In the past several years, ophthalmologists have shown a growing interest in alternative business models such as PE (private equity firms) and MSOs (management services organizations.)
Why is that? Many ophthalmologists enjoy the challenge and satisfaction of their clinical practice, but are increasingly dissatisfied with the complex issues of managing their business. You may be working harder than ever, but the bottom line doesn’t seem to reflect that. How do you assess whether your billing staff are collecting earned revenues properly, or where the problems might be? Human resources -recruiting, training, retention, and disciplinary issues are an ongoing challenge that take up a lot of valuable time. Solo or small group practices may have office managers, but they may not have all of the experience or technical skills to deal with a wide variety of issues such as IT security, software glitches, equipment issues, compliance, benchmarking, budgeting and infection control.
If you are considering a change, it’s important to understand the difference between a PE and an MSO, and the advantages and disadvantages of each model. At the same time, you (and your partners) should carefully consider what your goals are for the short- and long-term future.
Private Equity Firms
There has been a big trend in private equity firms buying ophthalmology practices in the last few years. Ophthalmology practices are well suited to the private equity business because of their revenue potential, diversity of revenue sources (e.g. LASIK, ASC, cosmetic procedures, Dry Eye Centers, Optical Shop, etc.). Private equity firms usually offer to form a partnership with an ophthalmology practice with growth potential. Typically, the physician practice owners receive an upfront payment in cash or stock and the PE receives a percentage of future profits. Usually the PE’s goal is to invest in the growth of the practice, and ultimately to resell it to another PE firm for a profit. Private investors are looking for a large return on their investment within 3-5 years, and that is generally achieved by selling to another entity.
One of the major advantages of partnering with a PE is that the physicians are able to get cash equity out of the value of the practice. This can be especially appealing to ophthalmologists in their 50’s and 60’s who are beginning to plan for retirement. At present, private equity firms are making attractive financial offers for many practices. This also enables ophthalmologists to pay off loan debts used for previous capital improvements or equipment.
Another appealing feature of a private equity arrangement is the ability to improve infrastructure and purchase state of the art equipment. Many PE firms are willing to fund major expansions and renovations, or purchase state of the art equipment, new waiting room furniture, etc. This furthers their goal of growth and improving the value of the practice for resale, while also increasing physician and patient satisfaction.
Business models for private equity arrangements can vary widely and are sometimes restricted by the laws in your state. Due to laws against non-physician management of medical practices, private equity firms often buy the assets of the practice and offer an MSO within their model.
The biggest disadvantage to a PE is that you are giving up a large amount of control over the practice in exchange for cash. The PE will be very active in decision making, and that includes veto power. You may have to live with decisions that you don’t agree with. For example, your PE partner may impose difficult cost cutting measures and operational efficiencies that result in the departure of long-term staff. Often the PE consolidates the practice with others in order to achieve savings in expense management. The practices may be required to use the same practice management software or EHR system.
Management Services Organizations
Management services organizations are a popular option among many ophthalmology and optometry practices. They provide contracted practice management and administrative services to individual physicians and group practices. Most MSOs offer a menu of options. MSO support can range from running the entire business side of a practice to managing specific functions such as the billing cycle, accounting and finance, payer negotiation, equipment, IT and software support, providing HR services, and conducting mergers and acquisitions.
Most ophthalmologists find it impossible to keep up with the latest developments and financial and legal requirements of various aspects of the health care industry. MSOs can provide special expertise either directly or by arranging sub-contracts. For example, they may offer full-service billing companies whose systems can achieve highly efficient charge submissions and provide detailed reports of payor mix, claim denials, and other useful benchmarking tools.
Another benefit of being part of an MSO is that these organizations can negotiate purchasing and other contract discounts on behalf of a large group of physician practices. Large group buying power can result in more attractive pricing. MSOs can evaluate the benefits and shortcomings of various equipment choices and recommend the best choice to busy clinicians. In addition to better pricing they can arrange financing for capital equipment.
MSOs can also offer help with all aspects of HR management, which is considered a huge headache by most doctors in private practice. In some models, they will actually recruit and employ the staff, provide all required training, and oversee performance management. They are knowledgeable about competitive wages and benefits.
The significant advantage of getting involved with an MSO model is that the ophthalmologists can still maintain the reputation and culture of the practice they have built. They can retain control of decision making, while achieving improvements in efficiency, quality, and the bottom line. In many cases, MSOs can help physicians be more disciplined in running the business and making difficult decisions. Tighter management controls are likely to improve the value of the practice. Your succession planning may ultimately involve selling to junior partners, another practice, or to the investors in a private equity firm. Increasing the value of the practice will put you in a better negotiating position no matter which option you choose.
Ophthalmologists in solo practice or group practices who are considering partnering with a private equity firm or a management service organization need to carefully evaluate their options. Every practice has different needs and goals. Speaking with other ophthalmologists about their experience can be edifying, but make sure they do not have a vested interest in your decision. Hiring experts with skills in practice valuation or legal expertise in PE or MSO contracts will be key to a successful experience. Make sure you exercise due diligence and fully understand the risks and benefits of your decision!