Private Equity Firms Increasing Purchases of Otolaryngology Practices

Daniel M. Keller, PhD

September 13, 2022

PHILADELPHIA — Private equity (PE) firms have fostered a consolidation of physician practices in a variety of medical specialties over the past decade. They are now accelerating their focus on otolaryngology–head and neck surgery (OTO-HNS) practices, raising capital from pension funds and high-net-worth investors and using the money to purchase equity in the practices. Their apparent goal is to improve the valuations of the practices and later sell their equity for more than the purchase price.

"Private equity investment has been prevalent in other surgical and procedural specialties, particularly in dermatology and ophthalmology," Hemali Shah, BS, a medical student at Yale University in New Haven, Connecticut, told attendees here at the American Academy of Otolaryngology–Head and Neck Surgery (AAO-HNS) 2022 Annual Meeting. She said that until now, no studies have focused on PE investment in OTO-HNS practices, spurring her to investigate the issue.

She showed that PE firms have invested in about 100 dermatology and ophthalmology/optometry practices each year over the past few years. For orthopedics, interest of private equity is rising ― about 10 to 15 practices were purchased in recent years.

For her study on PE in the OTO-HNS area, she searched historical PE deals through December 2021 using PitchBook, a comprehensive, publicly available, online market database of companies and investors. She included deals pertaining to otolaryngology and its subspecialties but excluded surgery centers, which could include other surgical specialties.

"The acquisitions that we found were verified to be otolaryngology practices by searching the practice websites as well as [news] releases," Shah said.

Among the 23 practices acquired by PE firms between 2015 and 2021, most were in the South Atlantic region of the US, particularly in Florida and Georgia, followed by the South Central region (five practices in Texas) and the Midwest region (six practices across Wisconsin and Illinois). Deal-making accelerated over the period studied, growing from one each in 2015 and 2016 to seven in 2020 and eight in 2021.

"There's quite a range in terms of the number of clinics for each practice, ranging anywhere from one to two all the way to 30 locations, and also the number of practicing ENTs [ear, nose, and throat physicians]," Shah reported. Most practices (n = 14) comprised six to 10 otolaryngologists, but five had more than 15 otolaryngologists. Only three of the practices employed one to five practitioners. In total, there were 204 practicing otolaryngologists across 132 clinical practice locations involved in acquisitions between 2015 and 2021.

One limitation of the study is that it included only public PE investment, not nonpublic funding, and thus it does not represent the totality of PE investment. In addition, access to the dollar amount of investment in deals was limited, so ownership stakes remained unknown.

Shah highlighted some key considerations for OTO-HNS and other specialty practices contemplating selling equity to a PE firm. Potential advantages include access to capital for additional patient care services, equipment, and new technology. Acquisition also alleviates some administrative burdens, provides purchasing power with vendors, and may foster relationship-building among its physicians.

She said some potential disadvantages are "alignment of incentives between physicians as well as the private equity management and performance metrics. Patients' ability to access care at these private-equity-backed practices may be different, and then [there is] also the impact on physician autonomy and negotiating power after acquisitions."

Besides trying to quantify the value of these deals in the future, investigators need to examine their impact on access to care, quality of care, patient outcomes, healthcare costs, physician job satisfaction, and promotion, Shah said.

She advised that with increasing PE investment in physician practices, "there should be a mindfulness about potential misalignment of private equity firm incentives and physician autonomy and how they impact patient care."

Session co-moderator Anil Lalwani, MD, professor of otolaryngology at Columbia University in New York City, commented to Medscape Medical News that the entrance of PE into medical practices is "a concerning trend for the independence of physicians and how they practice. Ultimately, when there's engagement of private equity, there is a profit motive. And if profit drives decisions, that can be a problem for patients."

"But I think it's good that people are starting to study it to so we can really understand is there an upside that outweighs in a way that's still fair and doesn't cloud our judgment as physicians?" asked his co-moderator, Linda Lee, MD, a facial plastic and reconstructive surgeon at Massachusetts Eye and Ear Infirmary in Boston.

The problem is not unique to PE investment, Lalwani said. "I think one of the trends that's really disturbing as a physician is the increasing lack of control of what I do professionally, either as private equity or as the hospital or some other entity [gains more control]. And I think as we go forward, we really need to find a balance between the ability of physicians to independently control their fate while working within larger organizations as we try to provide the best care."

Speaking with Medscape Medical News, Brian McKinnon, MD, MPH, MBA, interim chair of the Department of Otolaryngology–Head and Neck Surgery at the University of Texas Medical Branch at Galveston, added more perspective to the issue of PE investment in the medical realm.

He worked at Hahnemann University Hospital in Philadelphia when a PE firm bought the 133-year-old institution in 2018. The firm had a long history of successfully turning around financially troubled hospitals. However, "[t]hey ultimately came to the decision that the value of the hospital appeared to rely on its real estate rather than its business," McKinnon explained, "so it did what any good, respectable private equity does, it's going to seek the highest value for its investment, which was to ultimately declare bankruptcy of the entity but gain the value out of the underlying real estate."

One year after the purchase, the hospital abruptly declared bankruptcy, diverted trauma patients away from its emergency department, left many poor and underserved patients to find treatment elsewhere, left 800 nurses needing to find new jobs, and 574 resident and fellow trainees to scramble for programs elsewhere.

"Private equity is not terribly concerned about anything other than achieving its return on investment," he said. "And of course, the patient's outcome in terms of healthcare and their sense of the providers' care and attention to them may not be remunerative in a private equity sense." Thus, PE owners tend to focus a practice heavily toward achieving those financial returns in a relatively short period, "not always to the betterment of the practice or to the patient population," he said.

Similarly, a PE firm buying into an OTO-HNS practice "is going to look at a practice if that practice is a cash cow," McKinnon said. "They're going to do everything in their power to get back their original investment with an anticipated margin as quickly as possible, which, again, may not be in the long-term interests of the practitioners or the patients."

He cited a brief viewpoint article in JAMA Otolaryngology–Head and Neck Surgery that lays out PE strategy and implications for otolaryngologists regarding PE acquisition of their practices. It details how PE firms make money and how fast they want to do it.

"Private equity is going to pay themselves first," McKinnon warned. "They're not going to pay the providers first, they're not going to pay the office staff first, and they're not going to pay the suppliers first. They're going to pay themselves first."

For physicians contemplating a deal with a PE firm, he cautioned, "Understand why somebody is buying into your business. Understand what it means to work for somebody else whose goals short term and long term may be very different and may not be compatible with why you went into healthcare to begin with."

The study received no commercial funding. Shah has disclosed no relevant financial relationships. Lalwani is on the medical advisory board of Spiral Therapeutics and is a co-founder of Haystack Medical, Inc. He reported no conflicts of interest relevant to this presentation. Lee and McKinnon have disclosed no relevant financial relationships.

American Academy of Otolaryngology–Head and Neck Surgery (AAO-HNS) 2022 Annual Meeting.

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