Private equity firms and private practices have been combining forces for years. The equity firm brings in a large chunk of capital while the private practice brings a thriving business within a highly regulated marketplace. The equity firm can provide guidance on business operations while the private practice shares ownership interest with the firm.
This can seem like a good arrangement, and it some cases it may work out that way — but for others the deal can go sour.
What are the concerns that come with these types of arrangements?
There are two key concerns about these transactions. First, that involvement of investors can shift the practice’s focus from patient care to financial gain. Second, that the private equity firm will sell the practice in three to five years after the initial transaction.
This second concern is a bit more complicated because it is a longer-range issue. It begins with the initial transaction. When the private practice begins the arrangement with the private equity firm the firm gets a portion of ownership. The firm may choose to sell to another investor three to five years later to recoup their investment and turn a profit. This will leave the private practice with new owners. These new owners may be hospital systems or other investors. Since the private equity group has a share of ownership, the private practice has much less say during this second round of negotiations and may end up with a new set of owners they would have chosen to avoid.
What has changed?
The concerns are not new, but the issue is now getting national attention. President Joseph Biden called it out in his State of the Union, voicing the primary concern noted above: that as outside investors enter healthcare the balance tips in favor of financial gain. As a result, the quality of care decreases while the cost increases. This spotlight may signal an increase in federal oversite.
The government has also moved forward with False Claims Act (FCA) cases against private equity firms, holding the firms financially accountable if the government builds a successful case against a healthcare provider within the private practice they have partnered with. This can lead to steep financial penalties that may cool private equity firm’s interest in continuing to join this market.
What if my practice is considering a deal with a private equity firm?
Physicians and private equity firms can mitigate the risks that come with these deals by completing thorough due diligence prior to entering an agreement.
Attorney John Rivas is responsible for this communication.