March 14, 2019
Where Big Money is Putting its Money
Desperately seeking sun and smarts, we joined 500+ healthcare investors, entrepreneurs, attorneys and other advisors in Miami last week for McDermott Will & Emery’s annual Health Care Services Private Equity Symposium.
By far, the hottest topic was the physician practice management space – an overwhelming crowd-favorite investment sector in 2019.
Last year alone, more than 120 physician practice deals were announced or closed, with dermatology, orthopedics and ophthalmology atop the leaderboard. Fueled by physicians wanting partnership, scale and an alternative to health system employment plus a lot of dry powder at play across the PE landscape, there was a wave (we just can’t help ourselves with the beach references here), of PPM deals last year.
And while investors and panelists predicted the PPM space will keep riding high this year – so much so that any big failures in the industry should be a “false negative” that won’t slow its inevitable consolidation – they also cautioned the crowd that partnering with docs ain’t exactly easy. Interestingly, there’s a whole school of investors out there who were in business school (or doing something fun) during the late 1990’s and didn’t experience the glory of the first PPM wave.
You Have Questions, We’ve Got Answers
So, with that in mind, here are a few tidbits of PPM knowledge from the conference in the form of Q&A:
Which physician specialties will be hottest in 2019? This year, investments in the space are predicted to move away from retail models and instead focus on specific specialties like dermatology, ophthalmology, dentistry and others. Ortho also makes the hot list. We talked to at least three PE firms putting together ortho platforms. In the words of Cuba Gooding, Jr., “Show me the money!”
How can the industry possibly sustain double-digit valuation multiples? The bigger problem is a lack of discrimination about which practices warrant those multiples. Paying 10x for a sub-$1mm EBITDA practice is not a recipe for value investing.
Above all, the question on everyone’s mind is this: Will the sector spectacularly collapse like we saw in the 90s? What can investors, entrepreneurs and physicians learn from PPM 1.0 to make this go-round a success?
Street Cred: Knowledge Earned the Hard Way
Here are a few tips from panelists who spoke from experience (and weren’t in business school in the late 90s):
- Your company must have active physician leadership. Physicians trust their peers, not you.
- Deliver on your promises. Help make your physician partners’ lives easier and they will be your best advocate and enabler of growth. Break your promises, and you’ll find word travels fast in the physician community. As one PE investor said, “They’ve known each other 20 years… you just showed up 15 minutes ago.”
- Don’t cut corners in your compliance diligence. Qui tams and false claims issues can level you down the road.
- Physician partners must have skin in the game. Models have emerged where physicians take some chips off the table in the initial investment but maintain equity in both their own practice and in the holding company. Aligned incentives win the day.
- In other models that fully acquire practices, consider a comp model for the physicians that allows them to benefit from growth they drive.
- Develop meaningful avenues for physicians to participate in the broader platform to gain alignment and buy-in. Match their interests and strengths to the company’s strategic objectives. Allow them to drive and participate in the company’s needs around innovation, recruiting, quality improvement, patient experience, value-based care, business development, etc.
Beyond the Docs
In addition to the PPM space, behavioral health is expected to be a hot sector in 2019. Specifically, facility deals, social determinants of health-oriented companies and residential treatment facilities. Plus PPMs related to this space.
Home health and hospice were described as “coming into their own,” also known as maturing and becoming more attractive investments.
Radiology is on the up and up, as well.
And finally, more provider-payer hybrid combinations are on the horizon in 2019.