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Despite the directions the interviewer tried steering this conversation into, this is a really interesting interview. But when it comes to the private equity r

Despite the directions the interviewer tried steering this conversation into, this is a really interesting interview. But when it comes to the private equity roll-ups, I think everyone is missing the forest for the trees. If you are a doctor looking to retire and sell your business there is no one else right now who would buy it. The same goes for every category of "mom and pop" business in the US. Even if you could find someone experienced enough and interested in running it - that person could not afford the business. So there is kind of a double problem happening right now. One is simply demographic - experienced business owners are retiring at a much faster rate than they are being replaced. Secondly, there is the capitalization problem. A doctor knows what his practice is worth and wants every cent he can get out of it - but the next generation of doctor is not going to be able to compete with debt financing what a PE cash-buyer can get. In addition, there is a problem specific to medical practices - you can't just hand them over to your kid! (unless they also happened to pursue the exact same medical training you did). And in addition to this medical schools (as I have been told) are really underprepared new doctors for running a business. Keep in mind owner-operators already get a huge income and tax incentive over PE firms. It's kind of a perfect storm that makes medical clinics such a special target vs plumbers or landscapers or whatever. If you want clinics to stay independent and keep retiring doctors happy, we are going to have to carve out special programs or tax breaks for young doctors to buy up these businesses with debt. And keep in mind, these would be essentially subsidies for millionaires.

