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June 2020  Volume 13Issue 3
Journal of Health and Life Sciences Law

Private Equity Investment in the Physician Practice: Has Its Time Finally Come or Will the Mistakes of the Past Be Repeated?

  • June 01, 2020
  • Patrick D. Souter , Gray Reed & McGraw LLP , Dallas, TX
  • Andrew N. Meyercord , Gray Reed & McGraw LLP


The health care industry continues to see accelerated growth and increased emphasis on consolidation and coordination of care. The evolution of delivery models creates a need for capital by physician groups that in turn results in larger, more attractive investment opportunities. Private equity recently has been a significant source for funding these efforts, especially as they relate to physician practice acquisitions; however, physician sellers generally have little or no experience in such transactions and should therefore recognize that health care investments and the subsequent operation of physician practices are unique due to the multitude of business and regulatory concerns that must be navigated. The various structures used for practice acquisitions, including key agreements and professional relationships; due diligence issues; federal and state laws that impact medical record access and ownership; and fraud and abuse concerns must be appreciated and considered prior to the closing of a transaction and continue to be addressed after the transaction is consummated. Consideration of such subjects is mandatory to ensure post-transaction business continuity and maximization of investment value while limiting liability. This article examines the legal and market forces that are creating a shift in the health care industry, how one prepares for and addresses those issues particular to the physician practice acquisition, and considers what history has taught us from previous efforts by private equity to acquire and subsequently monetize physician practices.


The evolution of health care delivery has been driven by increased operating costs and declining reimbursement, the need for investment to expand service lines to create additional revenue opportunities, and the increased focus on coordinated care and competition resulting from consolidation. While health systems and hospitals have the ability to access capital and weather negative financial impact as they respond to market conditions, physician groups generally do not have the flexibility, expertise, or financial resources to do the same. The days of physicians primarily addressing how to provide the best care to their patients is long gone. Rather, physicians must now focus on a myriad of business-related issues that take away from their time to deliver patient care, such as revenue cycle management, payer negotiation, information technology, and compliance with a profusion of federal and state regulations unparalleled in most other industries.

With this increased need for business and capital resources, physicians are faced with a decision: seek alignment from those traditionally not involved in health care or become an employed physician with a health system or hospital-affiliated entity. For example, for the first time, the percentage of employed physicians is greater than those who have an ownership stake in their practice.1 Physicians choosing the path of employment with a health system or hospital-affiliated entity do so by exchanging their autonomy for better practice resources. The physicians will have access to the system’s managed care contracts that should provide reimbursement at rates greater than those commonly obtained by an independent physician practice. Additionally, the employment relationship provides the physician access to greater capital resources while alleviating much of the administrative duties necessary to operate an independent medical practice. For those physicians choosing to retain more autonomy and own their medical practices, a prevailing trend is to associate with private equity to provide needed capital and business resources to effectively operate while providing an alternative for physicians to monetize on their ownership and provide an exit strategy to capture value for their practices.2 This article explores the market drivers that have created the private equity investment environment, transactional issues the physician and private equity parties should consider, and best practices that provide the greatest opportunity for success.

The Evolution in the Delivery of Health Care and the Problems it Presents to the Physician Practice

The days of a physician simply “hanging a shingle” and needing to only concentrate on practicing medicine has long passed. According to a recent survey by Definitive Healthcare, the most significant trend for health care professionals in 2019 was consolidation within the industry, according to 25.2% of the responders.3 The drivers of this increased consolidation are the desire for health care concerns to gain negotiating power, offset the ever-increasing fixed costs with which they are saddled, and have the ability to address and react to the uncertainties of the future of health care.4 This consolidation is not limited to health systems and physician groups; it includes insurers, pharmacies, medical laboratories, imaging providers, and device and medical supply concerns.5 In today’s health care industry, it is paramount that the physician practice keep pace with consolidation efforts. In addition, the physician practice should consider investment in ancillary services ordinarily provided by other providers in the market who are consolidating to keep in step with their competition. Ancillary services—such as point-of-care laboratories, prescription dispensing, diagnostic testing, imaging, and other non-physician services necessary in a patient’s care—provide an additional source of practice revenue in the face of decreasing reimbursements and provide the platform for a more comprehensive set of services, but they are also expensive to implement.6

In the past few years, the health care industry has also experienced an increased emphasis on coordinating patient care among health care professionals and reducing the delivery of unnecessary services with the intent to increase the quality of care and deliver that care in a more efficient and cost effective manner. Care coordination focuses on the proactive organization of patient care activities among those providing such care, as well as sharing the information possessed by the parties. In order to promote, and in some instances require, quality care, the federal government has established a significant number of initiatives intended to reduce the escalating costs of health care, while closing well-documented gaps in care and care coordination.7 Commercial payers have followed suit with similar types of programs. Care coordination is causing a shift from the traditional fee-for-service reimbursement model to value-based health care, which compensates physicians for keeping patients healthy.8

When faced with these significant evolving market conditions and increased regulatory requirements and complexity in delivering medical care, the ability of a typical physician practice to overcome these obstacles is generally outside its capabilities with the current state of decreased reimbursements. The modern-day physician practice requires expertise and infrastructure that is costly, and most likely unachievable without significant capital resources. Physician groups have recently sought to bridge the gap of needed resources by seeking closer relationships with health systems and hospitals, larger independent physician practices, and private equity-backed investments or consolidations. Each comes with its own benefits and limitations with significant interest by the private equity suitor through their equity-backed management companies.

