Private equity (PE) investors are players in every industry and, in recent years, have stepped up their involvement in various healthcare sectors, including physician services. In 2016, while private equity activity slowed in general, the value of transactions (that were disclosed) in health care rose to $36.4 billion, the highest level since 2007.¹ Private equity firms view the physician practice marketplace in several specialties, traditionally fragmented by largely independent ownership, as ripe for increased profitability through growth and consolidation. The firms invest in/acquire physician practices and ASCs with the aim of making good businesses better. They want to grow the businesses, increase their value, and eventually sell them to secure a return on their investment. (See “Private Equity Arrangements,” next page.)

Ophthalmology has been among the specialties attracting PE attention based in part on the high demand for its services in an aging U.S. population. As many as 20 initial practice acquisitions have taken place so far, most in 2017. Ophthalmology is also appealing because it includes a diversity of revenue streams, including clinics, optical dispensaries, and surgery centers. In addition, “the ophthalmology market is characterized by a supply and demand imbalance that creates an attractive opportunity for private equity investment,” says Kyle Bohannon, president and CEO of American Vision Partners. “The patient base requiring care now and in the future is far greater than can be serviced by the current number of ophthalmologists nationwide.” American Vision Partners is the company formed by H.I.G. Capital’s 2017 investment in Barnet Dulaney Perkins Eye Center and Southwestern Eye Center in Arizona.

The View from the ASC

For private equity investors in ophthalmology, ASCs are an important piece of the puzzle. According to Bohannon, “The presence of ambulatory surgery centers makes an investment significantly more attractive, primarily because they provide control over the continuum of care. Our physicians treat the patient from the initial clinical visit through the surgery and ultimately through postoperative care.” Since American Vision Partners was formed by the initial acquisition of the Arizona practices, the company is “extremely active on the acquisition front,” Bohannon continues. “We regularly evaluate acquisition opportunities, many of which do not have an ASC. If the business does not have a surgery center, we may incorporate the development or acquisition of an ASC into our investment thesis, although optimal geographic dispersion is a critical factor.” Steve Sheppard, managing principal with Medical Consulting Group, Springfield, MO, elaborates: “Historically, PE firms haven’t been attracted to businesses with contracted revenue streams from institutional payors, such as the government, hence the earlier activity in dentistry and veterinary medicine, where the bulk of transactions are cash. However, while ophthalmic ASCs have a contracted revenue stream, it’s relatively well-defined and predictable. Furthermore, with offerings such as refractive surgery, premium IOLs, and femtosecond laser-assisted cataract surgery, a retail medical component is in the mix.”

Private equity investment isn’t expected to change any fundamental aspects of ASC operations. Ophthal-mologists, after all, pioneered the use of ASCs, so their centers are already well-run. But PE-backed growth on the practice side of the new enterprises increases ASC utilization. “When we open or acquire new clinics or hire new surgeons, our ASCs are busier,” says Mark Rosenberg, formerly a Barnet Dulaney Perkins Eye Center executive, who is now vice chairman of the American Vision Partners board of directors. And, as Sheppard points out, “ASCs are high-fixed-cost businesses, which means incremental volume is very profitable. Technically, in a perfect world, it’s possible for an ophthalmic-only ASC with two ORs to handle 6,000 to 8,000 cataract surgeries a year, and many centers have a great deal of available operating time they may not recognize.” In both the practices and ASCs it acquired, to optimize workflow and improve the patient experience, American Vision Partners introduced an electronic check-in system and new scheduling software. It also opens its busier surgery centers on Saturdays to accommodate patient demand.

In 2014, Brett Katzen, MD, FACS, and the other owners of Katzen Eye Group in Baltimore, partnered with PE firm Varsity Healthcare Partners. The resultant management company, Eyecare Services Partners, grew the practice significantly and increased its value as promised before selling to another PE firm, Harvest Partners, in 2017. Shortly after the first transaction, the new executives directed some improvements that were specific to the ASC. The pre-op and post-op areas were enlarged and other additional space was created so that a femtosecond laser could be moved from an OR to a room of its own, all of which improved patient flow. “I’m doing more cases than ever,” Dr. Katzen says. Other changes included the purchase of a new femtosecond laser, the addition of electronic medical records in the ASC, and load balancing of the surgeons for more productive scheduling. The management company also sought new external surgeons to use the ASC, “something surgeons themselves aren’t particularly fond of doing,” Dr. Katzen notes.

