Strategic health systems may become a more viable exit, although complex, option for private equity-backed physician practice management platforms as sponsor-to-sponsor deals slow and hold periods lengthen, according to a Sept. 29 blog post from VMG Health.
Here are five things to know:
1. Health systems buy pieces, not platforms. PE sponsors usually value an integrated business, according to the post. Health systems rarely want every market or specialty in a multistate platform. They look at how individual markets, specialties and physicians fit their geography, strengthen clinical programs, fill gaps in their networks or expand access. Sellers should expect that different regional buyers may acquire different parts of the business. That means platforms built through years of acquisitions may need to separate those same assets to get the most value at exit.
2. The operating model after closing comes first. Many buyers like the professional corporation-management services organization model as an alternative to employing physicians. That view often changes during diligence. Once buyers assess IT, revenue cycle, physician compensation, governance and administrative support, running two parallel physician enterprises can prove more complicated than expected. VMG Health advises defining the post-close operating model before negotiating valuation.
3. Compensation changes move EBITDA. Health systems often inherit physician compensation structures that differ significantly from those in their employed medical groups, according to VMG Health. If compensation, overhead, revenue or incentive models change after closing, post-physician compensation EBITDA changes too. So does the price a buyer can justify. For example, a practice under a risk-based reimbursement model could see a significant revenue shift if it moves to fee-for-service under health system ownership.
4. Carve-outs take planning. Shared MSO services, technology platforms, payer contracts, compensation programs, leases and ownership structures all need planning before assets can be separated. Transition services agreements let buyers take on operational responsibilities over time while keeping continuity for physicians and patients. Payer contract portability can also materially affect value if agreements can’t be transferred efficiently.
5. Health systems favor certain traits. Buyers usually look for:
- Markets next to their existing service areas
- Specialties such as orthopedics, cardiology and primary care that strengthen core service lines, or dermatology to fill gaps in physician access
- Well-managed operations with sustainable physician compensation models and simple transition plans
- Physician alignment. Many physicians partnered with PE to keep their entrepreneurial independence. If a strategic deal significantly changes that model, physician support and retention can become one of the biggest factors in whether the deal succeeds.
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