Increased Involvement by Private Equity in Physician Practices

The focus on the health care market by private equity companies is similar to the practice management companies that were popular in the 1990s. Private equity firms hold substantial investment funds, and health care remains an attractive investment vehicle. It is estimated that investors are currently holding $1.8 trillion dollars allocated for health care investments, and health care providers are an attractive target for multiple reasons. Unlike most investment sectors, the health care sector is growing at a quicker rate than the Gross Domestic Product. The health care industry is relatively recession-proof since there is continued demand during economic downturns, and many health care providers do not have access to professional expertise while many medical specialties remain fragmented.9 Certain specialties like oncology, ophthalmology, dermatology, orthopedic, urology, gastroenterology, and radiology are of particular interest to private equity firms primarily because of the opportunity to consolidate practices and generate increased revenues from ancillary services. For example, in the dermatology industry, seventeen private equity-backed dermatology-specific management companies acquired 184 practices during the six-year span of 2012 to 2018, which accounted for an estimated 381 dermatology clinics located in 30 states.10

As evidenced by the dermatology example, private equity firms primarily utilize management companies as the vehicle for their investment. Typically, a management company that is specialty-specific will acquire the assets of a physician practice within that specialty through a combination of cash and restricted ownership in the management company. However, in some states that have robust prohibitions against the corporate practice of medicine (CPOM), private equity firms may have to structure the transaction such that a physician practice continues to hold the practice assets. In those states, a layperson, such as a management company owned by private equity, might be deemed to be able to exert too much control over the physicians since the physician is beholden to the management company for those assets necessary for the delivery of medical services.11 The purchase price is generally tied back to a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). This purchase price computation can generate prices in the low single digits to upwards of 12 times EBITDA.12 Additionally, the management company will employ the non-clinical personnel of the practice and enter into a management contract with the practice under which the private equity firm manages the administrative business of the practice. For its management services, the manager is paid a management fee anywhere from 10-30% of the practice’s net revenue and in some instances, a higher percentage based upon services provided and the overhead customary to a medical practice in that given specialty.13 In addition to the cash purchase price paid to the physician owners, an acquisition of a physician practice can provide several other long-term potential benefits to a practice. Private equity firms may provide capital for expansion to address consolidation and care coordination concerns, electronic health records systems commonly referred to as “EHR” or “EMR” (electronic medical record), and additional revenue sources. Presumably, they also provide management and business acumen while typically allowing the physicians greater autonomy and less conflicts of interest than would typically be found in a relationship with a health system or larger independent physician practices.

Private equity firms may also utilize a “friendly medical practice,” which employs physicians and is formed by one or more physicians licensed in the state where the medical practice is located and affiliated with the management company. This type of medical practice, known as a Friendly PC model, or similar type of corporate entity that is legal in the state where the practice is located, will serve as the employer for the physicians (and other clinical personnel) and is subject to the same management services arrangement. A variance of the Friendly PC Model is the Captive PC Model, which is structured similarly to the Friendly PC Model; however, the Captive PC Model provides for an agreement separate from the management services agreement, requiring the physician owner to transfer ownership of the Captive PC to another physician who is allowed to own the entity under state law. This model is frequently used in states that maintain strong CPOM laws that limit the ability of a layperson to own or control a medical practice.14 However, whether as a Friendly PC or a Captive PC, it is important that the arrangement does not result in the management fee rising to the level of fee-splitting by charging a rate that is not fair market value and commercially reasonable, or the management company controlling the practice decisions that should fall within the exclusive purview of the physician.15

The primary aspect of a transaction that will be of note to both the private equity firm and the physician is the ability of the management company to increase revenue and control costs. Obviously, the physicians’ compensation will be negatively impacted by the management fees unless the management company achieves both goals. Many of the management companies in the 1990s failed because they guaranteed physicians’ compensation, and the physicians lost their incentive. Those that succeeded at least for a few years were successful because of the ability to increase ancillary revenues from such activities as expansive diagnostic imaging, ambulatory surgery centers, and other ancillary services.

Preparing for and Structuring the Private Equity Transaction

The structuring of the private equity transaction utilizing a management services organization is remarkably similar to other types of private equity transactions, but as with all health care transactions, the devil is in the details regarding due diligence and other pre- and post-closing considerations. The physician practice must be prepared to provide these additional due diligence components particular to a health care provider entity.

Transaction Structure

As previously mentioned, the typical private equity transaction involving a physician practice contains four participants: (i) the physician practice selling its assets, (ii) the private equity firm funding the transaction, (iii) the management company that acquires the physician practice’s assets and employs its administrative and non-licensed medical personnel, and (iv) the physician practice that will employ the physicians and other licensed medical providers and owns the clinic assets if the private equity firm offers not to utilize the target physician practice as the medical practice going forward. The following three models are possible structures to achieve this transaction:

Example 1. Asset purchase transaction retaining the target physician practice to employ licensed health care professionals.

The model illustrated in Example 1 is advisable if the target physician practice (i) is the private equity’s initial acquisition; (ii) has continued value for its name identification or identifiable market presence, which may include preferable locations and other intangibles that have value tied back to the target entity; (iii) possesses favorable payer contracts; or (iv) has material contracts that cannot be assigned to a new physician entity or otherwise terminated without substantial additional cost.

Example 2. Asset purchase transaction involving new physician practice for employing licensed health care professionals and own the clinical assets.

The model illustrated in Example 2 is preferable when the private equity firm has an established physician practice that can employ licensed health care professionals, has those tangibles or intangibles that are greater in value than the target entity, or the target entity has substantial actual or contingent liabilities.

Example 3. Asset purchase transaction involving a merger of the target physician practice with the new physician practice.

The model illustrated in Example 3 may be used if both the target entity and the new physician practice have value that should be combined, there are no actual or known contingent liabilities that may negatively impact the physician practice on a going-forward basis, or for tax reasons. This model is usually not advisable due to the problems of integrating the combined entities.

