🔒Private equity firms emerge as larger players in CT’s consolidating healthcare market

Connecticut physicians — like doctors across the nation — face an increasingly challenging landscape.

“We have arrived at this crossroads where things are not pretty,” said Dr. Khuram Ghumman.

He is a primary care physician with a small independent practice in East Granby, and also vice president of the Connecticut State Medical Society.

“The insurance challenges, the regulatory requirements,” he said, “in a state where the burden is higher for malpractice, a state where 16 years in a row, we have not seen any adjustment to the Medicaid rates.”

Pressures include the ever-rising costs of everything from electronic health record systems, to malpractice insurance, to technology, said Arnold Menchel, an attorney specializing in health care with law firm Halloran Sage.

“The big driver is the ever-increasing need for significant amounts of capital,” he noted.

Physicians have been dealing with these financial and organizational pressures in a number of ways, including through consolidation.

Most of the attention has been on small groups teaming up to become larger practices, or groups being bought out by hospitals and other health systems.

Another trend growing in popularity — and sometimes flying under the radar — is practices embracing private equity investment. It’s happening in Connecticut.

A national study by Avalere for the Physicians Advocacy Institute found a 43% increase in the percentage of physicians employed by corporate entities between 2019 and 2021, a trend that’s been accelerated by the COVID pandemic.

Over the same period, there was an 86% increase in the percentage of corporate-owned practices.

“I’ve always categorized the Connecticut healthcare marketplace as the land of frozen molasses,” said Jeff Hogan, president of Farmington-based Upside Health Advisors.

But, in the last year or so, Hogan said he’s observed a change.

“Suddenly, we are seeing all kinds of companies moving into Connecticut, seeing the opportunity to optimize existing provider groups,” he said.

Recent deals

In February, for example, publicly traded Privia Health invested in New Haven-based Community Medical Group, an arrangement that encompasses more than 1,000 in-state providers.

Then in March, Chicago-based management services company VillageMD, the beneficiary of multiple private equity investment rounds, acquired Starling Physicians, a primary care and multispecialty group with 30 locations in central Connecticut.

Private equity interests are also backing some of the various players in the race to build out high-profit surgical centers in Fairfield County and elsewhere in Connecticut.

Hogan said Connecticut is seeing a rush of outside investor interest right now, because PE firms see a lot of potential for change.

“It’s been a very legacy, fee-for-service, uncoordinated, volume-dependent marketplace,” he said. “And that’s why it’s become such an expensive marketplace. The PE companies, for better or for worse, have furnished the capital for a lot of this innovation that we’re starting to see finally come into the marketplace.”

It also can’t hurt that one of the highest-profile healthcare investors in the country is Annie Lamont, co-founder and managing partner of Stamford-based Oak HC/FT, and wife of Connecticut’s governor.

Oak HC/FT has made many investments in management companies that help inject private equity funding into physician groups, including VillageMD.

But private equity has a checkered reputation in the healthcare world. Studies have shown that the involvement of private equity can drive up prices for healthcare services, as firms seek a double-digit return on a short time horizon.

Doctors have also reported feeling as if they lost control of clinical decision-making after a PE takeover.

Some have pointed to the 2019 closure of private equity-owned Hahnemann Hospital in Philadelphia as the poster child for the ills of PE asset stripping in the healthcare field.

“It’s often convenient to say PE is bad, but I’ve seen many instances from very, very smart, strategic, tactical private equity firms who aren’t there just to eke out a three-year return,” Hogan said. “In fact, they’re in it because they’re strategic and they see value in the organization.”

Regional hub

Another recent entrant to the Connecticut market believes it has solved this conundrum. Dallas-based GI Alliance is a gastroenterology specialty group that has minority backing from private equity.

It currently employs around 800 doctors in 15 states, making it the nation’s largest GI physician practice management company.

In January, it acquired Connecticut GI, the state’s largest physician group in that specialty with 82 physicians, 45 advanced practice providers, and 400 overall employees providing care in 25 procedure locations.