mistrial9 3y ago
sorry, thirty years ago I could have subscribed to "and keep retiring doctors happy" but now, no way Jose
- meepmorp 3y ago
  why the change, out of curiosity?
dwallin 3y ago
"there is no one else right now who would buy it." You are missing a qualifier: "at the current market price." If you prevent or disincentivize PE from buying these types of businesses, the price would drop to the level of its new adjusted demand.
- legitster 3y ago
  Sure! But that cuts into the "keeping retiring doctors happy" piece. If your practice is worth $15 million but you only get 50c on the dollar because there is no buyer pool, you might be pretty grumpy. To the broader picture though, this is a double edged sword if you want more private family practices. Less doctors are going to go through the work and cost of starting their own business if they have to take a haircut on its net worth at retirement.
  - P_I_Staker 3y ago
    They can get grumpy. Who cares? They can live with $7.5 million. I hope they will be able to recover from this crushing blow.
  - tiedieconderoga 3y ago
    If you remove the premium offered by people who just want to scrap the business for parts, and no prospective owners can afford it at your target price, is the business actually worth that much as a going concern? It sounds to me like your hypothetical doctor might actually be upset that they can't get $2 on the dollar by selling to an unscrupulous party. You could view the PE premium as a way for the good doctor to benefit twice from all the tax benefits that they accrued over the years as incentives to keep their business around.
  - atourgates 3y ago
    Then your practice isn’t worth $15-million. I’m married to a physician in private practice, who owns their practice. From the beginning, we’ve always been aware that when she retires in 15-25 years, we have literally no idea what if anything the sale of her practice might bring. It could be essentially nothing (aka, the used value of the equipment, and it’s shocking how quickly even very expensive medical equipment depreciates on the used market). It could be sustainability more, but that’d be a nice bonus, not something we can count on, or that any physician should count on for their retirement planning. No retiring physician is owed anything for the “value” of their practice. And while on a personal level a PE buyout would be a nice bonus at the end of my spouse’s career, not getting it wouldn’t have affected either her decision to go into private practice, or her ability to. Far and away the biggest factor preventing more privately owned physician practices is the fact that hospital-owned practices are often reimbursed around double for the same procedure as independent practices. This has shifted somewhat with the shift from “pay for service” to “value based care” models, but both put independent physician-owner practices at a tremendous disadvantage to large hospital systems. And it’s a damn shame because private physician owned practices are a much more efficient way to care for patients.
Dwolb 3y ago
Agreed. Had a family member receive an LOI at 10x EBITDA so they decided to sell (not sure where they closed). They mentioned that if a doctor would have purchased the practice, it would be 1x or 2x at best. Related: they would have been interested to scale up, but didn't know how and were afraid of the complexity of trying to manage a 3rd location.
- legitster 3y ago
  Another thing to keep in mind is that it was a completely different regulatory environment when most of these private practices started. 50 years ago you could run a cash business with yourself, a receptionist, and a nurse. Incumbent practices could keep up with the times and add billing staff, but you would have to be insane to start a new practice today. I'm all for healthcare reforms, but it's a pity that we didn't pursue a simple voucher or cash-based system over our insanely complex system.
  - Dwolb 3y ago
    Right. Seems like there’s opportunity to be the backend operating system to scale these practices. That’s what PE is supposed to be anyway, but they don’t run it like an owner-operator would.
  - lotsofpulp 3y ago
    The human body is an insanely complex system, hence the resulting complex system to discern fraud and waste. Really only a doctor or very educated person can evaluate another doctor’s determination.
vault_ 3y ago
> A doctor knows what his practice is worth and wants every cent he can get out of it - but the next generation of doctor is not going to be able to compete with debt financing what a PE cash-buyer can get. In my opinion, the physician in this example is a monster. Profit maximization is a choice, not some kind of moral imperative. Am I supposed to have any respect for somebody selling out their employees and patients to vampires so they can retire to a beach or whatever? The solution I'd want to see for situations like this is to find a way to sell to the people who have a continuing interest in how the business is run: employees and customers. The "exit" that does right by all interested parties would be something like having a newly formed employee coop gradually buy out the founder's ownership stake. To make a tech analogy, you don't have to sell your 0-day to foreign government just because they pay more than the bug bounty program! You don't have to sell out your community to vampires because they're the highest bidders! This is a choice that somebody is making.
- legitster 3y ago
  Well, keep in mind that from the perspective of the rest of the healthcare industry, private practices are kind of dinosaurs at this point. They don't play well in our modern system, and the last 50 years of healthcare legislation has done everything short of outright banning them. New doctors are not trained or expected to run businesses. Getting money from medicare or insurance is a nightmare. Patients want access to more services than ever before. The entire idea of a private practice is anathema to modern ideas of healthcare oversight and access equity. Even getting private malpractice insurance is almost impossible now. There is a reason almost nobody is starting private practices anymore. So to give the doctors a bit of credit this is a chance to slip quietly into the night.
  - JohnFen 3y ago
    This explains quite a lot about why health care has been noticeably getting worse over the last several years -- for everybody. In my part of the US, you can't even find a doctor that is taking new patients at all, private practice or otherwise. Talking with some doctors, it's clear that being a doctor these days is a very undesirable job. I know I wouldn't want to do it.
TearsInTheRain 3y ago
"In addition, there is a problem specific to medical practices - you can't just hand them over to your kid!" - Doctors partner with the person that will take over their practice for years before retiring. PE is destroying this system and the latest crop of doctors will lose out on mentorship and the opportunity to run a practice. Everything will become big corporate offices and everyone will suffer
- BeetleB 3y ago
  > Doctors partner with the person that will take over their practice for years before retiring. PE is destroying this system and the latest crop of doctors will lose out on mentorship and the opportunity to run a practice. Everything will become big corporate offices and everyone will suffer Of all the doctors I personally know, only one was interested in working in such a practice (let alone owning one). Where is the existing doctor going to find other doctors to partner with? Especially when they can get paid more to work elsewhere?
busterarm 3y ago
Doctors are an exception and specifically because of the regulatory issues. If you look at other boring "mom and pop" businesses out there, like laundromats, gas stations, car washes, liquor stores, mailbox stores, etc...there's a tons of "acquisitions" entrepreneurs out there buying these things up like crazy and tons of influencers out there (codie sanchez, etc) telling them to do so.
CryptoBanker 3y ago
I don't know where you get the idea that private medical practices are unsellable... It is very common for retiring doctors to sell their client base/practice to other doctors in the same field.
paxys 3y ago
The partnership model exists for exactly this scenario and has thrived for centuries in every sector. If a doctor wants to retire they are obligated sell their share of the business to other partners, not outside entities. When a new partner is promoted they have to buy their way in. All of these problems are solved. If PE firms are getting involved it is due to either greed or mismanagement (or both), not some inherent flaw in the system.
- itairal 3y ago
  It is systemic but it isn't really a flaw. It is the higher order effects of flooding the system with liquidity. If you look at the richest people in America in 1985 and adjust their wealth for inflation no one even makes the top 100 in 2023. If the richest person in America only has 5 billion in 2023 USD then systemically there is just not enough liquidity to think about the risk/reward of buying a vet. We have basically diluted the price of all businesses and all assets. With the amount of liquidity in the system you can either have it pool and do nothing or buy business you would never have previously. This is the price we pay for avoiding what probably would have been two depressions from the financial crisis and covid. Everything in economics is a trade off. It is very hard to say if we would be better off or not. If we had spent the last 15 years of life dealing with two depressions who knows what society looks like now. It is a very different answer if you are 20 or 45 too I imagine.
clarkevans 3y ago
> there is no one else right now who would buy it Their are firms that let you sell to your employees via an ESOP. One I know of (though a friend) is https://www.awcfund.com/ https://www.awcfund.com/
ryandrake 3y ago
> Even if you could find someone experienced enough and interested in running it - that person could not afford the business. I mean, this must be a huge factor. Ignoring doctor's offices for a moment--even regular mom-n-pop small businesses. Few actual humans can afford one, so PE gobbles them all up. I'd love to own a small local business. Know why I don't buy one? I just can't afford any, it's that simple! Same reason fewer and fewer people can buy houses: They simply can't afford them. So PE swoops in and buys housing, too. This seems to be one of the many ill effects of America being set up so there are fewer and fewer rich people, and those fewer own more and more of the pie. If wealth were distributed more evenly, maybe more Average Joes would be able to buy and run their own businesses. But our society doesn't encourage this broad base of wealth. It instead encourages a shrinking elite owning everything.
derbOac 3y ago
Part of what you're touching on is a general problem with rent-seeking, regulatory costs to entry, and monopolization in general, in the US at least. With physicians, this is kind of a consequence of a system their professional organizations have shaped: they kind of brought this ("this" being lack of buyers) on themselves to some extent by restricting supply. But even outside of that, if you ignore that part of it, there's monopolization costs coming from other directions. Many physicians are getting squeezed by decreases in their options, as hospitals and clinics merge, which creates efficiencies that make it hard for small clinics to compete with, which in turn leads to fewer administrative options should a physician choose to try somsething else. My sense is it's even worse than that, because even if you still have a few large hospital systems to choose from, the administrators are being incentivized in the same ways across the chains, so it's one flavor of hyperprofitized healthcare corporation versus another flavor of hyperprofitized healthcare corporation. Basically, it's hard for small clinics to compete even if someone wants to, because healthcare has become a cuthroat profit-driven market, with lots of big money and plenty of opportunities for those in power to take advantage of advantages. I guess what I'm saying is it's not just the debt for the young physician: it's a very risky thing to do, period, being a small clinic versus an oligopoly of large chains. "A doctor knows what his practice is worth and wants every cent he can get out of it" is one possibility, but another is that that seller is in a position of survivorship bias, and can't find buyers because they don't see it as a rational decision even outside of the debt question. The reason why you don't see this with landscapers or plumbers or whatever is because those markets have far more competition, and they're not overregulated (at least to the same extent). Healthcare as a market is characterized by obstacles to competition everywhere: if you ignore the rationale for those obstacles, and just look at it for what it is, you're left with an infrastructure that's constituted largely of barriers and costs to entry and participation. Basically, the market has become too expensive even for practitioners to participate fully in, so the only thing left are financial heavyweights.

