As the costs of running a medical practice go up and reimbursements go down, private equity investors can be an attractive option for ophthalmology practice owners. Private equity groups are certainly attracted to them right now, and seemingly flush with cash in exchange for majority ownership. While signing a PE agreement can mean a personal financial windfall, more freedom from bureaucratic tasks and a clarified transition plan for late-career surgeons, it also usually spells loss of control of one’s day-to-day practice life. Private equity has already penetrated dermatology and dentistry, and is now reaching out to ophthalmology. Here, experts discuss what PE looks for when deciding where to invest its dollars, and offer some insights on the PE trend and alternative ways to reap some of PE’s practice-growing benefits without fully committing to the model. 

Ophthalmology’s Appeal

Matt Owens, JD, a partner at Arnold & Porter in Washington, D.C., represents medical practices negotiating private equity deals. He thinks that ophthalmology practices are interesting to private equity investors for a variety of reasons. “You’ve got a large baby-boomer population that’s starting to need more ophthalmic care,” he says. “Relatively few doctors are entering ophthalmology, compared to those who are retiring. There also seems to be a general view that the younger doctors entering ophthalmology aren’t as driven to own and run their own practices; they’re more attracted to a different work/life balance than in the past.”

Private equity’s ability to consolidate the strengths of multiple practices and its centralized management can

Koch Eye Associates, based in Warwick, Rhode Island, has been through a sale to private-equity investors, who made administrative changes to the practice to increase revenues in preparation for a secondary sale. The resale, which took place recently, was to a group that has a pattern of buying and holding its investments.

give parties entering into such agreements greater bargaining power to negotiate better rates for products, services and covered lives with vendors and insurers. “Ophthalmology is an expensive specialty,” says Paul Koch, MD, founder and medical director of Koch Eye Associates in Warwick, Rhode Island. The Boston-based private equity group Candescent Partners purchased Koch Eye Centers in 2011, making it part of Claris Vision, and then recently resold it to CV Global Holdings. “Doctors today may be thinking, ‘How much support am I going to have for the things I need to build my practice? I can’t get a piece of equipment or offer a new procedure and amortize it that fast on my own.’ Outside investors can help with that,” he says.

The comparative stability of health care service providers as an investment, versus real estate, for example, has lured would-be stakeholders to ophthalmology before. Professional medical management  companies (PMMCs) emerged in the late 1990s and wrought havoc on many ophthalmologists who accepted stocks in exchange for control of their practices, when the practices went public and the promised payouts failed to materialize. A rebounding economy after the recession of 2007 to 2009 has again given rise to private investors looking for places to put their funds to use. “It has come back up in the last couple of years because private equity companies are looking for other ways to invest, because they’ve raised all this money and they have to put it somewhere,” says Tom Harbin, MD, MBA, an ophthalmologist and ophthalmic business expert from Atlanta. “Their investors expect them to grow their dollars and make a profit. So that’s part of the reason that this has suddenly come back to the fore after many years.”

How It Works

Private equity groups will pay owner/doctors a multiple of their practice’s strategic value to gain control of it, in order to increase its revenues for eventual resale. The practice’s strategic value differs from its market value in that it’s based on projected future earnings, which is what surgeons are really selling to PE. The valuation is a multiple of a practice’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). “It really comes down to the practice’s EBITDA,” says Mr. Owens. “In my experience, the multiple is in the range of five to the low double digits—generally seven to 10, but up to the teens for some practices.”  

 “Private equity will agree to purchase you for some number, and they will ask you to take most of it, usually about 60 percent, in cash. They’ll ask you to leave the rest behind as equity to help fund the rest of their activities,” Dr. Koch explains. “They will then finance the growth of the organization using the residual equity, which may or may not give returns to the doctors who leave it behind.

