Private equity (PE) and venture capital firms have been expending their involvement and acquisitions in the healthcare industry for years. Many physicians, physician practices, other healthcare provider types, or their employees who are approached by PE regarding an acquisition may have questions regarding the proposed deal or some of the issues that may arise.
In general, a PE firm will approach a physician practice or other provider type and propose some sort of arrangement. The PE firm may seek to buy a controlling interest in the practice, where state law allows non-physician ownership of a practice, or to set up a management services organization which contracts with and manages the practice. Either way, the PE firm acquires control over most or all of the operations of the practice. The PE firm may persuade the practice to enter the arrangement with promises that the PE firm will provide some form of management expertise, industry experience, or unique support structures that will make the practice more profitable or efficient.
However, most, though not all, PE firms adhere to a business model that prioritizes short-term profitability over other concerns. This model may conflict with the priorities of physicians who also prioritize quality of patient care, sustainment of professional and business relationships, and the long-term viability of a practice. In practice, PE firms often attempt to cut costs by decreasing administrative or clinical support staff, increasing physician workload, renegotiating contractual agreements with the practice’s vendors and employed physicians, or shifting the practice’s business model toward more profitable services and cutting less profitable patient services. While some of these measures may very well increase the efficiency of a practice, physicians should be aware that their priorities may not align with the priorities of the PE firm seeking to take over the practice. Physicians should carefully evaluate the terms and operative models of any such transaction with a PE firm or PE-back entity.
Physicians who are employed by a practice that is taken over by a PE-backed entity have a separate, but similar set of concerns. A PE-backed entity will generally attempt to renegotiate contracts with employed physicians. These new contracts may include dramatic increases in the physician’s responsibilities, his or her obligation to indemnify the PE-backed entity in the event something goes wrong, and the scope and duration of non-compete provisions, as well as severely limiting the physician’s ability to terminate the employment agreement. Often these changes are in exchange for little or no increase in compensation. Employed physicians who are offered a new employment contract by a PE-backed entity should carefully evaluate the terms of such an agreement.
For over 35 years, Wachler & Associates has represented healthcare providers and suppliers nationwide in a variety of health law matters, and our attorneys can assist providers and suppliers in understanding new developments in healthcare law and regulation. If you or your healthcare entity has any questions pertaining to the sale of a practice or healthcare compliance, please contact an experienced healthcare attorney at 248-544-0888 or wapc@wachler.com.