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Sellers Beware: Private Equity Firms Are Targeting Neurology Practices
What You Should Know to Protect Your Interests

Article In Brief

Private equity companies are buying up medical practices and then selling them a few years later. Experts talk about the impact it has had in certain specialties such as dermatology and, more recently, on neurology.

When pediatric neurologist, Mark Mintz, MD, FAAN, FAES, opened his practice and clinical research center in 2005, he was the only physician. By 2018, the Center for Neurological and Neurodevelopmental Health (CNNH) and The Clinical Research Center of New Jersey (CRCNJ) had expanded to a group of six physicians, nine neuropsychology team members, and 15 other clinical staff. Over time, Dr. Mintz had become aware that in order to grow any further and realize his vision of scaling up to a national level, his company would require substantial capital investment. So, when he was approached by Council Capital, a health care-focused private equity firm based in Nashville, he began engaging in conversations with the company, which ultimately led to an investment deal in October of 2018.

Over the past several years, private equity investment groups have invested in medical private practices in a variety of specialties. They have shown particular interest in dermatology, ophthalmology, gastroenterology, and primary care, and have more recently begun to turn their attention to neurology. Experts say that they target large “platform practices” for their ability to expand, and they typically assume 60 percent to 80 percent ownership. Those medical practices, depending on size, are often paid high single-digit multiples of EBITDA (earnings before interest, taxes, depreciation and amortization), a proxy for operating cash flow, according to Jake Vesely, an analyst at Provident Healthcare Partners, an investment bank that provides merger and acquisition services to physician practices.

Vesely, who wrote an industry report about the practice entitled “Provident Perspectives: Private Equity-Driven Consolidation within Neurosurgery and Neurology,” explained that “private equity firms plan to sell the practices in a few years after augmenting their value by expanding ancillary services and acquiring smaller practices at lower valuations than the platform practice, a strategy for increasing value known as multiple arbitrage.” By acquiring smaller practices at a discount, the larger platform not only grows in size but can warrant a larger valuation multiple, a numeric multiplier, typically applied to EBITDA, to arrive at the enterprise value of a practice at the time of exit, Vesely added.

According to the 2019 Insights Report based on 2018 Data and Information from the AAN Member Research Subcommittee, 13 percent of US neurologists are employed in solo practice and 24 percent are employed by a group (of which the median number of members is three). For investors, a fragmented market like neurology creates an ideal opportunity to embark on a strategy for add-on acquisitions.

“Such fragmentation is one of the greatest attractions for private equity firms,” noted Vesely, who explained that they are predicting that most smaller practices will not have the capital or the infrastructure to be ready for the transition to value-based care. In turn, physician partners, who do not traditionally have an exit strategy, are attracted to the upfront liquidity (generally provided as a cash sum at the completion of a deal) as a way to realize the efforts that they have put in building their practices, Vesely added.

Because private equity firms have become more aggressive in pursuing lucrative opportunities in the medical sphere, some neurology practices are reporting frequent contact by investors. Leeann Garms, chief executive officer of Raleigh Neurology Associates, has received numerous calls from investment firms inquiring about potential acquisition opportunities over the past 18 months. When the practice, composed of 19 adult neurologists and three pediatric neurologists, responded to one such call, agreeing to listen to their pitch, a team of five bankers quickly arrived by plane to present intensive data and a sophisticated market analysis.

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“Ultimately, their goal is to get out of the game by selling the consolidated group within three to seven years to another private equity firm, a larger health care conglomerate, the public via an initial public offering, or to an insurance company.”—DR. SAILESH KONDA

“The only way for physicians to ensure that they get what they deserve and make decisions that safeguard the care of their patients is if they continue to own and manage their practices, because it is only then that they are able to control the financial operations of their business.”

—LANNEY E. PAULEY

“The business model was extremely aggressive, and our doctors were reluctant to cede the control that comes with being acquired,” she added. “Most private equity company strategies involve purchasing and consolidation in order to support scaling the business, “she explained. “This often results in dilution and creates significant challenges to retaining your culture or vision for how the practice is run.”