“They think of things not in terms of long-term growth, but in very short-term time increments,” Dr. Koch continues. “Whereas we might plan to buy some new equipment or hire new people with an eye to how things will look 10 years from now, PE will make decisions based on how things will look 90 days from now. In order to eventually sell to somebody else for a lot of money, they have to be able to show quarterly increases in earnings to demonstrate that they’ve got a model that they’ve managed well so that it’s attractive to other buyers.”

The time frame from PE purchase to the secondary sale varies, and the shorter the time horizon, the more sweeping and rapid the changes to a practice tend to be. “A span of seven years or so to the flip is not unheard of, because there are those groups that buy and then hold on longer,” says Mr. Owens. “But it’s still private equity, and doctors in the practice still look forward to that second bite at the apple.”

Understand PE’s Goal

Understanding how PE works is key to understanding a particular group’s goals for your practice—and making sure you’re comfortable helping to facilitate them. Dr. Koch says that the time horizon is typically shorter than seven years, and practices should make sure they understand what any prospective PE investors expect to accomplish. “First, determine what they would like to achieve with the acquisition,” he advises. “If the PE people can’t negotiate a situation where they’re going to make a lot of money, they’re not going to make a deal. They want to make their money in a time frame. They want to buy the practice; they want to run up profits by 250 percent in a short time period. For a PE firm, three years would be a nice turnover; five years would be a satisfactory one; and if it goes to seven years, that’s a long-term deal—and many PE groups don’t like that.” 

With the understanding that private equity groups are tapping into ophthalmology to make money for themselves at top of mind, some surgeons are joining forces with them and also benefiting. How can an individual practice make itself stand out to private equity and insure a favorable valuation?

ASC and Receive 

Geographic reach and access to an ambulatory surgery center are two features that PE prizes. Being an established presence in your corner of the world is critical to attracting private equity. PE looks first for “platform” practices: These are practices that are already well regarded in their communities that pull from a good-sized geographic area, ideally with an ambulatory surgery center.

According to Dr. Koch, Koch Eye Associates already ticked off those boxes when they were looking for the best way to continue growing. “We looked at all the usual options. We were such a large entity in our market that none of those things were feasible. My brother, the business manager, finally asked the question, ‘If we were a widget


factory what would we do?’ Well, we would hire an investment banker to start with, so we did that, made a nice portfolio and shopped it around. That’s how we got involved in the private equity market. We were a platform practice: We were a large, well-run multispecialty practice with a very strong presence in the community. If they wanted to get into ophthalmology, we were a very prime organization for PE to deal with. So when our investment banker approached the investors, we fit the profile of an acquisition pretty much to a ‘T,’ ” he says.

“Private equity firms will buy a platform practice in an area with practices nearby, either practices that can feed referrals into the platform practice or practices that will add value,” says Dr. Harbin. “The goal of this, from the time that the first set of deals comes together, is to keep growing and then sell. It’s been done in a number of other situations, like dentistry, where after they build up a platform practice, they sell.”

Are small or solo practices shut out of the PE trend? A smaller practice in a region where PE is active in ophthalmology could attract such investors as a “bolt-on”—a practice purchased and then subsumed into a larger platform practice that they’ve already acquired. PE investors can assemble large regional practices by bolting multiple small offices onto their platform practice. “Practices of all sizes can attract a private-equity deal if that’s what they want,” says Mr. Owens. “It really depends on their EBITDA, and whether these kinds of transactions are happening in their part of the country. There are still a lot of geographic areas where private equity really hasn’t taken hold, though, and if you’re located in one of them, you’re pretty much out in the cold for now.”

Mind Your Business

A PE deal will leverage the expertise of outside management to spur revenue growth, but investors aren’t eager to pay good money to rehabilitate problem practices. Just as you should carefully vet any PE groups that express an interest in your practice, you should expect intense scrutiny from the other side of the negotiating table. “Besides the obvious—which would be to strive to be a platform practice with good community presence and access to a surgery center—I would say that practices need to make sure that they are in good compliance, because no investor wants to come in and discover that a practice that appears fiscally sound actually isn’t all that it seems because it’s not billing properly, for example,” says Mr. Owens. Specifically, PE groups will shine a spotlight on your practice’s billing to make sure that your office’s CPT codes align with procedures performed and to make sure that no upcoding and unbundling are taking place. They’ll also examine your legal exposures, including malpractice. Practices that are interested in attracting private equity should audit their finances, and make sure that they have secure EHR if possible.

