At the annual meeting of the Large Urology Group Practice Association (LUGPA) in Chicago, Illinois, Victor Houtz, MBA, CPA, the chief operating officer of New Jersey Urology, and E. Scot Davis, the CEO of Arkansas Urology, debated the pros and cons of partnering with private equity firms to fund physician practice groups. Houtz, whose organization joined with private equity firm J.W. Childs Associates in 2018, spoke in favor of it, while Davis took the opposing view.
“I think the question we are asking ourselves every night when we go to bed…is, how are we going to transform our practices to adapt to the changing health care environment?” Houtz said. “How are we going to mitigate the reimbursement risks that we are being faced with? That’s the fundamental challenge we are faced with today.”
Houtz called partnering with J.W. Childs a “terrific opportunity” that allowed New Jersey Urology to expand to 58 clinical sites — with more being added continually, according to Houtz — and 6 cancer treatment centers, as well as a pathology lab and a new contract research organization.
Davis countered by arguing that when physicians join with private equity firms, they may gain some financial security, but lose autonomy. “The challenge is, we want to think private equity is going to [have] high autonomy and high security, but that is unknown,” Davis said.
Houtz said that his group dealt with this question, as well as figuring out how private equity fit with New Jersey Urology’s future, by creating a process that bifurcated the practice into 2 separate groups. “The physician group keeps control of the clinical practice,” he said. “The private equity [group] has the opportunity to focus on providing the resources to building growth, accelerating growth, and creating ultimate value for our physicians.”
Davis said that while Arkansas Urology may be able to grow more quickly with the kind of capital infusion private equity would bring, even without it, the organization has grown 8%-12% every year. After some debate among group members, Davis said they looked at their options and decided against a capital infusion. “We decided we weren’t going to sell our clinic, we weren’t going to go sell real estate, [or] go to the bank and borrow money,” he said. “We took a revenue stream and dedicated that revenue to growth.”
Davis also argued that private equity may not be right for younger physicians, who may perceive a buyout as leaving them holding the bag in the future. “Senior physicians definitely have a cash-out option,” he said. He also criticized the notion of a so-called second bite at the apple, which refers to private equity injecting a second infusion of capital into a practice, sometimes by bundling it with similar companies. “There’s a lot of talk about this second bite,” he said. “I’ve been in this 3 years and there hasn’t been a second bite yet.” In order to get to that second bite, companies have to show a certain level of profitability, he said. “The only way to get to that level is to get more cash or cut costs,” he said.
“The second bite is not a fantasy,” Houtz said. “I predict we will see one within the next 3 years.” He noted that New Jersey Urology is continually planning how they will increase their cash flow and profitability to entice investors.
Davis admitted that private equity’s unique financial structure can hold appeal to groups that want to find exit strategies for senior partners, and said that arbitrage — in which private equity firms leverage market forces to improve profitability of an asset, such as a group practice — can have “distinct tax benefits.” But he also cautioned that group culture must be robust in order to withstand the challenges of private equity deals, and added that there is “not enough runway” to determine if private equity is a sustainable model for physician groups. Ultimately, both agreed that whether private equity is right for a group depends on multiple factors.
Houtz V, Davis ES, Goldfischer ER. The Great Debate – Private Equity. Presented at: LUGPA 2019 Annual Meeting; November 8, 2019; Chicago, IL.