Due Diligence Concerns

Due diligence is one of most important areas of concern in a private equity transaction. It will usually address certain common areas of concern no matter the type of transaction. The areas of review include organizational and governance of the target entity, financial and operational information, tangible and intangible property owned and leased, contractual relationships, insurance coverage, governmental regulation requirements, litigation matters, employment and benefits, and tax matters. However, in light of the heavily regulated health care industry, there are items that must be reviewed as part of the due diligence process that are particular to the physician practice investment no matter the size of the transaction. The physician practice should be prepared to provide such information in a complete and timely fashion that experience indicates will probably not be available for review upon the presentment of the due diligence checklist. The private equity firm should have retained expertise in the area in order to recognize the need to request, review, and understand the information. While private equity firms familiar to health care investments will generally have retained that expertise, many new private equity participants in the health care industry may not recognize the need to do so.

A physician practice considering a transaction with a private equity firm must recognize the significant scope of due diligence and prepare the documentation and information prior to surveying the landscape for possible partners. A private equity firm should revise its typical due diligence request to include information not usually part of a non-medical due diligence request. An example of a Physician Practice Due Diligence Request is included as Example A at the end of this article to serve as a roadmap for the type of information that should be requested for this type of transaction, i.e., when a physician practice is considering a transaction with a private equity firm.16 While this template is for a large physician practice acquisition, it is advisable to follow something similar for both small and large practices. The physician practice, no matter the size, will benefit because the example will provide a broader roadmap than what the practice may contemplate is needed, and it will ensure full disclosure. The private equity firm will benefit too because it may not have the expertise to request all of the information needed to adequately review and evaluate a physician practice opportunity. The following are due diligence items that should be added to the standard due diligence template that a private equity firm uses when initiating due diligence on a physician practice:

  1. Operational information should include visits/encounters, wRVU, charges and collections by provider and by location or division, a sample of billing-related information by provider for the previous year, total and gross charges by payers for the previous three years, information on internal and external billing audits, and processes in place to determine and repay overpayments and patient refunds.
  2. Real estate information should include a list of all hazardous materials or similar hazardous substances used or generated by the physician practice, where such was used or generated, and how such was disposed or stored.
  3. Tangible and intangible property information should include vehicles owned or leased in the name of the practice (there is a chance that a physician or physician’s family member’s vehicle will be leased through the practice) and intellectual property, including software used by the practice (the physician may be an owner or there is a contractual relationship with a third party such as a license or royalty agreement that will require additional discussions and review).
  4. Material contracts not related to parties involved in the provision of medical care that may include management service agreements, consulting agreements, and billing and collection agreements that are not terminable without cause or are exclusive, service and maintenance agreements (common with diagnostic equipment that are owned or leased by physician practices), business associate agreements, and all payer agreements.
  5. Any contract, no matter the materiality level, between the physician practice and its physicians and any third party where a referral is made, or received, including agreements between facilities, marketing arrangements, recruitment agreements, medical directorship agreements, and clinical research agreements (including those related to ongoing research and development activities of any employee or independent contractor).
  6. Insurance information related to any actual or contingent liabilities that may or may not be covered including notification letters of possible claims and all material information related to such possible liabilities.
  7. Information related to government regulation, including all health care specific licenses, certifications, registrations, and authorizations specific to the physician practice; any corporate integrity agreements or consent decrees; any information related to governmental or commercial insurance investigations; any Certificate of Need (CON) documentation; and any notifications of actual or threatened complaints or allegations of noncompliance with any legally mandated requirements.
  8. Compliance program materials, policies and procedures (including past internal and external audits and monitoring of same) related to business practices, billing, and collecting; HIPAA (Health Insurance Portability and Accountability Act) and fraud and abuse matters; and disclosure of any remuneration (cash or in-kind) for free or discounted goods or services from any health care entity or individual working for or on behalf of any potential, current, or past vendor.
  9. Employee information specific to physicians, nurse practitioners, and physician assistants, including specialty, board certifications, facilities where credentialed, provider numbers, and NPIs (National Provider Identifier), and information on all employees who are on VISAs (Verified International Stay Approval) or under other types of immigration status.

All of the additional due diligence information listed above is particular to health care business acquisitions. Additional follow-up due diligence typically will be required because due diligence in this area usually will result in more questions and the need for fact-specific disclosure. To ensure adequate and complete information is provided, and that subsequent additional responses to questions raised or additional requests for information presented by the private equity firm are addressed, the physician practice should designate both a physician involved in the day-to-day affairs of the practice and its governance and a senior administrative person, such as the practice administrator, to address the due diligence responses and certify the completeness of the information presented. It is not uncommon that one has information that the other individual does not have due to the capacity each serves.

A physician practice should expect that the private equity firm will perform its own in-depth compliance audit to determine that previous business operations were legally performed, compliance efforts are sufficient to identify problematic situations, and steps are taken to cure such issues that may have been uncovered. The private equity entity will want any compliance issues addressed prior to closing, including disclosures made to governmental and commercial payers that may result in liability owed by the physician practice. Self-reporting, either by Self-Disclosure protocols as issued by the federal government17 or pursuant to commercial payers’ provider manuals or participation agreements will need to be considered depending on the issues identified in this process.

