One of the most striking trends in American health care in recent years has been the injection of private equity into the system. The private equity model centers around increasing the value of purchased practices for eventual resale to a second private equity buyer, who hopes to repeat the process for another eventual resale, often referred to as “the second bite of the apple.”

According to a 2021 report from the American Antitrust Institute1, estimated annual private equity deals in American health care tripled from $41.5 billion in 2010 to $119 billion in 2019. And a report from the American Medical Association found that in 2018 the number of doctors who were employed by a company surpassed the number who owned their own practices for the first time.2

Not surprisingly, placing health care into a model that focuses on expansion and profitability can be dangerous, with the potential to make patient care secondary to the financial concerns of investors backing the private equity purchases. So far, ophthalmologists who have decided to participate report mostly positive experiences. But even when all goes well, the private equity explosion is reshaping the look of health care in the United States by propelling the formation of larger and larger health care groups. And, the trend is still on the upswing.

“After a very brief COVID-related pause, private equity in the ophthalmologist space is still on a steady churn,” notes John Pinto, president of J. Pinto & Associates, an ophthalmic practice management consulting firm. “The most desirable practices are getting multiple pitches every year. Even smaller practices are often taking calls from companies inquiring about their interest.”

Mr. Pinto points out that most of the private equity deals happening in ophthalmology right now are still primary transactions, not a second go-round. “The focus is also still on beachhead practices—those that are large and regionally important and have a strong ASC component,” he says. “That’s what you’d expect at this stage in the relatively young development of private equity in ophthalmology. It’s basically walking the same trail that all of us did back in the 1990s, when the first version of Wall Street and ophthalmology’s dance took place with the physician practice management companies.”

Here, we’ll share first-hand stories and advice from ophthalmologists who’ve now been involved in the private equity process for several years, with additional perspectives offered by outside experts. (For more on this topic, check out “Is a Private Equity Deal Right for You?” in the April and May 2018 issues of Review.)

Overall, assets under private equity management in 2010 were estimated at $1.7 trillion. Recent projections suggest that number may reach $9 trillion by 2025. (Source: Preqin) (Photo courtesy of Getty Images.)


Stepping Into the Fray

Retinal specialist Daniel M. Miller, MD, PhD, vice chair of the medical executive board for EyeCare Partners and former chief medical officer for the Cincinnati Eye Institute, has been involved with private equity for a number of years. His organization, CEI Vision Partners, was assembled in the initial private equity firm purchase and recently went through the “second bite of the apple,” when it was sold to a second private equity firm. 

“I joined Cincinnati Eye Institute in 2006,” Dr. Miller explains. “At the time, it was one of the largest private multispecialty ophthalmology companies in the U.S. It was 100-percent physician-owned, with multiple surgery centers and a large number of partners. During my first decade at CEI we were very successful and continued to have steady growth in the northern Kentucky, southwest Ohio and western Indiana markets. We had a top-shelf executive team, great physician leadership and a culture of partnership between the physician leaders and the executive leadership.

“Around that time, hospitals began acquiring primary care physicians and subspecialists,” he recalls. “Although most of this didn’t involve ophthalmologists, we felt a little threatened by this trend. So, we started thinking about strategies to enlarge our footprint. One of the things we decided to do was start a management services organization—an MSO—that was just physician-owned. We found some like-minded groups in our region will were willing to join us. The goal wasn’t really to make it a revenue-generator, but to provide shared services among the participating organizations, broaden our influence in the region, and eventually do some joint contracting and strategic moves.

“That turned out to be a good model,” he says. “We learned a lot about providing services to other ophthalmology practices, and it got us thinking about expanding beyond our region. However, we also learned that there are limitations to that model. We didn’t have the capital to drive the acquisition of additional practices.”

Dr. Miller notes that a few years later the private equity wave began to pick up steam. “During that period of time, we were constantly getting called by capital investors and private equity groups,” he says. “However, at the time we didn’t see that fitting into our strategic objectives. But after working with our MSO, we started to look at the situation differently. We realized that given our size and what was happening in medicine, expanding our footprint was going to be an important long-term strategy.

