Ep. 43 All About Private Equity in Healthcare Part One

by | Jul 26, 2023

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Join us as we explore the dynamic world of private equity firms and their foray into healthcare operations. While the focus is typically on the potential for significant profits in acquiring healthcare businesses, we must also examine the critical need to acknowledge and manage the inherent risks. 
The complexity of healthcare operations often conceals consequential factors within blind spots, presenting unique challenges during the early phases of an acquisition. Our expert guests – Executive Consultant Monty Pate and Vice President of Practice Operations, Angie Howard – delve into the intricacies of this process, offering valuable insights on how to best assess a medical practice’s starting state, and how to best position it for profitability. 
With a focus on fostering successful and mutually beneficial partnerships, this episode – hosted by Rebekah Duke – equips listeners with the knowledge to navigate the uncharted territories of private equity in healthcare. For the healthcare professional, an investor, or industry enthusiast, this episode offers perspectives on embarking upon new frontiers in the realm of private equity acquisitions in healthcare that you won’t hear anywhere else. 

Thank you for listening to the Medical Advantage Podcast, where each we take time each episode to discuss the ideas and technologies changing healthcare, and the best practices your organization can take to stay productive and profitable. Subscribe wherever you get your podcasts to ensure you never miss an episode. 

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Full Episode Transcript

Medical Advantage Podcast: Welcome to the Medical Advantage Podcast, where you can hear healthcare professionals, expert consultants, and industry thought leaders discuss the exciting new ideas and technologies that are changing the business of healthcare. Tune in to each episode as we hear from some of the most innovative minds in medicine about the future of healthcare and how your organization can stay profitable, efficient, and on top of industry best practices.

Rebekah Duke: Hello, and welcome everyone back to the Medical Advantage Podcast. Once again, I am your host, Rebekah Duke, and ecstatic to bring more fresh insights from our corner of the healthcare world. Today I am delighted to welcome back a return guest, Monty Pate, our Executive Healthcare Consultant, plus our Vice President of Practice Solutions, Angie Howard.

In this new series all about private equity, we’ll delve into the world of PE firms exploring their varying levels of involvement in healthcare operations. While acquiring healthcare businesses can yield significant gains, it’s crucial to acknowledge the potential risks involved. These risks arise not just from healthcare’s inherent instability, but rather from its intricate nature, often concealing consequential factors within our blind spots.

The mission of our collaboration with private equity is to meticulously piece together these elements, striving to create a comprehensive understanding that benefits all parties involved in an optimal way. And with that said, I am so excited to welcome back to the podcast, Monty and Angie. Hello there.

Montgomery Pate: Hello.

Angie Howard: Hi Rebekah.

Rebekah Duke: Hey guys. Good to have you. So, Angie, if you would please get this conversation rolling. Can you define what the scope is of this discussion? What is private equity in healthcare? Just a high level overview, if you will.

Angie Howard: Sure the term private equity is very broad, but at a high level private equity companies are investment partners that buy and manage companies before selling ’em. So typically PE companies invest in a private company and sell it within three to five years and distribute the proceeds among investors.

Rebekah Duke: The stage for what we have to discuss today. So, Monty, how far into healthcare does private equity extend?

Montgomery Pate: Well in the physician medical group sector, deals such as mergers and acquisitions which are backed by private equity, in 2014 that only accounted for 10% of the total deals. And this is coming from a report by a company called Healthcare Appraisers.

However, by 2020 the number of deals backed by private equity had jumped significantly to 72%. So quite an increase there. It was also noted that the private equity capital that’s available for investment is close to $2 trillion.

Now according to Forbes, in 2022 we saw a bit of a slowdown, meaning there was less merger and acquisition volume, but the deals themselves were actually larger. So it is still very prevalent in the healthcare space. It should be noted before we begin the podcast here, really dive into it, that they’re often federal and state specific laws that regulate that relationship between private equity and medical groups. So for the purposes of this discussion, we’re gonna approach it from a very generic standpoint.

Rebekah Duke: So what would you say is presently driving practices to merge and align with private equity firms?

Montgomery Pate: Well, from a medical practice perspective one of the big ones is economies of scale in terms of overhead, meaning less overhead per provider in daily operations.

How much are you spending to support that provider? That’s a very important metric. Another motivation is growth. Just like in any business, medical groups are looking to increase their market share. Angie, do you have some thoughts on this?