It is standard in a health care transaction of this nature that escrow arrangements and indemnification agreements favorable to the private equity firm be included as part of the transaction’s terms. If operational or compliance issues are identified, the amount held in escrow will likely be increased over what the private equity firm ordinarily requires to address the increased potential liabilities. The indemnification provisions will also be more favorable to the private equity firm than traditionally requested due to the increased liability associated with the potential liabilities. These terms may include a longer indemnification period or lower thresholds to recover under such provisions. Ultimately, once the time periods in the escrow conclude, the physician practice will receive the amount remaining in the escrow account. However, if the amount in the escrow account does not meet the indemnification demands, the physician practice (and in some cases, the physicians who have received financial payments from the transaction) may be required to pay additional monies to satisfy the indemnification demands made by the private equity firm, subject to any maximum amounts that must be paid back as negotiated between the parties.

Pre- and Post-Closing Federal and State Law Considerations

A theme that has been stressed in this article is that the health care industry is much different from other industries in which private equity firms commonly invest. The health care industry is one that is heavily regulated and the repercussions not only include financial risk, but also may result in civil and criminal investigations and penalties. Private equity firms must analyze the regulatory risks pre- and post- transaction. Of critical importance are four areas that create possible pitfalls in the transaction that must be addressed pre- and post-closing of the transaction.

The Corporate Practice of Medicine Doctrine

The Corporate Practice of Medicine Doctrine addressed above pertains to state laws limiting the various business structures available to the private equity firm and the level of involvement a layperson may have in ownership or management of a physician practice.18 The bottom line rule is that physicians must be able to independently practice medicine without any exertion of influence or control in the delivery of medical services. Otherwise, the patient may suffer when decisions of care are made for business purposes, rather than for the patient’s best interests. The private equity firm may do such things to streamline efficiencies within the practice and add ancillary services, but in doing so, it should not negatively affect the physician-patient relationship and the care provided thereunder.

While all states have some level of protection from this occurring, there are varying exceptions from state to state that must be analyzed prior to the private equity firm launching into a particular state. Health care counsel within the state should be engaged to carefully review and advise on statutes and regulations that affect the analysis, as well as additional guidance, such as state attorney general opinions that interpret these rules. For example, while the state of New York has one of the strictest corporate practice prohibitions, it has fee-splitting statutes that prohibit the splitting and sharing of professional fees generated by licensed health care professionals or professional firms with those who are not licensed.19 Regulations accompanying this statute expressly prohibit percentage of revenue based compensation arrangements involving fees paid or similar types of structures dependent upon revenue generated by the professional.20 There is similar regulation prohibiting these type of arrangements with medical facilities.21 Management companies, and especially medical billing companies, typically charge a percentage of revenue for their services. Those who are not familiar with New York law are surprised that New York expressly prohibits the structure that is allowed and used in many other states.

Medical Records

Many assert that the most valuable asset of a practice is its patient base. The patient base serves as the basis for the revenue stream that private equity firms wish to obtain. It commonly is the method by which the value of a physician practice is determined based upon EBITDA. A common misconception is that the medical records are included in the assets purchased by the private equity firm. While only one state, New Hampshire, explicitly gives the patient ownership of his or her medical records, the remaining states are evenly split between those giving the physician or hospital ownership of the medical records, and the other half having no legal authority as to who owns them.22 The patient simply has a right to them except in some very limited instances.

The transfer of medical records to another is not a transfer of title but rather, a creation of a custodianship arrangement between the physician practice that created the records and the party that is holding them on behalf of that physician practice.23 Prior to the transfer of a patient’s medical records to another physician in other than a custodianship arrangement, the patient must consent to the transfer. Confidentiality, privacy, and security laws at the state and federal level must be complied with as well. Also, the patient must be notified where their records are if they are transferred. Usually, the transfer to a new practice will be accomplished along with a notification to the patient that the new practice will assume his or her care; but in the event the patient wishes to transfer care to another provider, the steps on how that may be accomplished should be provided. It is imperative that this transfer be accomplished in a timely and complete manner pursuant to state medical board rules, federal and state confidentiality laws, and privacy and security laws and regulations.

Fraud, Waste and Abuse Concerns

A major concern of government and commercial payers and health care providers is addressing fraud, waste and abuse in the delivering of, and the billing and collecting for, health care products and services. The private equity firm should be equally concerned because the physician practice, its physicians, and key management may be subject to civil and criminal prosecutions, recoupment of monies previously paid, and administrative penalties that may not just negatively impact their investment, but result in it having to cease operations. The Physician Practice Due Diligence Request included as Example A includes many requests related to these specific areas of concern.24

The primary federal basis for prosecution for health care fraud, waste and abuse are the Anti-Kickback Statute, the Physician Self-Referral Law commonly known as the Stark Law, and the False Claims Act. The Anti-Kickback Statute prohibits a person from paying, receiving, or facilitating the exchange of any type of remuneration in exchange for the referral of a patient part of a federal health care program unless an exception or safe harbor exists.25 The Stark Law prohibits a physician from making a referral to a party in which the referring physician has a financial relationship, either through ownership or compensation, for certain items defined as “Designated Health Services” if the products or services will be paid for by Medicare, or a claim for such is presented to Medicare unless an exception exists.26 Finally, the False Claims Act and associated laws prohibit the presentment of a claim to the federal government by a party who knows the claim to be fraudulent or false.27 Many states have similar laws that are utilized for enforcement actions as well. Federal administrative actions, such as exclusion from participating in federal programs28 and Civil Monetary Penalties29 are also available to prosecute those participating in such illegal activities.