“So, we took a deep dive into looking at private equity,” he continues. “Over the preceding years we’d received so many calls that we had a Rolodex of private equity groups that were interested in ophthalmology. Using that resource, our CEO led us through a competitive process, in which we considered more than 30 private equity groups as potential partners. We whittled that list down to 10 companies, and then did a formal vetting process. In 2018, we partnered with Revelstoke Capital Partners, out of Colorado, forming CEI Vision Partners, a.k.a. CVP.”

Daniel M. Miller, MD, PhD, above, says his practice’s partnership with private equity has been positive so far, in large part because the partners they’ve chosen have had a shared vision for the future and similar values and priorities. (Photo courtesy of Cincinnati Eye Institute)

Dr. Miller notes that one of the most positive aspects of working with Revelstoke was that they kept CEI’s executive leadership intact. “We already had a successful ophthalmology CEO and VPs managing the key functions of our company, and an experienced physician leadership team that Revelstoke was willing to invest in,” he says. “For their part, they added some new key positions: they brought in a chief financial officer, a chief operating officer, a VP of payor contracting and a VP in charge of revenue cycle management. We already had more than 400 employees and multi-state surgery centers, so these were things we really needed to scale our company to a higher level. The new additions helped position us for that level of growth.”

Dr. Miller says the partnership with Revelstoke worked out very well. “Our choice of Revelstoke in our first transaction was very fortuitous,” he says. “They really upheld their part of the bargain in terms of what we were hoping to achieve with growth and expanding our business. And, we had shared strategic goals that we worked very hard to achieve. We were able to add many excellent practices to our organization, such as Virginia Eye Consultants in the mid-Atlantic, and we were able to grow throughout Ohio with mergers and acquisitions. The company grew to be quite large.”


More Private Equity Journeys

Richard L. Lindstrom, MD, founder and attending surgeon emeritus at Minnesota Eye Consultants in Bloomington, Minnesota, has seen the results of his group’s purchase by private equity firm Unifeye Vision Partners. (Their group hasn’t been through a second purchase yet.) Dr. Lindstrom says that overall, he’s happy with the way the new ownership arrangement has worked out. “I wouldn’t have done anything different in hindsight,” he notes. Asked if everyone in the practice is satisfied with the current situation, he points out that in a large group practice there are always differences of opinion. “But objectively, everyone is doing well,” he says. 

Dr. Lindstrom says one of the biggest advantages of having private equity backing was pandemic related. “When we were partially shut down by COVID-19 for extended periods, our practice losses were covered by our private equity partner,” he explains. “I estimate that we would have required a capital call for several hundred thousand dollars per partner to cover these losses without our private equity partner. They covered all losses.”

John D. Sheppard, MD, MMSc, FACS president of Virginia Eye Consultants, medical director of EyeCare Partners MidAtlantic Ophthalmology, and a professor of ophthalmology at Eastern Virginia Medical School, has also experienced the private equity phenomenon first-hand. Dr. Sheppard’s practice, Virginia Eye Consultants, joined CEI Vision Partners in early 2019, and is now part of EyeCare Partners. As a result, Dr. Sheppard has had the opportunity to experience the private equity process through a second sale. 

“At the time of the first merger, the difference between our practice and Cincinnati Eye Institute was that CEI was already very large and had more or less reached equilibrium,” he explains. “In contrast, our practice was growing about 20 percent a year. So, we were growing intrinsically, while they were consolidating and growing by acquisition.” 

Dr. Sheppard says the merger worked well, for a number of reasons. “Our two practice cultures were very well-matched,” he says. “We were able to avoid duplication of management. We had many shared committees. Also, becoming bigger brought us cost savings. For example, our surgical packs immediately went to half price when we became a much bigger entity. That was just one of many welcome changes.”

Dr. Sheppard notes that both practices were able to learn from the experiences of the other. “Their doctors visited us and we visited them,” he says. “Despite both of us being leading regional and national practices, we still had a great deal to learn from each other. It’s been a nice marriage of two like-minded practices.”

