M&A in Physician Practice Management: An Alternative to Hanging Up the White Coat

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Since 2017, over 4,500 healthcare service companies have been acquired. Both strategic acquirers and private equity groups are heavily investing in Physician Practice Management (PPM) companies as they are recession resistant, have consistent cash flows, and are uniquely scalable. Everyone needs to see the doctor when they are sick, whether the economy is thriving or in a downturn. A majority of physician practices bill Fee-For-Service (“FFS”) with a reimbursement timeframe between 30-60 days after submitting claims to insurers. This cash flow cycle is consistent and predictable, which is attractive to investors. Also, physician groups are quite scalable by implementing a single electronic medical record / billing system over many different practices with different specialties or having the ability to gain leverage over insurance companies with ever increasing scale and reportable outcome data. A large physician group can typically enroll smaller groups into their managed care agreements, adding 10-20% in allowables in short order. If a group was to change from FFS contracts to an at-risk capitated structure, revenues can increase materially over FFS. Due to these factors and many more, investors are aggressively investing in the PPM space at high valuations.

Private equity is estimated to have approximately $1.5 billion of capital available for U.S. acquisitions and they have mandates to put this money to work. Additionally, with the increased cost of debt in today’s market, the volume of larger ($250M+) transactions being completed is in decline. This is causing larger investors to come down stream to acquire a larger number of smaller businesses. Most PPM businesses fall into the sub $100M size category, which is seeing increased investment volume.

Strategic Acquirers vs Private Equity

Strategic acquirers are typically publicly traded companies in the healthcare industry. These large companies grow both organically and in-organically (through acquisitions). The major difference between a strategic acquirer and a private equity group is the equity structure. Most strategic acquisitions are paid in all cash or mostly cash and some publicly traded equity. The overall liquidity of this transaction structure is appealing to some sellers. Cash can be immediately invested by the seller and the publicly traded equity can be sold at any time on the public markets.

A private equity transaction is typically paid out in cash and rollover equity. Rollover equity is comprised of private shares of stock in the original selling company (retained equity) or an equivalent value of shares in the private equity group’s portfolio company that is acquiring the business. The major difference between rollover equity shares and publicly traded shares is that rollover shares are not liquid, meaning it cannot be sold at any time. The typical hold period for private equity investors is 3-5 years. Over this time, the rollover equity shares increase in value as the business grows, then can be sold when the private equity group sells the business to the next investor or goes public.

Why Are Independent Physician Groups Selling?

Many independent physician practices have decided to undergo an acquisition of their practice for a multitude of reasons.

One of the most prevalent reasons for the sale is based on the idea of de-risking, also known as diversification or “not putting all your eggs in one basket.” Many physicians have built their practices from the ground up, put in the hard work, and want to protect that investment. By selling a majority of the practice, owners are able to “take some chips off the table,” while still participating in the upside growth with an investor’s capital. This is typically achieved by selling 70% – 80% of the practice for cash and rolling over/retaining the remaining 20-30% in equity. Most private equity deals are structured this way to align incentives of the buyers and the seller’s post-acquisition. Many times, this rollover equity returns more cash to physician owners than the initial cash transaction. This concept is known as the “Second Bite of the Apple.”

Another reason physicians are transacting is due to the difficultly of running a successful and profitable private physician group in today’s market. There are many factors that contribute to this difficulty, including a continuous downward pressure on reimbursement rates, increased labor costs and labor shortages, and more sophisticated competition entering the marketplace. These factors all result in an uphill battle for independent physician groups.

The 2024 Centers for Medicare & Medicaid Services (“CMS”) Proposed Rule identifies an overall 3.26% reduction to the conversion factor, which will decrease FFS Medicare payments next year for physicians. Labor shortages and increased inflation also put downward pressure on margins for private groups making it harder to keep up with larger groups with full recruiting / retainment departments. Additionally, Medicare (and commercial payors) are shifting from an FFS payment model to a value-based model for care. This makes it more difficult for smaller private physician groups to keep up with the resources of well-capitalized groups with access to better technologies and more robust back offices.

Another hurdle many physician owners are seeing is the shift in work life balance requirements from younger physicians. Many physician groups are finding it harder and harder to find motivated younger physicians willing to put in the work to become a partner and run the business. Many young doctors want to work 40 hours a week and spend more time on non-work activities. If there is no succession plan in place, many near-retirement physician owners look to find a capital partner to continue the legacy of the practice.


In the 1990’s private equity first began investing in physician groups, but the initial private equity model was flawed. These investors initially told physicians how to practice medicine and implemented a non-production-based compensation model. These two things simply did not work and lead to their failure. The new private equity PPM model that started in the 2000’s required physicians to make all medical decisions and participate in a production-based compensation model. The private equity group focuses the implementation of efficiencies to make practices more profitable and scalable for growth. The success in this new model can be seen in the impressive returns private equity has achieved in PPM transactions.

Despite high inflation and cost of debt, valuation multiples on physician practices remain high due to the nature of the recession resistant healthcare market. Align Business Advisory Services is a nationwide lower-middle-market mergers and acquisitions (“M&A) advisory firm. Align and its team have facilitated more than $3 billion in healthcare services transactions, making it one of the key sector areas of focus for the firm. Contact us today to discuss the current dynamics of healthcare M&A and what opportunities may be available for your practice in today’s market.