The importance of understanding the scope of laws related to fraud, waste and abuse is paramount for both private equity firms and physician groups. It is understandable why a physician group would be concerned since it is providing care and submitting claims for payment related to the products and services provided; however, private equity firms should have similar concerns not only from a due diligence standpoint, but from a post-closing standpoint. Since the private equity firm will be providing management and administrative services through its management company, the management company may have liability as it relates to any violations of such laws. Recently, two private equity firms were named as defendants in two separate whistleblower actions filed under the False Claims Act. The basis for inclusion of the private equity firms in both instances was that each was involved in the operations of the health care entities to the point that their involvement facilitated violation of the law.30


As a companion concern to fraud, waste and abuse in the areas of pre- and post-closing is the area of compliance. The private equity firm should recognize that how vigorously a physician practice follows a compliance program—supported by the appropriate policies and procedures—will generally be a bellwether as to how the practice’s operations have been run, and whether the practice is in compliance with best practices and the law. The compliance program of a physician practice typically demonstrates the corporate persona of the practice and should provide insight to possible liabilities for associating with the physician practice. On the other hand, the need for a robust compliance program must be recognized by the physician practice to ensure compliance with the law, which is an indicator to third parties of properly run operations. The Office of Inspector General has significant resources available related to guidance on compliance and structuring the compliance program.31

In situations where past poor compliance efforts are present in a physician practice, the practice’s employees may be unintentionally ignorant of the law and not accustomed to ensuring that best practices are followed. In those circumstances, the private equity firm must ensure that a robust compliance program is created—or the previous one updated—and that the employees are trained not only on its implementation, but in a consistent, regular basis thereafter. There may very well be pushback by the employees that “this is how the practice has always done x” or “this is what everyone else does,” but the employees must understand that these are not defenses to a violation of the law. A proper compliance program will demonstrate the intent of the parties to comply with the law. A new management and operational structure must recognize that compliance efforts must be continued, or the repercussions may significantly and adversely affect the practice.

Is History Going to Repeat Itself?

As previously mentioned, the current wave of private equity investing in physician practices is not new. The health care industry witnessed a similar onslaught of suitors in the 1990s when private equity recognized the value of monetizing management services provided to physician practices, and physician practice management companies (PPMs) became the norm in the physician practice world. Companies like Phycor and MedPartners, backed with private equity investments, created single-specialty and multispecialty clinics through rollups using management service companies as the vehicle to bring them together. The visions of both private equity firms and physicians were to create the management company, go public, and prosper from the endeavor. For a period of time, this vision worked. Public PPMs in 1997 raised $2 billion to further acquisition efforts. In 1998, approximately 39 public and 125 private PPMs existed, but eight of the ten largest PPMs had declared bankruptcy by 2002.32

The dramatic downturn can be attributed to a variety of market and business reasons. First and foremost, the limited availability of physician practices worthy enough in size and revenue to be acquired caused the prices being offered and paid to reach unstainable levels, often 50-100% above the underlying cash-flow value.33 PPMs overpaying for the practices resulted in losses when the revenues from the management services did not reach the levels contemplated. Second, the management services provided did not deliver the value promised on a consistent basis. Physician owners had traditionally been diligent in keeping costs as low as possible, and the management companies did little to improve those efforts. In fact, it was not uncommon for costs to increase due to the infrastructure needed to oversee daily operations in a scattered structure of physicians.34 Finally, the resulting practice issues such as guaranteed salaries with misaligned incentives and insufficient data analytics resulted in physicians’ productivity remaining static, or in some instances decreasing, and the inability of a private equity firm to understand and appreciate the resulting financial problems arising from such situations.

The threshold issue that must be addressed by the physicians selling their practices and private equity investing in them is why both parties believe the results of management companies today will be different than the failed management companies of two decades ago. There is some support for the notion held by those in private equity that the parties to such an arrangement are smarter today and can avoid the mistakes of the past. It appears some private equity firms recognize the need to be much better aligned with the physicians in the strategic direction of their combined enterprise compared to what occurred in previous business models. Efforts to be better integrated with the physicians both in the coordination of management activities and the financial relationship are now more prevalent. No longer are physicians paid a fixed salary but rather, they are compensated with some type of productivity component. Further, private equity firms believe they will be more financially aligned with physicians through current and future reimbursement initiatives, such as bundled payments and value-based contracting. To support value-based initiatives, private equity firms appear to be accumulating practice data not just to improve patient care, but also to succeed in value-based contracts.

Lessons from the 1990s may have been learned, but there is a continued belief by the private equity sector that they can still consolidate the fragmented health care markets, centralize administrative services, and achieve economies of scale. The question that remains, however, is how much consolidation, increased efficiencies, and revenues can a management company achieve before it interferes with physicians’ clinical practice and negatively impacts the physicians financially? The conflicts of interest generated by private equity firms may not be ignored or avoided any more today than they were in the 1990s. How does one balance Wall Street’s need for a financial return with the physicians’ compensation and most importantly, the physician’s Hippocratic Oath? Does increased ancillary revenue and economics of scale provide the necessary revenue to balance the parties’ respective interests? Will ancillary services be ordered unnecessarily in order to increase profit? These questions must be addressed before a transaction is consummated, and throughout the entire relationship. Otherwise, the physician’s clinical independence is lost to the motivation for profits.

Only time will tell whether private equity firms will be successful in today’s heath care environment. Private equity firms and physicians must focus on the patient and the value of care delivered, while at the same time recognize the need to obtain favorable managed care contracts and increase the ancillary services the practice may provide. A patient chooses a physician based on the comfort and trust the physician provides in the delivery of care to the patient and patient’s family. If the focus is solely money and profit, the patient will eventually realize what is happening and leave the practice.

