Half of private equity-owned physician practices are resold within 3 years

April 19, 2024 - More than half of private equity-acquired physician practices underwent an exit within three years of acquisition, with most practices being resold to other private equity firms, according to a study published in Health Affairs Scholar.

When private equity firms acquire physician practices or other healthcare organizations, the intended end goal is to sell the entity so investors can see a return on investment. Investors generally expect to see returns within three to eight years, making exits a natural part of the private equity cycle.

Private equity firms may exit investments by selling their portfolio companies to other private equity firms, known as a secondary buyout. This strategy pushes the ‘buy to sell’ mindset, as the second firm must also achieve growth over a short time period to realize investment returns.

Firms may also exit investments through trade sales to strategic corporate buyers seeking a competitive advantage in their industries, a method that advances the ‘buy to keep’ strategy, as buyers likely want to hold on to investments and integrate them into existing operations.

Alternatively, firms can exit investments through an initial public offering in which a portfolio company is listed on a public stock exchange.

Researchers assessed private equity exits following investments in dermatology, ophthalmology, and gastroenterology to determine the nature and duration of private equity exits from physician practices.

Between 2016 and 2020, 807 physician practices in the three specialties were acquired by private equity firms. Just over half (51.6 percent) of these practices experienced an exit of the original private equity investor in which some or all assets were sold to a secondary buyer.

Among the 417 practices that underwent an exit, 97.8 percent experienced a secondary buyout where the practice was resold to another private equity firm. Just 2.2 percent of practices that underwent an exit were sold to a secondary buyer that was a strategic corporate acquirer.

Around 43 percent of practices remained owned by the initial private equity investor for three to seven years following initial investment, while 5.7 percent of practices had temporarily or permanently closed.

The median investment holding period for practices that underwent a private equity exit was 2.9 years across all five years. The median holding period was 3.7 years in 2016, 4.8 years in 2017, 3.8 years in 2018, 2.8 years in 2019, and 1.7 years in 2020.

Among dermatology practices, 63.8 percent of acquisitions in 2016, 68.9 percent in 2017, 54.9 percent in 2018, 50.0 percent in 2019, and 62.0 percent in 2020 were sold to another private equity firm. Within gastroenterology, 31.0 percent of acquisitions in 2016, 100 percent in 2017, 87 percent in 2018, 59.3 percent in 2019, and 80.3 percent in 2020 were sold to another private equity firm.

Among ophthalmology practices, 71 percent of acquisitions in 2017, 23.6 percent in 2018, 53.8 percent in 2019, and 19.8 percent in 2020 were sold to another private equity firm.

Within private equity firms with the largest number of exits, the number of affiliated physician practices increased by 595 percent in three years, on average.

The study findings highlight the fast pace of ownership change for many physician practices acquired by private equity firms. The trend of being resold to another private equity firm within three years can advance aggressive growth over short periods that do not result in any long-term benefits for physician practices and their patients.

Additionally, the rapid increase in the number of physician practices affiliated with a private equity firm indicates that greater antitrust scrutiny is needed. More ownership transparency of healthcare providers is also needed to accurately evaluate the scope and scale of private equity consolidation and its long-term impacts on care delivery.