mistrial9 3y ago

sorry, thirty years ago I could have subscribed to "and keep retiring doctors happy" but now, no way Jose

meepmorp 3y ago
why the change, out of curiosity?

dwallin 3y ago

"there is no one else right now who would buy it." You are missing a qualifier: "at the current market price." If you prevent or disincentivize PE from buying these types of businesses, the price would drop to the level of its new adjusted demand.

legitster 3y ago
Sure! But that cuts into the "keeping retiring doctors happy" piece. If your practice is worth $15 million but you only get 50c on the dollar because there is no buyer pool, you might be pretty grumpy. To the broader picture though, this is a double edged sword if you want more private family practices. Less doctors are going to go through the work and cost of starting their own business if they have to take a haircut on its net worth at retirement.
- P_I_Staker 3y ago
  They can get grumpy. Who cares? They can live with $7.5 million. I hope they will be able to recover from this crushing blow.
- tiedieconderoga 3y ago
  If you remove the premium offered by people who just want to scrap the business for parts, and no prospective owners can afford it at your target price, is the business actually worth that much as a going concern? It sounds to me like your hypothetical doctor might actually be upset that they can't get $2 on the dollar by selling to an unscrupulous party. You could view the PE premium as a way for the good doctor to benefit twice from all the tax benefits that they accrued over the years as incentives to keep their business around.
- atourgates 3y ago
  Then your practice isn’t worth $15-million. I’m married to a physician in private practice, who owns their practice. From the beginning, we’ve always been aware that when she retires in 15-25 years, we have literally no idea what if anything the sale of her practice might bring. It could be essentially nothing (aka, the used value of the equipment, and it’s shocking how quickly even very expensive medical equipment depreciates on the used market). It could be sustainability more, but that’d be a nice bonus, not something we can count on, or that any physician should count on for their retirement planning. No retiring physician is owed anything for the “value” of their practice. And while on a personal level a PE buyout would be a nice bonus at the end of my spouse’s career, not getting it wouldn’t have affected either her decision to go into private practice, or her ability to. Far and away the biggest factor preventing more privately owned physician practices is the fact that hospital-owned practices are often reimbursed around double for the same procedure as independent practices. This has shifted somewhat with the shift from “pay for service” to “value based care” models, but both put independent physician-owner practices at a tremendous disadvantage to large hospital systems. And it’s a damn shame because private physician owned practices are a much more efficient way to care for patients.