Dr. Sheppard says being part of a larger organization has helped with managing a number of issues, including hiring. “The biggest problem all of us have been having is maintaining adequate staffing,” he says. “This is a national issue. Because we’ve joined forces with other practices, we’re able to pool resources involving recruiting, personnel management and human relations. Instead of having busy doctors trying to recruit staff and other doctors, we have a professional team, including an administrator, a recruiter and a doctor, who do that for a living. They seek out and vet doctors, ophthalmic technicians, surgical techs, registered nurses, front desk personnel and other staff members. This allows us to do the best possible job of screening, vetting and hiring.”

Dr. Sheppard notes that Virginia Eye Consultants didn’t acquire any other practices before it joined CEI. “We’ve done several regional mergers since then, and we’re working on several more,” he says.


The ASC Factor
“Private equity firms are discovering, as companies did back in the 1990s, that the ASC component is really critical to making this work,” notes John Pinto, president of J. Pinto & Associates. “Stable ASC profits and comparatively low enterprise complexity are in keeping with a corporate environment—much more so than the massive complexity and volatility of the underlying practices themselves. That’s why I believe that in the years ahead, many of these private equity companies will disgorge the practices they’ve assembled, but hold on to the ASCs. That’s what happened in the 90s. The best known of those companies is NovaMed; it was rolling up ophthalmology practices, but then decided to disgorge its practices and just stick with the ASC components. NovaMed became a surgery-center company, like AmSurg, instead of remaining in the practice management space. 

“A lot of the reason for this,” he continues, “comes down to what the corporate world refers to as ‘the hedgehog principle.’ A surgery center is a very well-defined, discrete business enterprise. There are many complexities, but those are narrow compared to the administrative and management leadership complexities found in an ophthalmology practice. It’s 10 times easier to run a surgery center than it is to run an ophthalmology practice, just in terms of the number of moving parts and things that can go wrong.”

Why didn’t the private equity firms simply start by going after ASCs? “Private equity companies that entered the ophthalmology sector were basically just taking a chapter out of what had happened in dermatology, veterinary medicine and other health-care-related rollups,” Mr. Pinto explains. “They said, ‘Let’s be in that business.’ These were entities that didn’t have much of an ASC presence, so they didn’t think about it. In addition, the ASC business was already populated by companies like AmSurg and local health-care systems, so there didn’t seem to be much runway to take a private equity approach to that. 

“I’m not saying that all of the current 40-plus private equity firms in ophthalmology are going to get boiled down one day to being ASC companies,” he adds. “But a significant number of them are finding that the vagaries and challenges of running a medical practice are not to their liking.”



The Second Sale

At the end of 2021, CEI Vision Partners’ anticipated second sale took place when it was acquired by EyeCare Partners. “Because of the strength of our partnership and our position in the national ophthalmology community, we were an ideal subsequent merger partnership for the folks at EyeCare Partners,” Dr. Sheppard explains. “EyeCare Partners was primarily optometry-focused; merging with them created an organization with strength in both ophthalmology and optometry. We’re now both the biggest ophthalmology group in the country and the biggest optometry group in the country. The current wave of collaboration between the two professions is reflected here by parallel organizations within ECP of equal proportion, equal importance and equal structure.”

Dr. Miller says this was a strategic move for his group. “ECP was part of our process years earlier when we were first looking at companies to partner with,” he explains. “We thought highly of their team back then, but it wasn’t the right time for us to partner with them. At that point their optometry business was much larger than their ophthalmology business, for example. But in the following years ECP made tremendous advances in both their optometry and ophthalmology platforms. 

“Their current leadership is really impressive, and it was a great cultural fit for us, in terms of shared vision, values and priorities,” he continues. “That made it mutually beneficial to both organizations to make a deal happen at the end of last year. A significant part of that was that Revelstoke shared our vision for what a future transaction might look like. 

“We’re now almost halfway through our first year of integrating with ECP, and it’s gone extremely well,” he adds.

The Cincinnati Eye Institute partnered with a private equity firm in 2018, and has now been through the “second bite of the apple.” The second purchase, by Eye Care Partners, has made them part of the largest ophthalmology group in the United States.

