PEs Buy MDs

Investors discovered health care decades ago, but their interest in the provider sector, especially the outpatient physician aspect of it, has ticked up in recent years.  An analysis in the Annals of Internal Medicine examines the trend.   (Annals Article)   The research was based on a literature search, although there isn’t much published research, and on interviews with people in the industry.  The authors describe typical tactics used in such acquisitions, including the aggregation of practices.  Specialists tend to the most favored targets, because they charge more and have more opportunities to generate procedure-based revenue.  Dermatology, urology, gastroenterology and ophthalmology have been recent areas of focus.  According to some data, PE firms acquired over 100 practices in 2017, but that is likely an understatement and may not include investments in start-ups.  Many practices have been willing to be acquired due to the increased administrative and regulatory burdens placed on the practice of medicine in recent years and the greater financial security offered in a PE-owned practice.  In addition to VC/PE investment, hospitals and health plans have been acquiring medical practices for many years.  In total, there has a been a radical reshaping of the market for outpatient medical care over the last three decades.  Spending hasn’t gone down and I am not sure quality has gone up much, so hard to say this has been beneficial.  But we don’t know what would have happened in the absence of these trend either.

So full disclosure, I am an investor in a for-profit,VC/PE physician company and I have evaluated opportunities for other firms.  The objectives of these firms is always to provide a return to their limited partner investors; that is what keeps the cycle going–the VC/PE firm creates a good return and their limited partners will then be likely to re-invest at least part of those returns in new companies.  Creating those returns can mean ensuring that there is a good product–one that has high quality and meets consumer expectations in a dependable, high level manner.  Health care in general historically had a poor record of attracting good managers, and VC/PE funds tend to bring in better ones.  But having more VC/PE owners also likely means trying to create market power and higher prices.  The more revenue, the more profit opportunity.  So I have very mixed feelings about whether the system benefits from this trend in ownership.  We might be getting better run organizations and better, more consistent quality, but we probably aren’t getting lower prices or less spending.