After experiencing one of the busiest quarters in recent history, healthcare M&A is booming with a handful of megamergers in addition to plenty of strategic activity in the middle market. Buyers are excited by the stability of the industry and opportunities for expansive growth for the right investments at the forefront of change in healthcare delivery.
As active M&A advisors in healthcare services, we have had many recent conversations with all types of buyers in the physician practice market, and regularly attend events covering the M&A climate for physician practices and ambulatory surgery centers (ASCs). Through our repeated conversations, we have identified 7 developments and trends we see in physician practice ownership.
- Everyone is buying. Physician practice independence is increasingly a thing of the past. In its most recent study on physician practice ownership in 2016, the AMA noted that less than half of practicing physicians owned their own practice – a trend that has only increased in the past two years. Health systems, payers, private equity, and national consolidators (often private equity backed) are actively buying across practice types. Private equity investment activity in particular is accelerating at a rapid pace with buyers seeing opportunities to consolidate markets and improve inefficiencies.
- Valuations have soared. We see valuations increasing across multiple industries in this sellers’ market, and physician practices are no exception. The availability of debt, buildup of cash on corporate balance sheets, private equity dry powder, and public market performance backdrop this climate. Specific to the physician practice space, we see a growth in number and interest of buyers driving the scarcity value of available, quality physician practices.
- Private equity buyers are recognizing the need to be discerning on what makes a practice a “platform” investment worthy of a splashy valuation. They are looking for infrastructure, management talent, in-house RCM, demonstrated capability to unlock additional revenue streams, recruiting capabilities, and other growth options.
- Payers are not only interested in primary care, but are pushing into urgent care, traditional “office” practices, and ambulatory surgery centers. Optum is certainly in the forefront of payers moving into the provider space including its 50,000 PCPs and recent acquisition of DaVita Medical Group.
- Hospitals continue to be acquisitive of physician practices, and tend to dominate the smaller size of the market. Hospitals have become increasingly competitive in attracting and retaining young doctors who increasingly value stability of earnings and work-life balance over the greater potential financial upside and independence in private practice.
- The physician practice management (“PPM”) model with private equity is more mature than the 1990s models, with financial buyers having learned many lessons from the failures of “PPM v1.0.” Strategies abound within the buyer community on how to align physicians more closely to the PPM managed service organization (MSO). All of these strategies are centered on aligning all party’s long-term financial incentives, on better understanding where and how to add value to practices, and on improved communication strategies.
- Governance is top of mind for buyers and sellers. In the aforementioned conference in April, the only thing that came up more than governance was valuation. Physicians need to retain full clinical governance – it’s best for patients and is a topic that is reviewed by the FTC/DOJ and state medical boards. Buyers have to be attuned to state regulations on clinical governance as well as physicians’ specific interest in operating governance topics.
If you are a physician practice owner and have considered the prospect of selling or transitioning your practice, or simply want to have a more detailed discussion of what buyers are looking for in your market, please contact us. Given the market climate we are consistently having these discussions with clinical practice business owners and can help you assess short and long term strategic options, as well as the right steps to take to achieve your objectives.
Craig Bowden is a Senior Vice President with SC&H Capital and has nearly ten years of professional experience in M&A transaction, financial, and strategic advisory services. He has been involved in several M&A transaction and strategic advisory assignments involving high-growth, middle-market companies across a number of industries including healthcare, manufacturing, business services, and software.