Dr. Miller attributes the success of this process in part to consistent leadership over time. “CEI was lucky to have great executive leadership and an intact executive team for decades,” he says. “A lot of our success had to do with that physician-executive partnership. When we looked to partner with private equity, we had a very clear vision of what we wanted to accomplish, and what we wanted that private equity partnership to look like. That ended up honing our decision about who we partnered with, and who would support our mission.”

Dr. Sheppard notes that one aspect of this process that’s made him very happy is getting to work with many ophthalmologists he’s known for years in the new organization. “Some long-established professional friendships are now among my partners,” he explains. “For me, private equity times two has been a wonderful experience. This is truly a world-class organization.” 

In terms of carrying these advantages further, Dr. Sheppard believes it would make sense for the organization to create a third division for their ambulatory surgery centers. “EyeCare Partners now has 31 surgical centers,” he notes. “That’s a very different management and personnel challenge.”

Mr. Pinto says that secondary recapitalization is a very real prospect for many of these private-equity-based groups. “Some of the 40-plus private equity firms out there will be undertaking that, but only a few of those secondary transactions have occurred,” he says. “The modus operandi of private equity firms is to hold on to these gathered up practices for four to seven years before disgorging them back into the market, so we’re probably several years away from seeing what the real impact of that will be.”


What About the Downsides?

The surgeons we’ve spoken to largely report positive experiences as a result of partnering with private equity. However, they’ve noted a few downsides:

• Adjusting to massive change. “Going down this road requires change, and for doctors who are creatures of habit, it’s disruptive,” Dr. Miller points out. “However, what we’ve seen is that the advantages of making this change are logarithmic, not just additive.”

• Giving up control. Dr. Miller notes that giving up control to a larger business entity can be a big issue. “For doctors in a smaller group who’ve had the ability to manage every aspect of their business, it’s hard to adjust to the culture of having an executive team, and reporting structures, and changing parts of your business to follow the established policies and procedures of a much larger business.

“However, I’d counter with the point that in most cases, physicians from smaller practices are freed from having to manage aspects of the business that aren’t patient-care-facing,” he says. “Doctors in a smaller practice are used to managing HR issues, front desk issues, call center issues, revenue cycle issues, payer issues, staffing issues, insurance issues and so on. But as the smaller company integrates into the larger entity, they no longer have to do that. That can be very freeing. Yes, it’s an adjustment, and you might not like the way that some things are now done. But things have to be done in a way that works across a much larger organization.”

• Dealing with a huge bureaucracy. Dr. Sheppard says working with layers of bureaucracy can be frustrating. “To make decisions, such as a new hire, new office or new equipment, you have to go upward through three layers of bureaucracy,” he explains. “Previously, we only had one layer to deal with to get various types of transactions approved and accomplished.”

• Having every purchase evaluated. Dr. Lindstrom says that having another decision-maker at the table primarily focused on the economics of each decision has been challenging. “Not every doctor can request any new ‘toy’ they want, without careful analysis of the potential return-on-investment before purchase,” he says. “However, this is also the biggest upside of the current arrangement. We make much wiser decisions regarding investment and capital allocation than we did before.”

• The new owner’s management style. Mr. Pinto says he’s encountered doctors near retirement who regretted making the deal. “The regret isn’t usually financial,” he says. “ Complaints are usually more along the lines of how the practice is now being managed by the corporate overseer. 

“There’s a whole box full of things they don’t like,” he continues. “Some are trivial irritants. For example, one client who left a private equity setting told us about having two receptionists, one of whom had a stapler that broke. The receptionist had to put in a requisition form to get a new $15 stapler. The requisition was not approved, with the private equity firm saying, ‘Use your desk-mate’s stapler so we don’t have to buy a second one.’

“There are also gross examples of practices that have been mismanaged—practices with strong financial and volumetric performance pre-transaction that fell down,” he continues. “Of course, some of this is multifactorial, because we’ve been going through a pandemic.”

Mr. Pinto adds that unhappiness between partners can go both ways. “I’m sure that for every story about a doctor being unhappy with his management company, there’s a private equity executive who has a similarly frustrating story about a doctor who wasn’t reasonable, while the firm was doing all that it could to operate in a difficult environment,” he says.