The private equity firm must actively pursue managed care contracts with improved reimbursement rather than rely on out-of-network billing that has been the subject of legislative action at both the federal and state levels to end “surprise billing” to patients.35 Commercial payers have recognized that some medical providers use this business model to bill the patient a “usual and customary rate” for a service that is generally much more excessive than what would be charged under a managed care fee schedule. These payers have pushed back on such billing because the service ends up costing what a payer believes is excessive and unreasonable for the service rendered. In turn, payer pushback may actually result in decreased reimbursements in the long run. Private equity firms should also incorporate legally available ancillary services into the practice setting to increase revenue and provide additional services to the patient. The addition of these services through the practice may not only provide better quality of care, but may also make it easier for the patient to receive a broader scope of services in one location. Both of these attributes serve as an alternative to eliminating staff that negatively affects the patient’s traditional experience that he or she has come to expect from their physician.

Best Practices in a Physician Practice Private Equity Transaction

The physician practice and the private equity firm both have best practices that should be followed for a successful transaction and long-term relationship.

Best Practices from the Physician Practice Standpoint

A physician practice should consider the following factors to prepare for a transaction and select the best private equity partner.

  1. Do not be hasty in picking a private equity firm. The physician practice must perform its own due diligence on the private equity firm. It should consider the private equity firm’s experience in the health care industry and in the practice’s specialty. It should analyze the private equity firm’s other transactions and its successes and failures. Also, everyone must have a clear understanding of the endgame for the investment. For example, does the private equity firm intend to roll up the physician practices and attempt to sell them, or is this a long-term investment play? The physician practice does not need to jump at the first offer. A quality physician practice with value will have others that are interested in a private equity arrangement, and having multiple parties involved typically results in better value received.
  2. Retain knowledgeable consultants and advisors. The physician’s financial advisors, such as accountants and legal counsel, are imperative in this process. The transaction may be complicated or have negative impacts from a regulatory standpoint, as well as significant tax consequences.
  3. Understand that the practice arrangement on a going-forward basis will be different from how it has been previously operated. A statement commonly heard in discussions between a physician practice and a private equity group is that for the physicians, “things will continue to operate as they always have.” Based on the arrangement itself, that is simply not the case. There will be changes in how things will be done, some better and others worse. The loss of control over the practice entity and in some cases, a decrease in compensation, may eventually happen. Physicians who have traditionally operated their practice will realize there are more layers to administration post-closing, even to the point where the new arrangement may feel more like a corporate practice than a medical practice.
  4. Be prepared with due diligence materials early in the process. A private equity firm may become leery of the transaction if the physician practice is not able to provide the requested documentation within a reasonable timeframe. It provides the appearance that the practice is not organized or operated efficiently. Having the documentation arranged and ready for production will reduce the cost of the transaction.
  5. No matter what the private equity firm says, do not rely on the management company to go public. One of the most important lessons learned from the private equity experience of the 1990s was this: while “going public” may be contemplated, it is not that easy and there are many variables that must be in place before going public can even be considered. Many physician practices sold their assets in the 1990s based on representations from the PPMs and the dream of going public. They traded some or all of their company for ownership in the management company so they could receive stock that was represented to be of great value when and if the management company went public. Too often, physicians became more focused on the “when” and did not give due consideration to “if” the management company went public. When the dust settled and the PPMs failed, physicians were left holding worthless management company stock certificates and no longer owned a practice that they could fall back on.

Best Practices from the Private Equity Firm Standpoint

The private equity firm can perform several functions that should assist in ensuring that a transaction is the right transaction and that the transaction happens smoothly.

  1. Understand the geographic market where the physician practice is located. The marketplace can be a key determiner in the success or failure of a physician practice. The payer mix of patients, the size and financial strength of competitors, and the ability to expand are all key factors that can help in determining whether an attractive opportunity exists.
  2. Retain knowledgeable consultants and advisors. This point applies to the private equity firm just as much as it applies to the physician practice. A health care transaction is unique and different compared to business transactions that typically occur in other industries, so it is advisable that those who have true expertise in health care transactions be involved from the very beginning.
  3. If a due diligence response is not complete or appears to be questionable, do not accept answers until they are complete. While physician practices generally have excellent skills in creating and keeping medical records, that is not always the case when it comes to documentation of business operations and other types of information usually requested in due diligence. It is not that the physician practice is attempting to hide something but rather, it is more likely that the physician practice never had the need to maintain such information in a format that a private equity company is accustomed to seeing.
  4. Have a realistic and developed plan early regarding how to add additional revenue to the physician practice. Additional revenue may come in many different ways. Consider the backlog of patient appointments and determine whether it would be advisable to add additional providers. The physician practice also might need to offer additional ancillary service lines that can generate a significant increase in revenue.
  5. Recognize that health care industry investments are different from other industry portfolios when trying to become more efficient or reduce costs. An attempt to use economies of scale may backfire in this industry. For example, in the context of physician practices, lower-level employees, such as front desk personnel, are often imperative to the practice and valuable from a patient perspective. Front desk personnel are the face of a practice, much like its medical providers, because they are the first and last persons a patient sees and/or talks to when interacting with the office. Front desk personnel answers the patient’s phone call or the call of a patient’s mother or father who is trying to get through to a provider because of a health concern. Long lines at the front desk, long wait times on the phone caused by staff reductions, and replacement of front desk personnel by automated phone trees will cause the practice to lose patients.


The current trend in private equity investment in physician practices is not dissimilar to what was experienced two decades ago. The reasoning for it then is the same as it is now: it provides the physicians with expertise and capital to further advance its operations and provide better care to its patients while increasing revenue. It relieves the physicians from administrative tasks that take up time that may be used for better purposes. With this in mind, physician practices and private equity firms considering an arrangement will benefit to keep in mind that the vast majority of the PPMs of the 1990s did not go public and a significant number failed. Are the authors then saying this is a failed experiment that should be avoided? No, that is far from the case.

