Private equity (PE) investment in physician practices has increased over the recent years, with 364 clinics and outpatient services being invested in in 2020 alone. As PE becomes an even more compelling capital partner for practices, our team set out to answer some of the biggest unanswered questions about this investment trend.

Throughout our research, we were repeatedly asked the following questions:

1. What type of physician practices are private equity firms investing in?
2. Is private equity investment good or bad for physician practices?
3. Will private equity firms stop investing in physician practices anytime soon?

Read on for our answers to these three questions.

Question 1: What type of physician practices are private equity firms investing in?

Answer: Both specialty and primary care practices—but with different goals for each.

What's happening in the market now:

Historically, PE firms invested in single specialty practices like dermatology, gastroenterology, and orthopedics with the goal of capturing more fee-for-service revenue. With this model they aim to cut costs, in large part through identifying inefficiencies, and increase revenue through expanding ancillary services.

More recently, PE firms began to invest in primary care practices, following the broader nationwide trend of value-based care and the increase in Medicare Advantage (MA). PE-backed primary care practices are acquiring smaller practices with the goal of increasing the number of covered lives.

They also invest heavily in value-based care (VBC) infrastructure like analytics, real-time data, and care-team redesign—while still looking for cost-cutting opportunities.

What we'll be watching:

Long-term PE investment in primary care is uncertain. The decision to continue to invest hinges on whether PE firms generate a large and quick enough return on investment (ROI) for shareholders—whereas value-based contracts typically take longer to see this ROI. These deals also largely bet on the MA market continuing to be hot, but we have questions as to how long MA will remain sustainable at its current rates.

Plus, these models rely on the government and commercial payers, which means though the influx of capital PE brings to primary care may tilt the scales in favor of VBC, there are still many factors outside of practices and firms' control that will determine the long-term success.

Question 2: Is private equity investment good or bad for physician practices?

Answer: It depends—each partnership is unique and comes with its own terms.

What's happening in the market now:

Each PE deal is a partnership between the physician practice and a PE firm. And as we know from our previous research on physician partnerships, there's a lot that goes into making a good one. Evaluating the merit of a partnership based solely on the funder isn't a good rule of thumb.

Cheat sheet: Private equity investment in physician practices

In fact, many practices we talked to were surprised during the capital partner process when they discovered PE firms were more aligned with their goals and needs than they expected. There is a huge range of physician practices, PE firms, and deal specifics that influence the success of a given investment.  

We think that the focus on PE as "good vs. bad" distracts from the reality that PE is a very real player in the market now. For individual practices looking to partner, we recommend a thorough vetting process to select a partner that is aligned with your goals and culture. For other industry players, we recommend developing your strategy to address PE's influence in the market now instead debating its merits.

What we'll be watching:

PE firms and physician practices agree that PE investments don't affect clinical autonomy—at least yet. But the jury is still out on whether these firms—like many other physician practice funders—will need to reduce clinical autonomy in the longer term to achieve standardization and ROI.

There are also mixed reviews on the effects of changing managerial operations. More evidence is needed to determine the extent at which patient care is changed. Most likely, we need more nuance to the evidence to understand the characteristics of PE-physician practice partnerships that are more likely to lead to both positive and negative outcomes.

Question 3: Will private equity firms stop investing in physician practices anytime soon?

Answer: We don't think so.

What's happening in the market now:

Despite talk of a "bubble bursting," we don't see that on the immediate horizon. For starters, PE firms currently have access to large amount of capital, and it's estimated that assets under management by PE funds will more than double between 2020 and 2025.

In health care specifically, an aging population with more complex needs means that the demand for health care is only going to increase. Physician practices, especially specialty care rollups, are a safe bet for PE at this point, with a proven model for ROI.

On top of that, we're seeing a trend towards secondary buyouts, where PE firms sell to another firm. In fact, it's quite common for the leading firms that invest in physician practices to swap investments back-and-forth, and we don't see this trend stopping anytime soon.

What we'll be watching:

Longer term, we expect new buyers to be at the ready for these PE-backed practices. These new buyers will need enough capital to purchase the practice at the end of the road, so insurance companies, large retail pharmacies, and tech giants entering the health care space seem like the most compelling purchasers to us.

We're also interested in whether the bets PE firms are taking on primary care and value-based care produce meaningful ROI on PE's shorter timeframe. Since most PE investments in physician practices last between 3-7 years, there is limited time to see a return on the investment.

Beyond that pure ROI question, there's the broader question of whether the industry will meaningfully move to value. That shift will be necessary to see the highest returns on these primary care investments. We could see PE firms backing away from these types of deals before the industry gets there.