At Koch Eye Associates, which was part of Claris Vision from 2011 to 2017 under a PE arrangement with Candescent Partners, the ASCs have continued to run smoothly.

“The company didn’t interfere with medical affairs, and was very good about supplying us with the equipment we need to do our jobs,” says Paul Koch, MD, who served as Claris Vision’s chief medical officer. A larger investment company purchased Claris Vision from Candescent late last year.

As far as private equity’s impact on the ASC market overall, industry observers say it remains to be seen. They cite two immediately apparent effects. One is a disruption in the way ASCs have historically been valued. The other is the likely need for the currently established ophthalmic ASC management companies to adjust their strategies in light of the new competition for purchasing ASCs.

Complex Considerations

The entry of private equity into ophthalmology has raised many questions about the future, including how successful the new model will be and how much consolidation will ultimately take place. While no one knows at this point, Bohannon offers his thoughts on the near term.

“I believe we will experience consolidation in the ophthalmology space throughout the next 5 five years as we have in other multi-site healthcare sectors, such as dental practice management, dermatology, and urgent care, yielding a small group of very large practices that come together to leverage economies of scale and create true multi-state platforms.” Sheppard sees the success of the PE model hinging on how successfully management can scale. Likening the possibilities to what’s been seen in a nonhealthcare industry, he says, “There have been many regional department stores through the years, only some of which became a Sears or JCPenney or Walmart, and today many of those are struggling.”

There are myriad pros and cons for practices entering into a private equity arrangement. It’s a one-of-a-kind opportunity for doctors to monetize the investments they’ve made in their practices and ASCs. Also, because it provides capital, as well as expertise in how to use it, PE may also be an ideal partner for fueling smart, substantial practice growth. On the other hand, physicians must be OK with giving up majority control of decision making. Taking a broader view, some wonder whether the new landscape may lead to commoditization of patient care² or downward pressure on future doctors’ earning potential. Bruce Maller, president and CEO of BSM Consulting, Incline Village, NV, sees PE as an opportunity for practices to build something special, but he wonders about the future — when the initial selling doctors transition out of their practices in the coming years.

“Will the new enterprises be able to retain the fabric that made the individual practices successful, the cultures the doctors created where employees and surgeons are motivated to come to work every day?” he asks. “That’s the ‘people’ aspect of this, and it will require leadership.”

To address the myriad issues to be considered is beyond the scope of this article. But what about the fate of practices that aren’t part of a PE arrangement? While some may find themselves “sleeping next to the bear” that is a huge ophthalmic enterprise, Sheppard doesn’t think that will be the case in every area of the country. “Areas outside of large metropolitan areas may not be targets,” he says. Furthermore, not every practice has the characteristics PE firms think are attractive as a platform purchase, but those that don’t may still have the opportunity to be “rolled up” into a PE enterprise as it expands beyond that point.

In the meantime, Maller suggests taking a deep breath. “First, get educated about how this really works. If PE is an option for your practice, deciding whether it’s the right path should be a function of your vision and your plan for the long term. Evaluate your options for achieving that vision and the answer may or may not be a capital partner.”

To that advice Sheppard adds, “There are always dynamics in the marketplace to keep you looking over your shoulder. Historically, overreacting has been a bigger danger than underreacting. Doctors need to think about what they want their organizations to look like, to what extent they want to maintain control, and to what extent their marketplace will allow them to do that.” ■

References

1. Global Healthcare Private Equity and Corporate M&A Report. Boston, MA: Bain & Company; c1996-2018 [cited Dec 12, 2017]. Available from: http://bit.ly/2D2qD2M
2. Resneck JS. Dermatology practice consolidation fueled by private equity investment. Potential consequences for the specialty and patients. JAMA Dermatol. Published online Nov. 21, 2017.