Is This a Pyramid Scheme?

It’s not hard to see potential future problems with the private equity model, which depends on finding ways to make companies more profitable so they can be sold to another firm, which will then repeat this in hopes of selling an even more profitable company or group to the next buyer in line … ad infinitum.

“Many have called private equity transactions a kind of pyramid or Ponzi scheme, aggregating values together and then selling them to the next greater fool,” notes Mr. Pinto. “The private equity model—which sometimes works and sometimes doesn’t—is that you take a comparatively small business, like a $10-million eye clinic, and you introduce a few easy profit-enhancement activities. Some of them are revenue enhancers, some are cost-containers. You do that with a collection of $10-million practices, in a service region that has the same payor cohort. You now have a large enough provider base to be able to drive a better deal with private payors.

“If you put those ingredients together in a pot and stir it up, there’s an argument for saying that you might be able to take a $10 million practice with a 30-percent profit margin and turn it into a practice with a 32- or 35- or 38-percent profit margin,” he continues. “If you get a whole bunch of those practices together, and you’re able to execute your plan, then the cohort of practices that you bought for seven or eight times earnings is now one much larger company with some regional control and pricing power. That cohort is now worth 10 or 12 times earnings. The people who buy that for 10 or 12 times earnings believe they can take 20 practices and aggregate them with another 20 or 30 or 50 practices and end up with a company with a billion dollars in revenue. They’ll be able to turn that into a public company, or sell it to a public company. In a typical environment it might now be worth 15 to 20 times earnings.

“At each level, as you grow in scale and make even small changes in profitability, there’s a strong amount of leverage occurring,” he says. “All along the way that benefits the doctor-owners who got the original deal done. It benefits the primary private equity firm, and it benefits the second private equity firm, or other recapitalizing entity. The profits daisy-chain on up.” 

But given that this is based upon ever-expanding profitability, won’t someone eventually end up getting burned? “If this keeps going,” Mr. Pinto replies, “at some point in the chain of events, some business entity is probably going to fail in its mission and the buyers will have their heads handed to them.”

In terms of whether requiring endless increases in profitability is realistic, Dr. Lindstrom points out that increasing profitability is necessary whether a practice is part of a private equity situation or not. “The external environment requires this of every practice if it’s to remain viable in the current external environment,” he says. “Today, bankruptcy and failure can, and do, occur in ophthalmology practices.”


How Far Can This Go?

Mr. Pinto points out that aside from the philosophical and ethical questions about this financial model, there are upcoming economic challenges that also threaten to undermine its success. Two in particular are worth noting:

• Rising interest rates. “The next challenge coming around the corner for private equity firms is that interest rates are rising,” he notes. “This is a very interest-rate-sensitive industry. This means that either the private equity firms will have to be more selective about the deals that they do, or doctors will have to accept a lower earnings multiple, because the numbers will be squeezed to death. If you combine that with the trend of generally falling profitability in ophthalmology, caused by fixed and falling fees and now a sharp rise in operating costs, it’s going to be a much greater challenge in the next four years than it’s been in the past four years. The term in the finance industry is ‘margin impairment.’ The past four years could be characterized as a kind of ‘golden age’ for private equity, the pandemic notwithstanding.”

Will that cause a big drop off in new offers? “I wouldn’t characterize it as an upcoming massive drop off, but I think there will be a lot more selectivity,” says Mr. Pinto. “And, the consequence of private equity firms being more selective and paying less in the years ahead is that they’ll have a smaller number of doctors willing to go forward with the transaction.”

• Receding financial goals. “A big private equity motivator for the doctor close to retirement,” says Mr. Pinto, “is, ‘Wouldn’t it be great to get those last few million dollars out of my practice and into my retirement account? Then I’ll be financially independent.’ Unfortunately, right now we’re looking down the barrel of a reset in equity markets and a drop in stock portfolio values. If and when that occurs, the average doctor will have a larger gap to close before they’re financially independent. So, they’re going to need a bigger check from a private equity transaction in the future than they require today.”

