for value-based healthcare.
Reasons for Caution
One of the biggest obstacles facing private equity investors in this sector is concern among PPMs about the PE’s effect on the quality of healthcare. Physicians and practice managers worry that profit may become the investors’ top priority while spending time with patients and high-quality treatment decisions become secondary. Or providers think they may feel pressured to practice unnecessary procedures which provide high reimbursements from payors. Or they are anxious that a practice will increase its prices for insurers, leading to increased prices for patients.
However, physicians may take comfort. Not only is it in the best interest from a business perspective to leave all decisions about patient care in the hands of the doctors, it is also a regulatory requirement. The most successful deals are ones in which PPM physicians select the right partners, ensuring that their investors share their vision for the enterprise.
Bancroft’s “Right” PE PPM Strategy
Bancroft Group’s point of view is that any successful PPM strategy must create increasing value for both investor owners and physician partners. Retail-focused PPM strategies—for instance, in gastroenterology, ophthalmology, and dermatology— have many positive elements to support value creation, including demand growth, stable reimbursement, and fragmentation. However, PE investors have recently been expanding their portfolios into new specialty areas— particularly surgeon-led practices such as cardiology and orthopedics--that have a lot of market power and tend to be financially independent of hospitals.
In our view, business building must focus on:
Driving operational efficiencies to maximize margins (scale synergies, unit throughout and capacity utilization)
Generating organic same store sales growth (visit volume growth, revenue per visit, additional capacity)
Adding new service lines (e.g., ASC's, office based procedures, elective and medically necessary ancillary additions)
Recruiting talented physicians and extenders to a market leading platform
Buying new practices accretively. While complicated by the current prices for practices, a clear, focused improvement model can deliver success
Considering PPM investment but not sure if a particular opportunity is right for you? Currently involved with a PPM that’s underperforming?
By utilizing Bancroft Group’s proprietary diagnostic tool, in less than an hour you can develop a quick assessment of the strengths and improvement areas of your PPM. Leveraging Bancroft PPM team’s 50+ years of experience, the tool asks a set of questions and then uses 25 different metrics to determine value creation opportunities and risks. With this information as a starting point, a Bancroft SWAT Team can conduct rapid due diligence to develop a strategic and operating assessment with clearly defined risks, opportunities, and improvement levers to pull.
At Bancroft Group, we’re focused on helping private equity companies and their investors succeed. Reach out today. We’re happy to discuss how we can help you achieve your business goals.