 “A well-run practice of any type would be attractive to PE investors,” says Dr. Koch. “They want to find a well-run practice that they can influence to generate greater profits for the eventual flip, or ‘event.’ I know people in solo practices using paper charts that have been acquired. I know of very sophisticated practices that have been paperless for years that have been acquired. They can deal with all kinds of models, just as long as the numbers add up for them.”

Mix it up

In addition to access to an ASC, any onsite optical dispensaries and cash procedures that add to the mix in your practice will make PE groups take notice. Out-of-pocket products and services like premium IOLs, LASIK, LipiFlow treatments, Botox, peels and facial fillers will augment the revenue stream created by reimbursed medical services and add to the picture of a healthy practice. 

As platforms absorb smaller practices that enter PE agreements, the opportunity to increase the number of different subspecialties within a practice arises organically. If your smaller practice doesn’t already feature more than one subspecialty, another way of diversifying your practice and increasing its allure for PE would be to acquire or merge with another like-minded smaller practice to increase both organizations’ reach and scope. 

“There are other ways to do it,” avers Mr. Owens. “Some platform-type practices may want to make themselves more attractive to private equity by making acquisitions of smaller bolt-on-type practices by themselves first, but others will find that the administrative and logistical work that involves may be best left to outside investors. So smaller practices may want to see if larger platforms will purchase them, or they might form groups with similarly-sized practices to increase their attractiveness.” 

(For more on alternatives to PE investment, see sidebar)

Be Alert for Change 

Dr. Koch’s perspective is informed by Koch Eye’s positive experience with private equity, but he now believes that the model’s heyday has already come and gone. “We were among the first to do it, and I think we were also among the first out of it,” he states. “And I think the whole trend of private equity has already come and gone. I think that the deals that are going to be helpful for everybody—a win for the PE, a win for the practice and a win for the patients—have come and gone. Private equity people are specialists in making money. We are specialists in taking care of patients.”

Dr. Harbin emphasizes that the PE model could change abruptly, leaving surgeons looking for other ways to attract capital. “People need to consider the question of whether this model will survive,” he says. “I remember the days of private equity swallowing up a bunch of ophthalmology practices, when things suddenly went south and a lot of surgeons had to buy their practices back. For those of us with some experience and some white hair, those are not pleasant memories. I happen to think that the model today has a better chance of surviving because a lot more cash is going into it, but there’s always the chance that it won’t. People need to keep that in mind when entertaining these deals.”

Dr. Koch says that the secondary sale of Koch Eye Associates from Candescent Partners to present owner CV Global Holdings conformed to a newer model. “When our people were ready to sell us, they were very good about giving us some voice in who would purchase us from them. We were next purchased by a private holding company, a group that has been buying businesses for many years and has never sold one. Every business they buy is a buy-and-hold. Unlike PE, which came to us asking for 90-day and 180-day plans, we’ve been asked to generate five-, 10- and 30-year plans for our business. In addition, young doctors are welcome to invest in the practice, and their investment is guaranteed at the multiple of sale. I think that is going to be the model that will be preferred going forward, and I think the private-equity model is probably one that is going to start petering out pretty soon. I think that doctors generally want to see their practices operate on a long-term basis, rather than on a series of short-term deadlines,” he says. 

Whether or not the current model is headed for obsolescence, right now PE deals continue. For ophthalmologists who are open to working collaboratively with the new management that accompanies a sale to private equity, their practices can grow leaner and more remunerative, with a payout up front and a chance for more upon resale. By taking a few steps to make your practice more investment-ready, you can encourage PE groups to come knocking on your door.  REVIEW