Physician practices and private equity firms must work together by learning from the mistakes of the past and developing best practices that will assist in ensuring higher chances of succeeding. The physician practice should not look at private equity investment as a payday from the sale of their assets and an employment agreement where they no longer need to concern themselves with the bottom line. On the flip side, the private equity firm must not view its investment in physician practices as another way to secure fast and easy profits. A successful venture takes a lot of effort from a regulatory compliance standpoint. In addition, the physician’s perspective on what works in the practice must be strongly considered without discounting the recommendation simply because the recommendation may not seem like the most cost efficient way of running a business (take note of the earlier example regarding the importance of a physician’s front desk personnel). When all parties work together, keeping in mind the lessons of the 1990s, everyone can reap the benefits. In addition, these types of successful transactions can provide the framework that will allow for more service lines, coordinated care, and improved delivery of health care, which should always be the goal.

Author Profiles

Patrick D. Souter is known for his legal and educational experience in the health care industry. His private practice in Gray Reed’s Dallas, Texas office is focused on transactional and administrative health care, corporate, securities, and antitrust matters. He is a Professor at Baylor University School of Law where he oversees the health care law program. He is also involved with the Robbins Institute for Health Policy and Leadership at the Baylor University Hankamer School of Business, where he teaches Healthcare Law and Ethics. Patrick is Board Certified in Healthcare Law by the Texas Board of Legal Specialization. As a long-standing member of the American Health Law Association, he currently serves as the Vice Chair of Publications for the Physician Organization Practice Group and has completed its training as a Mediator and Arbitrator. Contact him at [email protected].

Andrew N. Meyercord is Chair of Gray Reed’s Transactional Department in the firm’s Dallas, Texas office. Andrew is an experienced dealmaker and advisor for health care clients in a wide range of transactions and corporate matters, with a primary focus on mergers and acquisitions, and ongoing representation of hospitals, clinically integrated networks, and hospital-physician affiliations and alignments. His clients also include for-profit and nonprofit health care providers, entrepreneurs, an organ procurement organization, and major physician practices and networks. Board Certified in Health Law by the Texas Board of Legal Specialization, he is an active member of the American Health Law Association and has completed the organization’s training as a Mediator. Contact him at [email protected].

1 Tanya Albert Henry, Employed Physicians Now Exceed Those Who Own Their Practices, AMA (May 10, 2019), See also Carol K. Kane, AMA, Policy Research Perspectives: Updated Data on Physician Practice Arrangements: For the First Time, Fewer Physicians are Owners Than Employees (2019), Research indicates that in 2018, 47.4 of practicing physicians were employed with 45.95 of the practicing physicians having an ownership stake in the practice where they were employed. A more in-depth analysis of the research is found in Dr. Kane’s White Paper on the subject.

2 Jonathan LaMantia, Physician Practices Increasingly Turn to Private Equity For Capital, Mod. Healthcare (Apr. 26, 2019, 12:11 PM),

3 Fred Donovan, Healthcare Industry Consolidation is Most Important Trend in 2019, HIT Infrastructure (Apr. 23, 2019),
. The other areas of concern were Consumerism (14.4%), Telehealth (13.8%), AI and Machine Learning (11.4%), Staff Shortages (11.1%), Cybersecurity (9.5%), EHR Optimization (9.5%), and Wearables (5.3%). Interestingly, health care technology such as AI and Machine Learning, EHR, and Cybersecurity concerns are also important in the physician moving to a digital patient experience that is preferred by an overwhelming amount of consumers.

4 Altarum Healthcare Value Hub, Addressing Consolidation in the Healthcare Industry (Jan. 2016),

5 Tara Bannow, Healthcare Consolidation Goes Beyond Usual Players, Mod. Healthcare (June 10, 2019, 5:01 PM),

6 Julie Miller, Grow Your Practice with Ancillary Services, 95 Med. Econ. (Oct. 31, 2018), https://

7 Long-Term and Post-Acute Care Providers Engaged in Health Information Exchange: Final Report. 3.2 Initiatives to Support Care Coordination and Transitions in Care on Behalf of Persons Receiving Long-Term and Post-Acute Care/Long-Term Services and Supports, ASPE (Oct. 29, 2013),
. These programs include Accountable Care Organizations, various Medicare and Medicaid initiatives and Community-Based programs.

8 Eli Boufis, Why are PE Firms Hot for Physician Practices?, Forbes (Aug. 30, 2019, 10:08 AM),

9 Athena Insight, Private Equity Likes the Look of Healthcare, Athenahealth (Mar. 28, 2019),

10 Sally Tan et al., Trends in Private Equity Acquisition of Dermatology Practices in the United States, 155 JAMA Dermatology 1013 (July 24, 2019),

11 The prohibition against the corporate practice of medicine (CPOM) doctrine restricts the type of entity that may employ a physician or practice medicine that results in the commercialization of the practice of medicine or the interference in a physician’s independent medical judgment by one not licensed to practice medicine. A further explanation of CPOM is set forth in this article in the section entitled Corporate Practice of Medicine. Most states have laws prohibiting such practice, but many have broad exceptions to the prohibition. There are some states, such as Texas, New York, Illinois, and California, with very limited exceptions. For example, the New York Court of Appeals recently held that a medical practice that cedes too much control to a management company is “fraudulently incorporated.” See Andrew Carothers, M.D., P.C. v. Progressive Ins. Co., 128 N.E.3d 153 (N.Y. June 11, 2019).