“Raleigh Neurology Associates ultimately decided to remain independent, leveraging their experience in delivering outstanding care and service to the community and expertise in managing practice operations,” said Garms.

Acquisition of a Neurology Practice

James N. Goldenberg, MD, FAAN, the current medical director at Atlantic Coast Health Network, had helped co-launch a neurology group over twenty years ago. In 2007, the three owners formed a separate company to engage in clinical research trials and began to grow quickly. In 2018, the research company was contacted by a private equity firm and began a detailed due diligence process towards acquisition, which lasted more than six months.

“It was not an easy decision and we had concerns about relinquishing control of the hiring and firing of employees as well as other management issues,” Dr. Goldenberg recalled. “Unlike private practice, where private equity investment may raise concerns for a change in practice pattern such as patient volume and quality that directly relate to patient care, pharmaceutical clinical research is highly regimented by protocol and there will be very little variation in the patient experience after a sale or partnership,” he explained.

“We thought the investors were thoughtful and intelligent and agreed to move forward when, in the 11th hour, they pulled out,” he said. One of the research company's largest trials, that of an Alzheimer drug, had abruptly been halted giving the investors pause. Now, three months later, Dr. Goldenberg believes that it was for the best.

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“Private equity firms plan to sell the practices in a few years after augmenting their value by expanding ancillary services and acquiring smaller practices at lower valuations than the platform practice, a strategy for increasing value known as multiple arbitrage.”—JAKE VESELY

“The research company continues to grow,” he said, adding, “Perhaps we'll revisit this option in the future if the opportunity arises.”

Lessons Learned from Dermatology

To gain insight into the trajectory of private equity acquisitions, Neurology Today turned to the dermatology market, the fastest growing sector of private equity and venture capital investment over the past decade. An article published online in JAMA Dermatology on July 24 found that private equity firms had acquired 184 physician-owned dermatology practices between May 2012 and May 2018, and that these practices accounted for an estimated 381 dermatology clinics as of mid-2018—with 12 times the number of takeovers in 2017 than in 2012. Although Texas and Florida represented a third of these, the authors found a wide geographic footprint spanning at least 30 states.

Sailesh Konda, MD, assistant professor of dermatology and director of Mohs surgery and surgical dermatology at the University of Florida in Gainesville, has written and spoken extensively about private equity acquisitions in his field. He has observed private equity-backed groups consolidate and take advantage of economies of scale in dermatology by centralizing services, negotiating with insurance companies, and benefiting from group purchasing contracts.

Indeed, Dr. Mintz hopes that the infusion of capital into CNNH and CRCNJ by private equity will allow the company to consolidate existing operations, enhance contracting, and introduce a new electronic health records system. The company also hopes to hire more staff, secure key talent, and formalize the clinical model from a business perspective.

“We want to start a replication process and take our existing model and extend it geographically, by creating a hub-and-spoke system,” Dr. Mintz said. Although Dr. Mintz was unable to speak publicly about the initiatives in progress, he said, “What I can state at this point is that we are actively recruiting physicians and advanced practice providers (APPs), and also expanding our therapeutic service lines.”

But Dr. Konda warns that while the initial capital outlay may be attractive to doctors, there are tangible risks to the arrangement. “The investors have a finite time horizon for a specific return on their investment,” he said. He noted that although they bring economies of scale by centralizing operations, they are looking to turn a quick profit.

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“Unlike private practice, where private equity investment may raise concerns for a change in practice pattern such as patient volume and quality that directly relate to patient care, pharmaceutical clinical research is highly regimented by protocol and there will be very little variation in the patient experience after a sale or partnership.”—DR. JAMES N. GOLDENBERG

“They find better returns by replacing physicians with APPs and leveraging them to the maximum extent allowed by state law with varying degrees of supervision. This generates larger profits for the company but results in minimal financial gain as well as increased risk for the employed supervising physicians,” he explained. “Ultimately, their goal is to get out of the game by selling the consolidated group within three to seven years to another private equity firm, a larger health care conglomerate, the public via an initial public offering, or to an insurance company,” he added.