Angie Howard: Yeah, Monty I would add capital access for service line or technology. I would also add that a larger provider network, it provides more negotiating power for managed care contracts. So, in other words negotiating better reimbursement for the providers, better purchasing prices for the providers in those groups.

Montgomery Pate: Those are great points, Angie. I would also point out that often these groups are looking for reduced administrative burden, and they can find that through PE-backed physician practice management companies, which run the daily business operations. And finally at the end of the day, profitability, they’re looking for an opportunity to be a more profitable and sustainable business.

Rebekah Duke: Thank you for that explanation, angie and Monty. So with physician group transactions being a step in the process, can you expand on private equity’s role in that, Monty?

Montgomery Pate: Well, ultimately they’re looking to do several things, improve operations first and foremost. And that involves, of course, reducing waste, streamlining the processes within the medical group, but also positioning that medical group for growth.

All of these things help increase the value of the physician group, and as Angie referenced private equities looking to take these groups back to the marketplace in three to five years and hopefully return profits to the investors.

Rebekah Duke: Thank you for explaining how that all fits together Monty. So Angie, in your experience, whom are your consultants supporting in these transactions? Is it the private equity firm or the medical group?

Angie Howard: Rebekah that’s a good question. So it’s really both. A way to think about it is that specialized consulting is a tool used by private equity to help them meet their goals and we’re more optimizing valuable medical practice. However, the day-to-day working relationship between our consultants and our teams here at Medical Advantage is really between the medical group and us.

So, you know, I think the goal, private equity is not to come in and really disrupt operations, but to enhance them. So oftentimes the medical group will approach us and hire us to help optimize their operations and in turn, that will increase revenue and profit.

Rebekah Duke: Thank you for that clarity, Angie. Can you expand upon the benefits of a private equity firm partnering with a specialized consulting firm Angie?

Angie Howard: Yeah, so the consulting team is typically made up of experts with experience in areas such as practice operations, revenue cycle, marketing, and health information technology. Just to name a few. So this puts us in a unique position to assess the current state operations of a medical group, partner with the practice to improve business functions, utilizing current resources to the greatest extent possible.

So in other words, what can be addressed without a major capital investment? We also provide technology solutions to maximize performance. And then lastly, we create a roadmap for more valuable and more scale, scalable future state.

Rebekah Duke: All right. I see now how that all fits together for these objectives overall. So Monty to uncover and address any factors that would negatively impact adventure we begin with an assessment of the medical organization. Why is this so important and how do you begin?

Montgomery Pate: Well, as far as the why, it’s critical to know where you are starting from when you begin any project in a healthcare setting. You need to ask what’s the gap between your current operations and the industry best practices or your desired future state? And this can help a medical group fully appreciate the value associated with the opportunity they have in front of them, and can also help direct where they choose to focus energy and resources.

As far as the how, this usually involves several parallel tracks when it comes to an assessment and I’ll start out with discovery sessions. And this very simply involves talking with the medical group’s subject matter experts within the various business domains. And these discussions can be in person or virtual but the goal is to determine the operational pain points and frustrations that they encounter.

On a routine basis as advisors our team has learned to listen intentionally and avoid the temptation to enter the engagement with cookie cutter assumptions about where the obstacle lie. We’re always aware that each circumstance is unique.

Next involves data gathering, and this involves taking a deep dive into the organization’s performance metrics. These are key performance indicators from revenue cycle and operations that typically are benchmarked against the industry best practice. Angie, do you have some other thoughts on this?

Angie Howard: Yeah, I would add the IT gap analysis. So this involves identifying how the EHR and practice management or billing systems are supporting the current functional business requirements.

So this would include assessing workflows, security, data integrity, and data completeness. I would also add process mapping is a key assessment tool. This is an end-to-end visual representation of the work processes you are reviewing which capture the impact of decision points, handoffs, approvals, manual processes where and how technology is used and if, and then logic, et cetera.

Montgomery Pate: Alright, thanks for that, Angie. I would I guess wrap this up here. With a comment about a change management assessment, I think this is very necessary and it addresses the question, how prepared is the organization to undertake a major transformational initiative if one is required?

And this typically involves discussions with both the private equity and the medical group leadership to determine the decision making structure and protocol within and between the two groups. Positive changes in operations can be seriously jeopardized if there’s not clearly defined ownership for decision making within the various business domains.

People often agree that a change is a good idea, but they do not want to be the one accountable for giving the idea a green light. It’s also important that you identify the stakeholders and influencers within the organization who must be engaged at the very beginning of the process. And the most obvious of these are the providers. What is the plan to bring them on board? Meaning obtaining buy-in for a major transition.

