PHILADELPHIA — Private equity (PE) firms have fostered a consolidation of medical practices in various medical specialties over the past decade. They are now accelerating their focus on otolaryngology and head and neck surgery (OTO-HNS) practices, raising capital from pension funds and wealthy investors, and using the money to buy shares in the cabinets. Their apparent goal is to improve practice valuations and later sell their shares at a higher price than the purchase price.

“Private equity investments have been prevalent in other surgical and procedural specialties, particularly dermatology and ophthalmology,” said Hemali Shah, BS, medical student at Yale University in New Haven, Connecticut, to attendees here at the American Academy of Otolaryngology-Head and Neck Surgery 2022 Annual Meeting (AAO-HNS). She said that so far, no study has focused on private equity investment in OTO-HNS practices, which prompted her to investigate the matter.

It showed that private equity firms have invested in about 100 dermatology and ophthalmology/optometry practices each year for the past few years. For orthopedics, interest in private equity is growing – around 10-15 practices have been purchased in recent years.

For its study on private equity in the OTO-HNS area, it researched historical private equity transactions through December 2021 using PitchBook, a comprehensive, publicly available online market database. on businesses and investors. It included offerings relating to otolaryngology and its subspecialties, but excluded surgery centers, which could include other surgical specialties.

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

Of the 23 firms acquired by private equity firms between 2015 and 2021, most were in the South Atlantic region of the United States, particularly Florida and Georgia, followed by the South Central region (five practices in Texas) and the Midwest region (six practices across Wisconsin and Illinois). Deal closings accelerated over the review period, from one in 2015 and 2016 to seven in 2020 and eight in 2021.

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

One limitation of the study is that it only includes public private equity investments, not non-public financing, and therefore does not represent all private equity investments. Additionally, access to the dollar amount of investments in transactions was limited, so ownership stakes remained unknown.

Shah outlined some key considerations for OTO-HNS and other specialist practices considering selling stock to a private equity firm. Potential benefits include access to capital for additional patient care services, equipment and new technologies. The acquisition also alleviates some administrative burdens, gives purchasing power to suppliers and can help build relationships among its physicians.

She said some potential downsides are “alignment of incentives between physicians as well as private equity management and performance metrics. The ability of patients to access care in these private equity-backed practices can be different, then [there is] also the impact on the autonomy and bargaining power of physicians after acquisitions.”

In addition to trying to quantify the value of these agreements in the future, investigators should consider their impact on access to care, quality of care, patient outcomes, health care costs, satisfaction physician career and promotion, Shah said.

She said that with increased investment in PE in medical practices, “there should be attention to the potential misalignment of incentives from private equity firms and physician autonomy and their impact on care. to patients”.

Session co-moderator Anil Lalwani, MD, professor of otolaryngology at Columbia University in New York, commented. Medscape Medical News that the entry of PE into medical practices is “a worrying trend for the independence of doctors and their mode of practice. Ultimately, when there is a commitment of private equity, there is a profit motive. And if profit drives decisions, it can be a problem for patients.”

“But I think it’s good that people are starting to study it so that we can really understand if there’s an advantage that outweighs it in a way that’s still fair and doesn’t cloud our judgment in as doctors?” asked her co-moderator, Linda Lee, MD, a plastic surgeon and facial reconstructor at the Massachusetts Eye and Ear Infirmary in Boston.

The problem is not unique to private equity investing, Lalwani said. I think one of the really disturbing trends as a doctor is the growing lack of control over what I do professionally, either as a private equity or as a hospital or whatever. [gains more control]. And I think as we move forward, we really have to balance the ability of physicians to independently control their fate while working within large organizations as we try to provide the best care.”

Talk with Medscape Medical NewsBrian McKinnon, MD, MPH, MBA, acting chair of the Department of Otolaryngology-Head and Neck Surgery at the University of Texas at Galveston Medical Branch, added more perspective to the question of the investment in PE in the medical field.

He worked at Hahnemann University Hospital in Philadelphia when a PE company bought the 133-year-old institution in 2018. The company had a long history of successfully turning around financially troubled hospitals. However, “[t]They finally decided that the value of the hospital seemed to depend on its real estate rather than its business,” McKinnon explained, “so he did what all good respectable private equity does, he’s going to look for the highest value high for its investment, which would eventually declare the entity bankrupt but earn the value of the underlying real estate.”

A year after the purchase, the hospital abruptly declared bankruptcy, diverted trauma patients from its emergency department, left many poor and underserved patients to seek treatment elsewhere, left 800 nurses in need of new jobs and 574 residents and fellows scrambling for programs elsewhere.

“Private equity cares little for anything other than achieving its return on investment,” he said. “And of course, the patient’s health care outcome and their sense of the care and care of providers for them may not be rewarding in a private equity sense.” Thus, PE owners tend to focus a practice heavily on achieving those financial returns in a relatively short period of time, “not always on improving the practice or the patient population,” he said. declared.

Similarly, a private equity firm buying into an OTO-HNS practice “is going to look at a practice if that practice is a cash cow,” McKinnon said. “They will do everything in their power to recover their initial investment as quickly as possible with an anticipated margin, which again may not be in the long-term interests of practitioners or patients. .”

He cited a brief opinion piece in JAMA Otorhinolaryngology–Head and Neck Surgery which presents the strategy of PE and the implications for otolaryngologists regarding the acquisition of PE from their practices. It details how private equity firms make money and how fast they want to do it.

“Private equity is going to pay for itself first,” McKinnon warned. “They’re not going to pay suppliers first, they’re not going to pay office staff first, and they’re not going to pay suppliers first. They’re going to pay themselves first.”

For doctors considering a deal with a PE company, he cautioned: “Understand why someone is buying your company. Understand what it means to work for someone else whose goals at short and long term can be very different and may not be consistent with why you went into health care to begin with.”

The study received no commercial funding. Shah did not disclose any relevant financial relationship. Lalwani is a member of the medical advisory board of Spiral Therapeutics and co-founder of Haystack Medical, Inc. He has disclosed no conflicts of interest regarding this presentation. Lee and McKinnon did not disclose any relevant financial relationship.

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

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