I work all over the country, so I see both national and regional trends. For a while now, we’ve seen private equity firms sinking money into larger practices, particularly in the profitable subspecialties such as dermatology and oncology. In these larger organizations, the private equity involvement usually starts around capital expenditures, such as opening surgery centers, infusion centers, or purchasing equipment. The organizations themselves are already fairly well developed and may be looking to expand or merge with another practice, but they’re typically pretty savvy about running a business and how to interact with financial backers. Recently though, I’ve seen a couple of scenarios play out where smaller organizations have gotten themselves involved in with private equity money and the practices are clearly in over their heads.
The first organization I saw this with was a primary care group that had a decent number of physicians, but at 50 or so providers, was in no way a large group. They were located in Texas and had delusions of expanding their group statewide and had gotten some backing to do so. I was working with them peripherally through a consulting subcontract with their laboratory vendor, so was able to watch it play out from the sidelines. I watched the practice administrator threaten leadership from their EHR vendor, using phrases around their plan to “triple in size” and to become “a force to be reckoned with.”
First off, even if they tripled in size, that would put them in the 150-physician range, which their vendor doesn’t even remotely see as a “large” client. The practice had failed to realize this before making their demands for free services and free software in preparation for their growth. They also failed to understand that primary care practices rarely have the footprint or financial ability to become a force as they envisioned unless they are very large or have very tight ties to key subspecialties.
The practice administrator had sold her physicians a bill of goods and they were all buying into the illusion that someday they would be the pre-eminent primary care practice in Texas, and by bringing in some PE financing, they were on their way. The physicians didn’t understand that once you bring PE into the mix, you lose a fair amount of control because you’re spending someone else’s money. I never had the opportunity to read the agreement, but it was clear that either they gave away more rights than they understood or that the PE group was taking advantage of them.
The administrator, who is from Detroit, and the PE leader, who hailed from New York, also failed to understand Texas culture. They never could quite figure out why small practices and independent providers weren’t interested in merging with them. Having spent several years living there and dissecting the culture as a relative outsider, I could have given them some pointers.
First off, although Texas is legally a single state, when you travel around it and meet lifelong residents, you quickly realize that it might as well be multiple states. I know people who live in Dallas and Fort Worth who have never been to the other city despite them being only about 30 miles apart. For those folks, crossing that gap might as well be a trip to the moon, which is a shame when you consider what each of the cities has to offer.
When you look at the cities that are farther apart physically, the differences are even more striking. The drive from Brownsville in the South to Texline in the north is almost 900 miles and you cross through multiple cultural traditions on the way. Parts of Texas think they’re in the old south, parts of it think they’re in the Old West, parts of it think they are in old Mexico, parts of it think they’re “big cities,” parts of it ooze small-town charm, and parts of it are just weird (Austin, you know I love you). Oh yeah, and then there’s the Gulf Coast.
To think that you’re going to be able to understand and accomplish expanding to physician practices across that broad of a spectrum within 12 months seems like a long shot. Some of us can’t even get physicians to agree across county lines, let alone across cultural divides and geographic barriers. I’m not saying it can’t be done, but it’s going to be expensive and psychologically exhausting as you try to address the distrust that people have of each other when they’re coming from different perspectives.
Eventually, the practice burned through a lot of money trying to figure out the expansion and the PE group became frustrated. In the end, they were snapped up by a hospital system that they had previously shunned.
Another group I worked with more recently was a procedural subspecialty practice in the Midwest. They had been wooed by a PE firm promising market dominance and expansion, which resonated with the practice’s leadership. Although they’re just trying to achieve regional expansion and grow from their 30-physician size, they didn’t understand that the face they were presenting to the market they were trying to conquer wasn’t a nice one.
My first exposure to them was a meeting where the head of the practice opened with expletives and started shouting at the vendor in front of the PE team. Never a good sign. This guy would go out to practices they were looking at “merging” with (code for acquiring) and behave inappropriately. I once watched him threaten prospective partners and promise that they would be sorry if they didn’t align with his group. I felt like I was in a 1920s-era gangster movie and expected to see Robert De Niro walking around the room with a bat.
I was somewhat gratified to see both his administrative and IT teams begin to ally themselves with the PE team against him. This continued for weeks and he never had a clue that the axe was going to fall until they walked him out the door. In the aftermath, the physicians feel hoodwinked, and frankly I don’t think they wanted to expand that much at all but were relatively powerless to block the actions of the administrator because of their previous corporate setup. They clearly didn’t want to give up as much autonomy as they did for the promise of being the top dogs. If they thought their schedules were oppressive before, they are certainly not enjoying the MBA-level micromanagement that is now going on behind the scenes. I don’t doubt that the practice will eventually grow, but the PE managers have a vested interest in tightening the collective belt so that they spend as little of their own money as possible.
Anyone who doubts that medicine has become a business needs only to look at these types of examples to understand what is going on. Medical schools have done a great job adding courses in patient engagement and complimentary / alternative medicine to their curricula. Now they need to add solid business courses. If they don’t, then physicians need to seek this knowledge on their own just like they would learn a new procedure or therapeutic regimen. There are plenty of smooth-talking individuals looking to work with physician groups and all too easy for them to be on higher ground.
How does your group learn about trends in practice management? Have you had private equity interest? Email me.
Email Dr. Jayne.