Dwolb 3y ago

Agreed. Had a family member receive an LOI at 10x EBITDA so they decided to sell (not sure where they closed). They mentioned that if a doctor would have purchased the practice, it would be 1x or 2x at best. Related: they would have been interested to scale up, but didn't know how and were afraid of the complexity of trying to manage a 3rd location.

legitster 3y ago
Another thing to keep in mind is that it was a completely different regulatory environment when most of these private practices started. 50 years ago you could run a cash business with yourself, a receptionist, and a nurse. Incumbent practices could keep up with the times and add billing staff, but you would have to be insane to start a new practice today. I'm all for healthcare reforms, but it's a pity that we didn't pursue a simple voucher or cash-based system over our insanely complex system.
- Dwolb 3y ago
  Right. Seems like there’s opportunity to be the backend operating system to scale these practices. That’s what PE is supposed to be anyway, but they don’t run it like an owner-operator would.
- lotsofpulp 3y ago
  The human body is an insanely complex system, hence the resulting complex system to discern fraud and waste. Really only a doctor or very educated person can evaluate another doctor’s determination.

vault_ 3y ago

> A doctor knows what his practice is worth and wants every cent he can get out of it - but the next generation of doctor is not going to be able to compete with debt financing what a PE cash-buyer can get. In my opinion, the physician in this example is a monster. Profit maximization is a choice, not some kind of moral imperative. Am I supposed to have any respect for somebody selling out their employees and patients to vampires so they can retire to a beach or whatever? The solution I'd want to see for situations like this is to find a way to sell to the people who have a continuing interest in how the business is run: employees and customers. The "exit" that does right by all interested parties would be something like having a newly formed employee coop gradually buy out the founder's ownership stake. To make a tech analogy, you don't have to sell your 0-day to foreign government just because they pay more than the bug bounty program! You don't have to sell out your community to vampires because they're the highest bidders! This is a choice that somebody is making.

legitster 3y ago
Well, keep in mind that from the perspective of the rest of the healthcare industry, private practices are kind of dinosaurs at this point. They don't play well in our modern system, and the last 50 years of healthcare legislation has done everything short of outright banning them. New doctors are not trained or expected to run businesses. Getting money from medicare or insurance is a nightmare. Patients want access to more services than ever before. The entire idea of a private practice is anathema to modern ideas of healthcare oversight and access equity. Even getting private malpractice insurance is almost impossible now. There is a reason almost nobody is starting private practices anymore. So to give the doctors a bit of credit this is a chance to slip quietly into the night.
- JohnFen 3y ago
  This explains quite a lot about why health care has been noticeably getting worse over the last several years -- for everybody. In my part of the US, you can't even find a doctor that is taking new patients at all, private practice or otherwise. Talking with some doctors, it's clear that being a doctor these days is a very undesirable job. I know I wouldn't want to do it.

TearsInTheRain 3y ago

"In addition, there is a problem specific to medical practices - you can't just hand them over to your kid!" - Doctors partner with the person that will take over their practice for years before retiring. PE is destroying this system and the latest crop of doctors will lose out on mentorship and the opportunity to run a practice. Everything will become big corporate offices and everyone will suffer

BeetleB 3y ago
> Doctors partner with the person that will take over their practice for years before retiring. PE is destroying this system and the latest crop of doctors will lose out on mentorship and the opportunity to run a practice. Everything will become big corporate offices and everyone will suffer Of all the doctors I personally know, only one was interested in working in such a practice (let alone owning one). Where is the existing doctor going to find other doctors to partner with? Especially when they can get paid more to work elsewhere?

busterarm 3y ago

Doctors are an exception and specifically because of the regulatory issues. If you look at other boring "mom and pop" businesses out there, like laundromats, gas stations, car washes, liquor stores, mailbox stores, etc...there's a tons of "acquisitions" entrepreneurs out there buying these things up like crazy and tons of influencers out there (codie sanchez, etc) telling them to do so.

