What Physicians Need to Know About Private Equity Deals

Ericka L. Adler, JD, LLM


February 09, 2022

The sale of medical practices to private equity (PE) and related investors continues to be the trend in 2022. The primary reason private practices are so interested in selling to PE is that they typically will offer a much higher purchase price compared with either hospitals or other physician buyers.

However, the sale to any buyer comes at a cost to the physician-sellers as well, and this is something with which many physicians continue to struggle.

A PE's standard investment strategy is to acquire a practice with an existing footprint and reputation, and then grow the practice through the acquisition of additional smaller practices or by hiring more physicians. Typically, the structure of the transaction is such that the nonclinical assets of the practice are sold to a business entity owned by the PE (or a related entity) and the clinical assets are transferred into a professional entity owned by a physician, which may or may not be the physician-sellers.

The reason for this structure is that many states have a "corporate practice of medicine" doctrine, which prevents unlicensed people from owning professional entities or employing licensed providers. The PE controls the ownership and conduct of the physician-owned professional entity through written agreements, instead of directly, in order to comply with the law.

Corporate practice of medicine laws were created with the intent to avoid commercialization of medicine and to make sure physicians could exercise their own professional opinions without outside influence. Many states also have developed specific guidance in this area. Generally, to comply with the legal doctrine, documents in any kind of PE transaction are carefully written to promise providers freedom over clinical decision-making and ensure that true clinical decisions are left to physicians.

To operate a medical practice, the PE's business entity acts as a management company by providing all the nonclinical assets it just acquired and everything else the practice needs to operate: space, equipment, nonprofessional personnel, billing and collection services, et cetera. A management fee is paid by the professional entity to the management company, thus drawing profits to the PE investors.

The more efficiently and profitably the practice is run, the greater the profit that is pushed up to PE investors. Therefore, there is a clear incentive to the professional entity to be as profitable as possible.

The problem that arises in these kinds of transactions is that management decisions can directly affect the practice of medicine and clinical outcomes. In negotiating PE transactions, I fight hard on behalf of my physician clients to maintain control over the items that they feel impact patient care. This can include hours of service, staffing levels/type of staff, equipment and products available, amount of time that can be spent with patients, employee compensation and benefits, and cost of services and other similar issues.

Unfortunately, these are battles that typically cannot be won, and the PE buyer will insist these are pure management decisions. The PE's position, of course, is that it needs to control these factors in order to grow profitability and efficiency of the practice. Arguably, this is the same position taken by hospitals, and even private practices, in running their business operations.

What management items and services cross the line in their impact on clinical care? We may soon have a clearer answer to this question. Recently, a group of emergency medicine physicians sued Envision Health Care, alleging that it violated California laws that bar corporations from practicing medicine. Envision owns and/or partners to operate hundreds of emergency medicine groups across the country. In the lawsuit filed by the American Academy of Emergency Medicine Physician Group (a unit of the American Academy of Emergency Medicine), it is alleged that the PE is interfering with the way the medical practices are being run.

Examples given include increasing billings to patients, insurers, and third party-payers for physician services, leading to excessive billing. Additionally, the lawsuit argues that Envision profited by reducing physician compensation, increasing the number of patients that physicians see per hour, and increasing the utilization of physician assistants to replace costlier physician coverage. Envision also is alleged to track physician medical decision-making to provide practice improvement feedback reports, which are designed to "educate" physicians to practice medicine and make decisions that increase the amounts charged to patients.

It is hard to know whether a court will agree that any of the factors mentioned in the Envision case directly impact professional decision-making. However, this decision is being watched closely as it could affect PE deals, as well as a variety of other healthcare arrangements and transactions in those states that enforce the corporate practice of medicine doctrine.

In transactions in which I am involved, we are already discussing these issues and trying to find ways to allow for more physician input on some business decisions. Physician advisory boards and regular meetings on designated issues can sometimes help to alleviate conflicts on these issues.

For practices that may be entering into PE transactions or thinking about doing so, it is important to fully understand what power is retained and/or sold in any such transaction. Once sold, the practice no longer belongs to the physicians, and there always is an inherent conflict between providing the most thorough clinical care and achieving top profitability and efficiency.

In every transaction, both sides must understand and agree on their roles and whether they can live with the deal they are trying to consummate.

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About Ericka Adler
Ericka L. Adler, JD, LLM, is a shareholder and health law practice group manager for Chicago-based law firm Roetzel. She has nearly 25 years representing individual providers, physician groups, and other healthcare entities, focusing on regulatory and transactional healthcare law. Adler is also skilled in compliance counseling, handling mergers, sales and acquisitions of healthcare entities, and has deep experience with Stark, Anti-Kickback Statute, and other challenges facing healthcare professionals.

She also works with providers in HIPAA, fraud and abuse, billing audits, government investigations, and contract disputes.

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