So: How is this likely to end? “In the idealized world of those who are consolidating practices today, 15 years from now you may have three, four or five private or publicly traded ophthalmology megafirms, with billions of dollars of market capitalization,” Mr. Pinto explains. “If a patient dropped into Peoria or Dallas, she might have several major, national eye-care brands to choose from. Of course, there will always be independent practices out there, and some aligned with the health-care systems, in every market.”

EyeCare Partners is now the biggest ophthalmology and optometry organization in the United States. Is it possible to carry the increasing profitability model even further? “I’m pretty sure there will eventually be a third bite,” says Dr. Sheppard. “To accomplish that, we don’t necessarily have to get bigger; just better. And, we may simply become part of a different organization. However, we will be getting bigger, because we’re growing through intrinsic improvements in efficiency, hiring new doctors and acquiring new outstanding practices.”

Beware of Bad Apples

In recent years, as the reach of private equity has expanded within American health care, disturbing signs of abuse have begun to appear. It’s increasingly common to read reports of doctors and staff members in different medical fields being fired and/or filing lawsuits about policies put in place by private equity firms that undercut patient care. (Private equity is private; most transactions are not reported to regulatory agencies, so there’s little oversight.) 

Examples now appear in the news multiple times a year:

  • Hospital emergency rooms have been purchased by a number of private equity firms because of their profitability. Some ER doctors have objected to excessive cuts in patient care, requesting that additional staff be hired, with the result that they’ve been fired. (A number of lawsuits regarding these practices have been brought and won, but with negligible financial consequences for the firms involved.) Meanwhile, many examples of “surprise” ER bills attributed to private equity owner policies have threatened to bankrupt patients, making the news.
  • In the field of dermatology—popular with private equity firms—studies have shown that increasing profits by using more “physician extenders” has led to a decline in patient care.3-5
  • Many states have laws that bar corporations from practicing medicine, but those laws have generally remained unenforced. The American Academy of Emergency Medicine Physician Group recently filed a lawsuit against one of the largest private equity firms for running emergency rooms in California, as being a violation of these laws. The lawsuit is not seeking monetary damages; instead, it’s asking the court to stop the firm from running emergency rooms in the state. (Similar lawsuits have been brought—and won—against private equity firms operating in the field of dermatology.)

So far, few signs of this kind of trouble have appeared in the field of ophthalmology. But the possibility of profit-driven care replacing patient-driven care needs to be taken seriously.

“Obviously, when you have more than 40 private equity companies engaged in this in the field of ophthalmology, half are doing an above-average job and half are doing a below-average job,” John Pinto, president of J. Pinto & Associates, notes. “In my role as advisor to the profession, I don’t hear from doctors who are happy about their private equity environment; I hear from the doctors who are unhappy. An unhappy partnership isn’t terribly common, but it does happen. Most private equity folks are well-educated, thoughtful, well-informed business people. But I just finished a 100-hour expert-witness assignment, working through a dispute between a doctor and his management company. These things can ricochet off in very unpleasant ways.”

John D. Sheppard, MD, MMSc, FACS president of Virginia Eye Consultants and medical director of EyeCare Partners MidAtlantic Ophthalmology, says the focus should be on productivity, not profitability. “The more productive you are and the better job you do, the more money you’ll make,” he notes. “The only way we’ve made serious cuts in overhead is by reducing the number of administrators as a result of consolidating management. That’s part of the reason we entered into this new world. We haven’t made any compromises in our ability to deliver clinical care.”

Asked about media reports of private equity running practices into the ground for profit, Dr. Sheppard says that’s not going to happen in their organization. “Our mergers were carefully vetted,” he says. “Everybody’s anxious to do a good job. However, you have to put in the work [up front]. If you don’t research carefully enough to weed out the bad guys, you could get hurt.”

Daniel M. Miller, MD, PhD, vice chair of the medical executive board for EyeCare Partners and former chief medical officer for the Cincinnati Eye Institute, points out that bad choices are made by people in every kind of situation, not just private equity. “I think it’s important to remember that there will always be bad apples,” he says. “I’ve seen bad things happen under almost any type of business arrangement you can imagine, so I’m sure such things have happened with some private equity firms. The point is that those are outliers, and all of them will fail to be successful in the long run if they’re not providing ethical, high-quality patient care, along with a great culture for their staff and employees.