CryptoBanker 3y ago

I don't know where you get the idea that private medical practices are unsellable... It is very common for retiring doctors to sell their client base/practice to other doctors in the same field.

paxys 3y ago

The partnership model exists for exactly this scenario and has thrived for centuries in every sector. If a doctor wants to retire they are obligated sell their share of the business to other partners, not outside entities. When a new partner is promoted they have to buy their way in. All of these problems are solved. If PE firms are getting involved it is due to either greed or mismanagement (or both), not some inherent flaw in the system.

itairal 3y ago
It is systemic but it isn't really a flaw. It is the higher order effects of flooding the system with liquidity. If you look at the richest people in America in 1985 and adjust their wealth for inflation no one even makes the top 100 in 2023. If the richest person in America only has 5 billion in 2023 USD then systemically there is just not enough liquidity to think about the risk/reward of buying a vet. We have basically diluted the price of all businesses and all assets. With the amount of liquidity in the system you can either have it pool and do nothing or buy business you would never have previously. This is the price we pay for avoiding what probably would have been two depressions from the financial crisis and covid. Everything in economics is a trade off. It is very hard to say if we would be better off or not. If we had spent the last 15 years of life dealing with two depressions who knows what society looks like now. It is a very different answer if you are 20 or 45 too I imagine.

clarkevans 3y ago

> there is no one else right now who would buy it Their are firms that let you sell to your employees via an ESOP. One I know of (though a friend) is https://www.awcfund.com/ https://www.awcfund.com/

ryandrake 3y ago

> Even if you could find someone experienced enough and interested in running it - that person could not afford the business. I mean, this must be a huge factor. Ignoring doctor's offices for a moment--even regular mom-n-pop small businesses. Few actual humans can afford one, so PE gobbles them all up. I'd love to own a small local business. Know why I don't buy one? I just can't afford any, it's that simple! Same reason fewer and fewer people can buy houses: They simply can't afford them. So PE swoops in and buys housing, too. This seems to be one of the many ill effects of America being set up so there are fewer and fewer rich people, and those fewer own more and more of the pie. If wealth were distributed more evenly, maybe more Average Joes would be able to buy and run their own businesses. But our society doesn't encourage this broad base of wealth. It instead encourages a shrinking elite owning everything.

derbOac 3y ago

Part of what you're touching on is a general problem with rent-seeking, regulatory costs to entry, and monopolization in general, in the US at least. With physicians, this is kind of a consequence of a system their professional organizations have shaped: they kind of brought this ("this" being lack of buyers) on themselves to some extent by restricting supply. But even outside of that, if you ignore that part of it, there's monopolization costs coming from other directions. Many physicians are getting squeezed by decreases in their options, as hospitals and clinics merge, which creates efficiencies that make it hard for small clinics to compete with, which in turn leads to fewer administrative options should a physician choose to try somsething else. My sense is it's even worse than that, because even if you still have a few large hospital systems to choose from, the administrators are being incentivized in the same ways across the chains, so it's one flavor of hyperprofitized healthcare corporation versus another flavor of hyperprofitized healthcare corporation. Basically, it's hard for small clinics to compete even if someone wants to, because healthcare has become a cuthroat profit-driven market, with lots of big money and plenty of opportunities for those in power to take advantage of advantages. I guess what I'm saying is it's not just the debt for the young physician: it's a very risky thing to do, period, being a small clinic versus an oligopoly of large chains. "A doctor knows what his practice is worth and wants every cent he can get out of it" is one possibility, but another is that that seller is in a position of survivorship bias, and can't find buyers because they don't see it as a rational decision even outside of the debt question. The reason why you don't see this with landscapers or plumbers or whatever is because those markets have far more competition, and they're not overregulated (at least to the same extent). Healthcare as a market is characterized by obstacles to competition everywhere: if you ignore the rationale for those obstacles, and just look at it for what it is, you're left with an infrastructure that's constituted largely of barriers and costs to entry and participation. Basically, the market has become too expensive even for practitioners to participate fully in, so the only thing left are financial heavyweights.