Rebekah Duke: Thank you Monty and Angie. So I wanted to revisit something that was said earlier, the part about improving business functions, utilizing current resources to the greatest extent possible. Can you explain how that works, Angie?

Angie Howard: Sure. Quite often organizations attempt to compensate for bad processes. They do this by throwing additional staff at the problem they identify. Identifying high staffing ratios compared to national benchmarks is often the first clue as to where these suboptimal workflows reside. These also may correlate with the identified pain points that were revealed during the discovery sessions.

These scenarios of suboptimal processes can frequently be resolved. Utilizing available resources by the way of enhanced training because of particular technologies installed, does not necessarily mean that its capabilities are being fully leveraged. Very frequently we see organizations paying for functionalities that are not being taken advantage of within their billing or EHR systems.

So this training gap can prove to be expensive to the organization in terms of productivity of profitability. Resolving this can be a quick win for the organization. And Monty, do you have anything to add there?

Montgomery Pate: Well, I would make a a case for minimizing process variation. As medical groups grow through the acquisition of other practices, they’re gonna inherit the processes that are unique to each of those practices.

And this can include things such as how they schedule a referral management or how staff are utilized, or the revenue cycle itself. And it’s a very common mantra throughout the industry for the acquiring organization to state, to the practice they’re bringing on board, we do not intend to change how you do business. Don’t worry we’re not gonna change anything on the surface. This sounds harmless.

However, when you replicate this practice over the course of numerous medical groups being onboarded as part of a larger system process variation and daily operations soon runs rampant. And the impact on an organization often includes difficulty in influencing system-wide outcomes, decreased stability to effectively measure performance and potential frustration for patients as they move between practices within the system. So when you’re looking for quick wins, there’s often areas where a variance in process can be minimized or eliminated.

Next I would mention creating visible and actionable key performance indicators. That it’s really imperative that leaders at all levels in the organization can see the performance of the domains they’re accountable for, as well as those that are adjacent to their area of responsibility. Keep in mind, healthcare operations are an ecosystem and overlaps of impact are common.

Ideally the KPIs would be readily available in a dashboard setting. However, what’s important is that you use whatever tools you have at the moment to ensure that the KPIs are disseminated to the KPI owners and team members.

But one other word on KPIs, it’s not enough just to see the metrics. The owners must be given the latitude to make decisions that drive KPI improvement. As they say, you cannot improve what you don’t measure. Angie, any other thoughts on this?

Angie Howard: I would just add that memorializing the best practice and standard operating procedures. Often we refer those to those as SOPs, so this is something that can be started in short order. It’s critical that as you make changes in how you do business, that these are recorded in standard operating procedure documents.

So you wanna make these readily available for staff. There are plenty of formats available in the public domain. The key is that they are uniform and format, provide detailed guidance for specific business processes. Clearly identify the accountable parties. The value of these documents is that it gives you a reference point for training and onboarding new hires regarding performance expectations. And it also provides a document to evaluate and update as the business requirements change.

Rebekah Duke: All right. Very good. So this wraps up part one of our series. Thank you, Monty and Angie for your time sharing all this wisdom surrounding private equity’s relationship with healthcare, and how having the right consultants on your side paves the path to success.

Should you have any questions about how to make your practice more appealing to private equity, or how to refine your acquisitions process as a PE firm both before and after acquisition we’re happy to have that conversation with you anytime. You can reach us at info@medicaladvantage.com. This podcast is produced by Medical Advantage.

Medical Advantage provides consulting designed to help practices improve care quality, reduce healthcare costs, and increase revenue. Our broad portfolio of services optimizes operations for medical practices, specialists groups, and private equity. Insights you won’t hear anywhere else, please subscribe to our channel. See you back here for the next episode.

Medical Advantage Podcast: Thanks for joining us this week on the Medical Advantage Podcast where we discuss the ideas and technologies changing healthcare and what they mean to your organization. For more information, visit us at medicaladvantage.com and make sure to subscribe to the podcast on iTunes, Spotify, or wherever you get your podcast, so you never miss a show. 

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Ep. 43 All About Private Equity in Healthcare Part Two 

Read Full Episode Transcript Join us as we explore the dynamic world of private equity firms and their foray into healthcare operations. While the focus is typically on the potential for significant profits in acquiring healthcare businesses, we must also examine the critical need to acknowledge and manage the inherent risks.    Continuing our conversation surrounding the […]
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