“The two private equity companies I’ve been involved with have not in any way been interested in thwarting our ability to provide medical care,” he adds. “They’re extremely supportive of high-quality and highly ethical care, and they don’t have any interest in influencing physician decision-making around great care. Following any other pattern would be really damaging, not only to the culture of the company, but also to the core values of the company.” 



Avoiding the Pitfalls

Surgeons and outside experts say these strategies can help ensure a positive outcome when setting up a private equity deal:

• Be clear about where your practice stands and what your future goals are. Dr. Miller says friends and colleagues frequently ask about the pros and cons of partnering with private equity. “I tell them that what really matters when making decisions about your business—whether you’re a two-person practice or a mega-group like CEI—is: What’s your vision for the future of your practice? What are your key objectives? You need to spend a lot of time thinking about this,” he notes, “because if you don’t, you can get lost about the direction you need to move your company in. 

“Deciding whether this is the right option for you comes down to knowing your strengths and weaknesses, and being aware of the opportunities and threats to your business,” he continues. “You really need to understand your local market. And then you need to think about the strategic and cultural positioning of your practice, and what your near-term goals for the next five to 10 years are, and what your longer-term goals are for the legacy of your practice.

“Looking carefully at these issues will help illuminate what your best path may be,” he continues. “This will lead some practices to want to partner with a larger entity. For others, it may make the most sense to stay independent, or partner with a dominant health system in a closed-off market, or partner with other independent providers in your region. It will vary by practice and market.”

• Get good counsel before going through the process. Mr. Pinto says this is absolutely critical. “You need to know what you’re going to be doing,” he says. “You need to read the transaction documents carefully. You need to know what that management services agreement is going to bond you to. This is an exercise very few physicians have undertaken before, so it’s important to get good counsel to take you through the process.”

• Make sure you’ll be able to maintain your practice culture in the new arrangement. “It’s key to spend a lot of time thinking about the culture and ethics of your practice, and the quality of care you provide, and make sure that whatever entity you partner with shares those cultural values, ethics and quality goals,” says Dr. Miller. “You can’t walk that part back. Financial and operational things can be fixed, but those other things have to be aligned for a partnership to work.”

• Make sure the younger doctors in your practice will benefit from the merger. Many private equity transactions clearly stand to benefit doctors in the practice who are close to retirement; it’s not always clear that younger doctors have as much reason to cheer about the change. However, some doctors going through the process say this can be offset by structuring the deal appropriately.

“I think it’s really critical that young ophthalmologists get to have an ownership stake in the company, and that there’s a long-term financial interest in being an equity stakeholder in the company,” says Dr. Miller. “Our company is experiencing tremendous growth, and we expect that to continue over the next 20 years. So young ophthalmologists that find the right cultural fit are likely to enjoy significant financial growth over the course of their career.”

Dr. Miller says their private equity setup hasn’t deterred the younger doctors. “We’ve been able to continue to recruit outstanding, top-tier ophthalmologists from the best residency and fellowship training programs in the country,” he says. “The reason is that we have a great culture; we have great staff facilities and resources. The younger physicians in our group want to be involved in the full gamut of ophthalmology care.

“On the financial side, I do think there’s increased competition for recruiting younger doctors,” he continues. “One factor that makes a difference is the kind of equity opportunity you can offer younger doctors. For a young doctor who is just joining our company and establishing an equity position, this can be pretty significant.

“We set [our private equity deal] up so that everyone gets the same benefits,” Dr. Sheppard says. “It’s good for both the younger doctors and the older ones. In the first merger there were half a dozen junior doctors in our practice and more than 40 in our sister practice. Nobody left because of the merger. We had 100-percent retention.”

• Be willing to give up practice control, and make sure you’ll reach your financial goals. Mr. Pinto says his advice for those thinking of selling their practice has been the same since the 1990s when consolidation began to pick up steam. “You should only consider selling your practice, whether it’s to a larger local practice or a hospital system or a private equity firm, if two conditions are met,” he says. “First, the net proceeds after taxes and withholds should take you past your personal financial finish line. Second, make sure that you’re very clear that you will no longer be in control of the practice. 

