Private equity moves in on specialist practices

By Geir O'Rourke

20 Jul 2023

If it feels like medicine in Australia is in the grip of a corporate takeover, spare a thought for the US, where private equity firms now own more than half the specialist practices in some cities.

The growing influence of private investors in the US health system is the subject of a new report from the American Antitrust Institute, which also accuses private equity firms of jacking up the price of care once they move in and gain market power.

Moreover, the trend is accelerating, according to the researchers, who found the annual number of private equity buyouts had risen from 75 in 2012, to 484 in 2021, a more than six-fold increase in only 10 years.

At the local level, they found that individual PE firms were acquiring competitively significant shares of physician practice markets (link here).

In particular, in 28% of metropolitan statistical areas, a single private equity firm held more than 30% market share by FTE physicians. And in 13% of places, more than 50% of local specialists were at practices owned by just one firm.

Private equity acquisitions were also associated with price increases, with statistically significant upticks in the cost of care across eight of the 10 physician practice specialties studied following a buyout.

These price increases ranged from 16% in oncology to 4% in dermatology, and were significantly higher once a PE firm achieved dominant market share in a given city.

PE acquisitions were also associated with per-patient expenditure increases for 6 of 10 specialties, ranging from 4% to 16% depending on the specialty, the report found.

“Increased attention to the competition impacts of private equity in physician markets is urgently needed,” the authors said.

“The vast majority of the private equity acquisitions studied in this report took place without federal antitrust scrutiny and with limited state antitrust scrutiny.”

“The market share and price results reported here indicate that more scrutiny is warranted on private equity’s impact on competition. The pace at which private equity is entering these markets and monetising medicine makes a quick response imperative.”

PE aquisition deals by specialty. Source: AAI

Experts stress it isn’t just a US issue, with private investors also increasingly gobbling up healthcare concerns in Australia.

In a notable recent example, Melbourne-based private equity firm BGH capital became one of the largest healthcare operators in the country in 2020, when it bought out Healius’ medical centre business in a $500 million deal.

Private hospital giant Ramsay Health Care has also been the subject of intense investor interest, with private equity group KKR reportedly offering up to $20 billion for the company before talks broke down last year.

Trent Antonio, director, business advisory at accounting firm William Buck examined the issue in a blog two years ago (link here), where he warned there was a trade off for medical practice owners considering selling up.

He wrote: “Does the corporate model work for medical practices? Fundamentally there appears to be a disconnect between squeezing practices for profit and creating value to shareholders versus going above and beyond to ensure patient care is the number one priority.”

“Many doctors struggle with a corporate push down focus on profit, concerned for the effect it might have on their day-to-day operations and ultimately patient care.”

“Practice owners looking to sell are then faced with an ethical dilemma. Do they try to maximise their sale price by selling to a large corporate/private equity firm potentially willing to pay higher multiples? Or do they sell to a smaller party with a track record of practice ownership and management knowing patient care will be top priority, but for which they might not receive the same sale price as a corporate offer.”

“Of course, these things are rarely so black and white so every opportunity should be explored on its own merits.”

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