While some critics suggest that this may lead to overdiagnosis and overtreatment, adding extra cost to the overall health care system, they fear that this may not be a concern for the company and its investors, as a higher number of services translates to greater revenue.

In his article in JAMA Dermatology, “Future considerations for clinical dermatology in the setting of 21st century American policy reform: Corporatization and the rise of private equity in dermatology,” Dr. Konda and his colleagues discovered private equity-backed groups were not performing due diligence and were acquiring outlier dermatology practices. “Further research is needed to examine utilization of health care resources by private equity-backed practices,” he wrote.

Is Private Equity Needed to Grow Practices?

Detractors of private equity say that with expert management, growth, consolidation, and economies of scale can be achieved without investors who are looking to turn a profit. Lanny E. Pauley, MS, MBA, chief operating officer of Florida-based First Choice Neurology, the largest single specialty neurology group in the United States, was hired in 2004 by 16 neurologist partners, and has grown the organization to 92 adult and child neurologists and 35 APPs over the past fifteen years.

He said the mission of his group has always been quality care first, finances second. “When you start funding the people who give you the money instead of reinvesting either into quality of care or to the physicians doing the work, that's when the change in values occurs,” Pauley pointed out.

“The only way for physicians to ensure that they get what they deserve and make decisions that safeguard the care of their patients is if they continue to own and manage their practices, because it is only then that they are able to control the financial operations of their business.”

As a latecomer to the private equity market, neurology has an opportunity to learn from what has transpired in dermatology. Indeed, an editorial, which accompanied the JAMA Dermatology paper, noted that the potential benefits to dermatologists selling their practice to a private equity firm generally include a payment up front—often greater than $1 million per physician, based on the current value of the practice and taxed at the lower capital gains rate—with the possibility of additional payments when the practice is sold again.

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“We want to start a replication process and take our existing model and extend it geographically, by creating a hub-and-spoke system. What I can state at this point is that we are actively recruiting physicians and advanced practice providers (APPs), and also expanding our therapeutic service lines.”—DR. MARK MINTZ

“Transparency alone is not enough...until meaningful data are available on what happens to the quality of care and affordability for patients and payers, dermatologists should stop selling their practices to private equity firms, and legislators should prohibit such transactions,” the authors of the paper advised. “...the basic approach and incentives of private equity are not aligned with health and value in dermatology. By focusing on short-term revenue opportunities, private equity acquisitions will likely add to the immense cost and stark inequality of our health care system, with the added risks of unnecessary treatments and significant disruptions in care.”

Link Up for More Information

• Vesely J. Provident perspectives: Private equity-driven consolidation within neurosurgery and neurology. Provident Healthcare Partners. https://www.providenthp.com/wp-content/uploads/2019/02/Private-Equity-Investment-in-Neurosurgery-and-Neurology.pdf. Accessed August 7, 2019.
    • Tan S, Seiger K, Renehan P, et al. Trends in private equity acquisition of dermatology practices in the United States https://jamanetwork.com/journals/jamadermatology/fullarticle/2738309. JAMA Dermatol 2019; Epub 2019 Jul 24.
      • Konda S, Francis J, Motaparthi K, et al. Future considerations for clinical dermatology in the setting of 2st century American policy reform: Corporatization and the rise of private equity in dermatology https://www.jaad.org/article/S0190-9622(18)32667-7/fulltext. J Am Acad Dermatol 2019; 81(1): 287–296.e8.
        • Sharfstein JM, Slocum J. Private equity and dermatology-First, do no harm https://jamanetwork.com/journals/jamadermatology/fullarticle/2738305. JAMA Dermatol 2019; Epub 2019 Jul 24.
          • Baker J, Corser M, Vitulli E. Private Equity: How Wall Street Firms are Pillaging American Retail. https://united4respect.org/wp-content/uploads/2019/07/Pirate-Equity-How-Wall-Street-Firms-are-Pillaging-American-Retail-July-2019.pdf. Accessed August 7, 2019.