After a long recession, today’s market conditions have seen an influx of capital ready to be invested. Since 2014, there has been a steady and substantial increase in the number of investors buying ophthalmic practices and ambulatory surgery centers (ASCs). Knowing how these investors, more specifically private equity (PE) firms, function will help you understand how one entering your market might impact your practice or surgery center.

Why the Eyecare Industry?

Most private equity firms raise capital from institutional or high net-worth investors, which is then used to fund investments in specific industries. The investors provide the capital because they expect substantial returns on the investment. Because they’ve made a commitment to their investors for a 15% to 25% return over 5 to 10 years, PE firms target rapid-growth industries. Many PE analysts believe the healthcare industry offers a promising return for such investments.

Specifically, private equity firms and venture capitalists are interested in the eyecare industry for the following reasons:

1. It’s a fragmented industry. The current market has a vast network of practices with fewer than eight doctors. PE firms have the capital available to acquire and consolidate these smaller practices, which allows for more efficient purchasing, shared expenses, and the potential for increased profits. Additionally, folding smaller practices into a larger operating entity makes it easier to build necessary surgery centers or drive cases to an existing surgery center. Either way, the new entity will capture more revenue through the associated facility fees.
2. Increased demand for eyecare services. The aging population of baby boomers is increasing the demand for eyecare services, and, in particular, cataract surgery. This projected growth ensures a healthy revenue stream for the future.
3. Increased demand for surgery centers. Advancing surgical techniques and equipment technology continue to improve the safety of eye surgery as well as reduce the time required to perform and recover from surgical cases. This is driving more cases to ASCs. With a few exceptions, most eyecare cases have completely transitioned to ASCs. Increasing demand for eye surgery and other outpatient surgery bodes well for future revenue growth in ASCs.
4. The income is stable. Ophthalmology practices have a high, steady percentage of cash-pay procedures, such as cosmetic lid surgery, refractive procedures (associated with cataract surgery), and vision correction (e.g., implantable contact lenses or refractive lens exchange).

How does PE Differ from ASC Management Companies?

A PE-backed management services organization (MSO), which is developed by private equity buying into a “platform” practice, may look like an ASC management company. The eye industry is familiar with several ASC management companies, both privately and publicly held, that own and operate surgery centers. In addition to general strategic business planning, they typically provide some, or all, of the following:

• Billing and collections
• Accounting
• Group purchasing
• Financial analysis
• Legal counsel
• Strategic planning
• Operations guidance/management
• Staff leasing
• Provision of compliance manuals
• Oversight of policy adherence
• Payer contracting
• IT systems
• Physician recruitment

Although a PE-backed MSO may offer many of these services, the primary difference is that private equity is interested in the entirety of eyecare services, forming their management companies to operate practices and ASCs, and any associated ancillary services.

What to Expect from PE

When entering a new market, PE firms will first identify a platform practice. This is the practice that will create the management and ownership infrastructure for future growth. The goal of PE investors is to increase the earnings of a newly formed MSO through expansion of service lines, consolidation (acquisitions of other groups), and new business development — all made possible through the capital they provide.

In identifying a platform practice in a market area, the key elements of interest for PE firms include:

1. Multiple providers with a regional presence, a positive reputation, and a substantial market share, ideally with more than one or two key surgeons
2. A proven growth strategy and capacity to handle growth
3. Strong relationships with providers committed to continuing to work — usually for a minimum of ≥5 years
4. Strong payer relationships and access to patients
5. Reasonable operating overhead and sound financials
6. Solid IT infrastructure
7. An ambulatory surgery center

Once a platform practice and ASC are acquired in a market, the new PE-backed MSO will actively seek smaller practices to “roll up” into the new organization. Such acquisitions enhance profits through sharing expenses (e.g., consolidating the EPM/EHR platform) and driving more revenue through the existing entities. An ASC’s volume and profits can be greatly enhanced through the acquisition of a practice and moving surgical cases to the ASC. Another strategy of the MSO might be to broaden the services available to patients by adding a different subspecialty to the practice and ASC. This allows the MSO to keep the revenue within the organization, rather than referring patients somewhere else.

How Can Physicians Make a Smart Decision?

Often, the biggest interest for physicians considering a sale to PE is the amount of money being offered. Not long ago, physicians saw goodwill value in their practices dwindling. Today, they see what is being offered and say, “Wow! Someone is willing to pay me much more than I could have gotten selling to a new partner.” So, they often see it as a way to monetize the equity they have built.

Rather than focusing solely on the money, physicians who are considering selling should begin by asking more strategic questions, such as, “Where are we headed? How are we planning to get there? How will a financial partner ensure we attain our goals?” If answering these questions leads to the realization that there isn’t a strong vision for growth, then a private equity partner is probably not the right match.

At some point, you may need to decide whether to pursue selling to PE or a PE-backed management company. Staying informed of market trends will better position you to evaluate such an opportunity if and when it arises. While this article may provide the fundamentals of PE transactions, there are additional resources available you may consider, such as: articles and press releases about past transactions; investment bankers and consultants involved with private equity firms who can explain why, how, and the pros and cons; seminars and webinars featuring experts sharing their experiences; vendors experienced in dealing with some of the newly formed entities; and other physicians who have had the opportunity to partner with private equity and are willing to share the key factors that drove their decision.

Looking Ahead

Those who believe the PE trend may be a fad need only look to dermatology, where PE investments have gained a solid foothold within the past 8 years. Investors have been active in ophthalmology for more than 4 years, and show no signs of slowing down. Knowing this, it would be in your best interest to gain a fundamental understanding of what that might mean for your market, practice, or ASC. Staying abreast of market changes will strengthen your ability to evaluate the marketplace and ask the right questions when the time for decision-making is upon you. ■