The longest running type of PE investment in physician practices is in specialty practices. While the specialties invested in have varied over time, the most recent specialties of interest include orthopedics, cardiology, and gastroenterology. These specialties have three things in common that make them predictable targets for investment:

1. High utilization from an aging population
2. Associated ancillary services
3. Ability to shift procedures to ambulatory settings

When PE firms invest in these specialties, they tend to consolidate fragmented practices, look for inefficiencies and other cost cutting opportunities, and expand outpatient and ancillary offerings—all initiatives that cut costs and boost fee-for-service revenue.

More recently, we’re seeing increased interest from PE firms in primary care practices. Whereas specialty care rollups focus on fee-for-service volumes, these investments bet on the transition to value-based care. As such, the tactics firms use with these practices differ. At a high level, the goal is still ROI through reduced costs and increased revenue, but the way firms achieve that ROI—and the upfront investments required—differ. For example, primary care partnerships are more likely to see investments in analytics, real-time data tracking, care-team redesign, and virtual appointment infrastructure—while simultaneously rolling up practices to cover more lives.

Investment in fee-for-service specialty care is the tried-and-true approach to PE investment, which can lead to a cleaner alignment between physician practices and PE firms around growth expectations. As firms invest more heavily in primary care, both parties will need to factor two key differences to be successful:

1. What the investments look and feel like on the ground: The rapid growth phase will look different in each of these types of investments—so both investors and practices must be aligned on the ways this will manifest.
2. The timeline for return on investment: The length of time it takes for primary care investments to see ROI is longer, more uncertain, and hinges on reimbursement policy, which is out of the investor’s control. This makes primary care a more risky investment than specialty care, and to be successful it requires a firm that is willing to take that risk and make the appropriate investments into the practice.

PE firms invest in two types of practices: platform or add-on. A platform practice is usually large and has an infrastructure and care model of its own that can be scaled to other practices. An add-on practice is generally smaller, with less investment in technology or care model redesign. Platform practices tend to be earlier stage investments, with their technology, infrastructure, or care models being scaled to the add-on practices.

It’s critical that both the practice and the PE firm understand whether the practice is considered a platform or an add-on. The distinction between platform and add-on practices affects investments in two key ways:

1. Deal dynamics: From the practice perspective, platform practices have higher valuations and usually get more lucrative deals than add-on practices—as do their shareholders.
2. Autonomy vs. standardization: Platform practices view private equity as a means to scale their own care models or infrastructure. In contrast, add-on practices are more often looking to benefit from the models that the platform practices have to offer.

This means that add-on practices should expect more change and less control—so these deals work better when geared toward practices who need capital and scale to survive or see strong alignment with the platform practice.

For platform practices, success will be measured by the ability for to retain control and truly bring their care models to scale. These factors are what will set successful PE firms apart from competitor funders, like health systems or payers.

When a private equity firm invests, it does so to produce rapid return on investment and profit growth. The speed around and prioritization of these goals are the most significant way PE differs from any potential physician practice partner. The practice and PE firm must fundamentally be aligned on these for the partnership to succeed. And this is often where partnerships go wrong: practices are not prepared for the speed at which growth will occur or benchmarks that they will be held to.

Beyond that fundamental alignment, the methods by which growth will be achieved must be clear to both parties. Some of this will differ predictably based on the type of care delivered (primary vs. specialty care) or practice type (platform vs. add-on), but it is critical that partners have this discussion before entering into the arrangement. Specific questions to consider include:

1. Will ROI hinge more on cost cutting or growth?
2. If cuts are made, what is on or off the table?
3. What specific investments (e.g., care team redesign, technology) will enable this growth?
4. How will all of this be explained to shareholders?

Alignment on these specific questions like these—in addition to overarching growth principles—can help avoid unexpected pitfalls or pushback later on in the relationship.

Not all private equity firms specialize in health care—and within those that do, they may specialize in specific sectors of health care. Because health care has such myriad players and is not a linear consumeristic experience, firms with deeper experience in health care are likely to be better able to make smart decisions in this industry. In addition, firms must be able to translate this experience to the physician practice, most directly through seats on the board and added management structures.

When it comes to physician practices, we have an added layer of differentiation: firms that specialize in traditional specialty roll-ups and others who specialize in primary care investments to achieve value-based care. Knowledge of one type of practice does not translate to success in the other. Especially if we consider that much of private equity investment follows trends—and value-based care is a clear health care trend—firms must be able to both understand the reasons for an implications of this trend and ideally demonstrate success in helping practices achieve growth under risk-based arrangements. That experience will not only impact the types of investments firms make in a practice, but also their tolerance for a longer tail on ROI and willingness to invest in an arena where much is left to the control of payers and the government.

While we can speak to the first four indicators of success at a national trend level, each market will have individual competitor and payer dynamics that influence the success a PE deal will have in that market. After all, private equity isn’t the only funder fighting for these physician practices. Different payers may be playing either a partnership or all-out acquisition role of the physician practices in your market. Service partners are offering value-based care solutions with a range of success—and extending their reach into specialty practices. And national medical group chains are both building and acquiring practices, especially in urban settings.

The relative power dynamics of each of these funders in a market, as well as the market saturation of other physician practices and health systems, will impact who the power dynamic favors in a PE-physician practice deal.

1. In a highly fragmented market with lots of varied competitors, any one physician practice is less likely to hold dominance over referrals and patient lives.
2. In less competitive or fragmented markets, a sole physician practice may cover the majority of lives, and therefore have better leverage with both a PE firm and the market itself.

These dynamics—and how they shift over time—will impact the alignment between the two partners, the success of the deal, and how much disruption the deal will cause to a regional ecosystem. A PE firm’s ability to understand the local market, including its size, competitor makeup, and longer-term projections is more important to a deal’s success than national analyses.