Introduction

Private equity within physician practice management (PPM) is no longer an esoteric topic amongst physicians, as investment continues to accelerate into specialties that are familiar with consolidation: Dental, Dermatology, and Eye Care. In the last few years however, private equity has started deploying capital into newer specialties such as ENT, cardiology, urology, gastroenterology, orthopedics, pain management, women’s health, and others. As independent physicians battle health systems, reimbursement pressure, an inflationary environment, and a continued complex operating environment, practice owners across ENT & Allergy are continuing to educate themselves on strategic options, and the specialty has emerged as an attractive specialty for private equity investment, as evidenced by continued and accelerated activity in the space.

Source: Healthcare Dealflow

ENT & Allergy Trends

Trend 1: Increasing Clinical Demand

Demand for ear, nose and throat services continues to grow as the prevalence of allergy, asthma and a variety of other ear, nose and throat medical issues continues to increase, as evidenced by the chart below.

Source: Centers for Disease Control & Prevention (CDC)

Trend 2: Demographics / Aging Population

Consolidation within physician practice management is set to continue as a result of multiple demographic drivers. Specialty medicine as a whole has drawn investor interest due to an aging population and increasing chronic conditions, with ENT & Allergy falling in line with that trend: Over 50 million Americans (representing over 30% of adults and 40% of children) suffer from some level of allergies, ~15% (and growing) of Americans suffer from asthma, north of 10% of American adults have difficulty hearing, with those over the age of 65 suffering at an over 25% clip¹. 

Current ENT & Allergy Platforms

Why Now?

Physician Owner & Private Equity Alignment

The lack of uniformity amongst the private equity buyer universe within the space shows that private equity firms are learning from their experience within physician services as a whole, implementing new and innovative approaches and focusing on creating alignment in every element of the transaction structure. Overall, this is an exciting trend for ENT & Allergy practice owners, as they are not a guinea pig for proving out the private equity model, but rather are participants in a refined, evolving new model.

Opportunistic Value Creation for Practice Owners

The stage existing platforms are at within their life cycle can vary depending on which partnership model makes sense and there are a host of considerations surrounding the timeline to a second sale, existing track record (or lack thereof), and go-forward strategy, amongst others. 

While ENT & Allergy has a lot of momentum and has shown substantial evolution from previous consolidation efforts, the existing landscape presents a number of options for practice owners to better understand – ENT focused groups, ENT & Allergy focused groups that also include audiologists, and Allergy groups yet to expand into ENT (see the below table). Based on extreme growth potential across Otolaryngology sub-specialties, substantial interest to create a platform exists from private equity firms who have yet to invest in ENT & Allergy.

Demographic and clinical demand tailwinds, supplemented by a wide array of ancillary service opportunities, including but not limited to ambulatory surgery centers, allergy testing, biologics, asthma care, audiology testing, and pediatric allergy care, provide support for continued private equity investment.

With more ENT & Allergy practice owners approaching PGP over the past year for education and information, PGP expects to see continued activity both from an add-on acquisition perspective and a new platform formation perspective. As a result of all of the activity in the space, there are key considerations practice owners need to keep top of mind when starting to explore their strategic options.

Key Considerations For Practice Owners & Why an Advisor Is Important

When evaluating a potential partner, it is extremely important to find the right fit to ensure a strong go-forward partnership. PGP advises that four critical factors need to be considered when evaluating whether a partner is right for your practice:

• Maximize Economics and Achieve Most Favorable Deal Terms
  • Negotiating favorable economic deal terms (equity share price, timing of payment, etc.) 
  • Strike appropriate balance between total EBITDA credit vs the EBITDA multiple
  • Receiving credit for various tangible growth initiatives in the business (new locations, new providers, new service lines, etc.)
• Achieve Clinical Autonomy
  • Ensure there is a strong level of go-forward governance control at the local level
  • The practice maintains directional control at the company, including work schedules, vacation days, work location, and retention of staff
  • Maintained control of provider recruitment and retention
• Ensuring potential partners have the resources to execute against the strategy
  • Access to capital and economies of scale 
  • Adequate level of administrative and operational resources provided (Accounting / Finance, IT, RCM, Marketing, HR & Recruiting, Business Development, Legal, etc.)
• Track Record of Success
  • Partnering with experienced healthcare / PPM ‘Operating Partners’ with a history of adding significant value and operational guidance in the PPM space
  • Proven ability to align with young and newly recruited providers
  • Exceptional key performance metrics (recruitment, attrition,location growth, service line expansion)

While many independent groups may initially feel they can navigate a transaction without an advisor, those that have gone through the process with an experienced and reputable firm in their corner will be quick to highlight the significant value add from both economic, partnership and educational perspectives. Ensuring that each shareholder is prepared and fully understands the dynamics within a transaction is crucial for the future success of the business. 

A seasoned healthcare transaction advisory team can ensure that the most attractive outcome is achieved. Through a formalized competitive marketing process, an advisor can ensure the practice maximizes their economics and transaction terms. A transaction process also allows the practice to interview multiple private equity partners and choose the group that presents the best ‘fit’. 

Even if a group is approached by a buyer or has a buyer in mind, it is essential to run a process considering the practice has one opportunity to choose the right private equity partner, supplemented by the value a process drives regarding both deal terms and economics.

Creating Value after the Transaction

One of the biggest questions practice owners have is what happens after the transaction is consummated? In reality, if you are doing a transaction with a reputable private equity platform, physicians will largely continue to operate “business as usual”. The private equity partner will look to implement certain growth initiatives, but these initiatives will all be items that were discussed at great length in advance of consummating the transaction. On the clinical front, physicians will practice medicine the way they always have. Clinical autonomy is maintained, and an advisory firm like PGP negotiates this on the physician group’s behalf. As for infrastructure capabilities, groups that lack back-office sophistication will typically integrate into the “platform” practices EMR, Accounting and PM systems. Outside of day-to-day operations and clinical delivery, the most notable change is the holding of rollover equity in the new partnership by selling physicians. Due to the fact a substantial liquidity event is experienced, shareholders are required to utilize a percentage of their proceeds in the form of equity in the new enterprise. This is desired by the private equity firms as they want to maintain alignment with the physicians that they have invested in, creating a shared goal of a “second bite of the apple” when the platform ultimately experiences a subsequent sale 3–7 years down the road.

Private Equity Value Creation

Conclusion      

The consolidation within ENT & Allergy continues to accelerate into the second half of 2024 and PGP expects the pace to continue into 2025. Whether a practice outwardly desires private equity partnership, questions the rationale and effectiveness of a PE partner, or downright disagrees with private equity, it is essential to get educated and ensure your practice is positioned for continued success in your market.

For those that choose to go down the path, it is imperative that culture and alignment, not simply economics, is the first goal. The role of an advisor like PGP can be the difference maker not only in knowing who can be trusted and who has a track record of success, but in ensuring an economic outcome that is satisfactory when transferring the ownership of your business.

If interested in pursuing a transaction, learning about private equity, the private equity strategy, transaction dynamics, or activity in your market, please utilize the information below to contact the PGP team and schedule a discussion.

¹American College of Allergy, Asthma, & Immunology