“When we start talking to a new client about what should they do in respect to a new private equity deal they’ve been offered, it’s not a discussion about Wall Street and finance,” he continues. “It’s about those two areas: being able to give up control, and where are you in terms of your personal finances. We’ve had a number of clients come to us saying they’d hate to yield control to another party. They’re not good candidates for a private equity deal. Others will still be years and years away from their financial finish line, even after they get paid for the private equity deal. They’re not good candidates either.

“Ironically, we also get calls from doctors who are many times past their financial finish line,” he says. “They need $500,000 to retire comfortably, and they’ve got $15 million in the bank. Those doctors are also probably not good candidates for a private equity deal, because it’s not going to change the way they live. They’re just going to give up control of their practice without getting any counter-balancing change in their financial security or lifestyle.”

• Don’t assume stock options will be valuable in the future. “We tell our clients that when they’re negotiating their private equity transactions and calculating what they’re going to receive, they should completely discount the stock they reinvest in,” says Mr. Pinto. “Often, 20 to 25 percent of the proceeds of the original sale will be pushed back across the table to the private equity firm so the doctor can be an investor in the conglomeration of practices. But we always tell clients to assume that they won’t realize any value from that in the future. The reality is, it’s impossible to know what value it will have down the line.”

Dr. Sheppard offers three general pieces of advice for doctors considering going down the private equity path. “First, hire a salaried—not percentage-based—professional to guide you through the process,” he says. “Second, find ways to ethically maximize your EBITDA (earnings before interest, taxes, depreciation and amortization). Third, make sure you have a succession plan in place.”


The Road Ahead

So: How widespread in ophthalmology is this phenomenon likely to become? Mr. Pinto doesn’t expect to see many more private equity firms appearing in the eye-care space in the next few years. “The 40-plus firms that are out there today are going to slowly consolidate as part of the so-called ‘second bite of the apple’ transactions,” he says. “It’s still too early to know how all of this will settle out. But my prediction is that no more than 15 or 20 percent of the 7,000 or so private ophthalmology practices are going to join the private equity enterprise model. 

“Private equity has been a wonderful development for doctors at a certain stage of their career,” he notes. “It’s provided them with the ability to extract as much as twice the value they would have obtained from a doctor-to-doctor or doctor-to-institution succession transaction. But for many others—doctors at earlier stages in their professional life—it’s been quite disconcerting. I’m beginning to pick up a countercurrent, even as private equity percolates along. We’re seeing more doctors who are interested in starting up their own practice, because they decide that a private equity or health-system job is not going to be to their liking. Or, they’ve already been in a private equity context and now want to get out on their own and be private and independent again.”

Mr. Pinto points out that this consolidation has been happening for more than a generation. “Solo practices have aggregated into two-doctor practices; some of those aggregated into five-doctor practices and some merged into local health-care systems,” he says. “Some practices sold out their single-specialty practice to a multi-specialty clinic. The general trend, for more than a generation, has been toward aggregation into larger and larger operating units. Private equity is a catalyst for more of that, and it will continue to be a catalyst in the years ahead. But it should be seen as a continuation of an old trend—not something that’s new and different. And I believe strongly that in our lifetime there will never be a situation in which traditional, private, independent practice is untenable.”

Dr. Lindstrom notes that private equity isn’t for everyone. “If you’re very happy, very financially successful, somewhat buffered from the most challenging external environment headwind and not planning for growth that would require significant personal or personally guaranteed investment, why make a change of any kind?” he asks. “Practices with these characteristics are usually smaller and in the exurbs or rural areas. 

“On the other hand,” he adds, “if you’re in a more challenging urban environment which requires sophisticated management, and you want to grow meaningfully, a private equity financial partner can be a great partner.”

Drs. Miller,  Sheppard and Lindstrom are participants in private equity operations. Mr. Pinto has no financial ties to any private equity firms.

This article has no commercial sponsorship.


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