12 Harris Meyer, Specialty Physician Groups Attracting Private Equity Investment, Mod. Healthcare (Aug. 31, 2019),

13 It is important that the management fee is set at a fair market value rate and is commercially reasonable to address fraud and abuse and CPOM issues. It is recommended that a fair market value opinion be obtained from an independent, qualified third party valuation company upon the initial determination of the management fee and on a regular basis thereafter, such as every two years or sooner in the event of new market conditions or the management services change. However, even if such is the case, a management fee based upon a percent of practice revenues may implicate fee-splitting issues. In fact, some states, such as New York, expressly prohibit percentage arrangements. See N.Y. Educ Law § 6530(19) (2020) that prohibits the sharing of fees derived from professional services other than by “a partner, employee, associate in a professional firm or corporation, professional subcontractor or consultant authorized to practice medicine, or a legally authorized trainee practicing under the supervision of a licensee,” This prohibition includes any arrangement or agreement including payment for furnishing space, facilities, equipment, or personnel services utilized by the medical practice.

14 However, the Captive PC Model may not be a suitable business structure in all states, including those with CPOM laws. The consideration of a state’s laws and regulations, especially the rules of the state’s medical board, must be considered prior to using a particular business model. For example, the Captive PC arrangement may not be used in a state where such an arrangement allows a layperson to exert too much influence over a physician by maintaining the ability to dictate who may own the practice entity. See Allstate Ins. Co. v. Northfield Med. Ctr., P.C., 159 A.3d 412 (N.J. 2017). Furthermore, even in those states where it is acceptable, the level of control exerted over the physician owner must be a consideration as well when considering a business model. See Xenon Health, LLC v. Baig, 662 Fed. Appx. 270 (5th Cir. Oct. 5, 2016).

15 See Flynn Bros., Inc. v. First Med. Assocs., 715 S.W.2d 782 (Tex. App. July 31, 1986) (Management contract and oral partnership agreement between medical services contractor and partner of contractor—which gave partner 66.67 percent of profits of contractor’s medical practice despite lack of medical license by partner; the right to trade and commercialize on the medical license of contractor; the right to select medical staff to work in hospitals under contract; and which allowed partner to encourage hospitals to contract with contractor—violated the statute that prohibits aiding the practice of medicine by any person, partnership, or corporation not duly licensed to practice medicine and, therefore, were illegal, even though contractor was not partner’s employee.).

16 Lori A. Foley & Judd A. Harwood, Buyer Beware! The Value of Due Diligence in Hospital-Physician Transactions, Am. Health Lawyers Ass’n, Physicians and Physician Organizations Law Institute (Feb. 11-12, 2013),[2013_phy]%20q.%20buyer%20beware-the%20value%20of%20due%20diligence%20in%20hospital-physician%20transactions.pdf.

17 See Self-Disclosure Information, U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., (last visited June 2, 2020).

18 AMA Advocacy Res. Ctr., Issue Brief: Corporate Practice of Medicine (2015),

19 N.Y. Educ. Law § 6509-a (2020).

20 N.Y. Comp. Codes R. & Regs. tit. 8, § 29.1(b)(4) (2020).

21 Id. tit. 10, § 600.9(c).

22 Who Owns Medical Records: 50 State Comparison, Health Info. & the Law Project (2012),

23 Starting, Closing, or Selling a Practice, AAFP, (last visited June 2, 2020).

24 See, e.g., “Section F. Contractual Relationships” in Example A on page 111 pertaining to recruitment agreements, medical director agreements, and agreements with referral sources, and “Section H. Governmental Regulation” in Example A on page 112, pertaining to communications, investigations, and agreements with governmental regulators.

25 42 U.S.C. § 1320a-7b(b) (2020).

26 Id. § 1395nn. The Stark Law does not apply to all products and services but those identified as “Designated Health Services” or “DHS” that are as follows:

  1. Clinical laboratory services.
  2. Physical therapy services.
  3. Occupational therapy services.
  4. Radiology services, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services.
  5. Radiation therapy services and supplies.
  6. Durable medical equipment and supplies.
  7. Parenteral and enteral nutrients, equipment, and supplies.
  8. Prosthetics, orthotics, and prosthetic devices and supplies.
  9. Home health services.
  10. Outpatient prescription drugs.
  11. Inpatient and outpatient hospital services.
  12. Outpatient speech-language pathology services.

27 31 U.S.C. § 3729.

28 See, for an overview on Exclusions, The Effect of Exclusion From Participation in Federal Health Care Programs: Special Advisory Bulletin, U.S. Dep’t of Health & Human Services, Office of Inspector Gen., (Sept. 1999), See also for an update on Exclusions, The Effect of Exclusion from Participation in Federal Health Care Programs: UPDATED Special Advisory Bulletin, U.S. Dep’t of Health & Human Services, Office of Inspector Gen., (May 8, 2013),

29 42 U.S.C. § 1320a-7a. See, for an overview Civil Monetary Penalties, Background, U.S. Dep’t of Health & Human Servs., Office of Inspector Gen.,

30 Jaime Jones, Buyer Beware: DOJ Pursuing Private Equity Investors in Healthcare, Becker’s Hosp. Rev. (Dec. 20, 2018),

31 Compliance, U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., (last visited June 2, 2020).

33 Id.

34 Stephen Kraft, Physician Practice Management Companies: A Failed Concept, Physician Executive (Mar. 1, 2002),

35 Out-of-network billing, or what has been now identified as “surprise billing,” refers to instances where a patient is treated by a provider who is not contracted with the patient’s health insurance plan. The result is the patient unknowingly, and potentially unavoidably, is charged a higher rate than if the provider had been a contracted provider with the patient’s health plan. Numerous states have passed different variations of “surprise billing” laws to prohibit such billing and there are currently efforts in Congress to pass similar type of legislation. See Cong. Research Serv., Surprise Billing in Private Health Insurance: Overview and Federal Policy Considerations (Dec. 12, 2019),