GI Alliance is also seeking permission from state regulators to make a minority investment in Coastal Digestive, a New London-based gastroenterology group.

“We wanted to have a national footprint and really felt we needed to be in the Northeast,” said GI Alliance CEO and founder Dr. Jim Weber.

He said Connecticut has become a regional hub from where his company will continue to expand.

After growing his own practice organically for many years, Weber formed GI Alliance in 2018, with a controlling investment from Chicago-based Waud Capital. At that point, the company employed some 130 doctors in Texas and Louisiana.

“Physicians really are good at running a medical practice, maybe not running all the intricate back-office business stuff,” Weber said. “I didn’t want to go down that route, but I said, if we can be patient first, quality-centric, physician-led, I will do this.”

He recognizes the poor reputation some private equity deals have had in health care.

“There’s a litany of bad ones,” he said. “And most of those, what happens is that the doctors do it as what I call a retirement plan. They want to get a little money for what they’ve built, but then they back off from really running the practice. And that’s a problem.”

His model is different, relying on his funding partners for back-office expertise.

“They did help us find some really great business people for our executive team and provided the capital resources to be able to hire those people,” he said. “Private equity doesn’t help a doctor be a better doctor, or run the practice better from a clinical standpoint.”

He points to revenue cycle management, financial planning and analysis, accounting and analytics as areas where an outside eye and investment can add value to a physician practice.

GI Alliance made another strategic move last year, when it announced a physician-led buyout facilitated by a $785 million, non-controlling investment from another private equity player, Apollo Hybrid Value funds.

Weber said having built the business expertise he needed, he wanted to once again take control of the group.

“I didn’t need (Waud Capital) anymore,” he said. “Apollo helped us to get the capital to buy Waud Capital out, and we let them have just a minority share of equity.”

Weber said doctors now own 85% of the management services organization, while he’s serving as CEO and board chair, “not somebody from a private equity company.”

He also said GI’s national scale is redressing the balance of power for his physicians.

“As hospital systems and payers and others are consolidating, now we can go to the table with one voice, whether it’s in our local metropolitan area, in our state, or even nationally, and they’ll actually listen to us as physicians because we’re not just a group of three doctors and they don’t care — we’re a group of 800 doctors in multiple states,” he said.

Profit vs. patient

So, can physicians use private equity as a tool to gain more power in a rapidly consolidating marketplace, or is it a dangerous bargain?

“In the healthcare field, you are either answerable to the patient or to the stockholders,” said state Sen. Saud Anwar (D-South Windsor). “And that’s a big decision that people would have to make at some point.”

Anwar is a physician and co-chair of the legislature’s Public Health Committee. During this year’s legislative session, he co-sponsored a bill that would have required a study on the impact of banning private equity investment in hospice care.

“Private equity by definition is there to make profit for the investors whose primary objective is only profit,” he said. “And when we are dealing with humans, and at a critical time, you have to make a decision between the value of human life and profit.”

He would rather see the healthcare system, regulators and policymakers work together to solve inefficiencies and the need for investment in other ways, like tackling wasteful duplication and paperwork in the insurance system, curbing malpractice lawsuits and improving Medicaid rates.

Meantime, state regulators do have purview over some healthcare deals involving private equity firms.

But there is concern that some acquisitions still fly under the radar, and a Connecticut physicians’ working group in February called for closer regulatory scrutiny on ownership transfers involving private equity firms as well as payer/provider organizations.

Connecticut is a “corporate practice of medicine” state, meaning that clinical decision-making must legally remain in the hands of physicians, regardless of the ownership model, said Menchel, the Halloran Sage attorney.

Ghumman, the East Granby physician who served on the working group, said there should also be restrictions on the amount of debt private equity firms take on to leverage healthcare-practice buyouts.

And, he believes the current trend toward physician group consolidation may be due for a drastic reverse.

“This is just not sustainable, and we are watching it unfold and not doing anything. And I think that’s a big loss,” he said. “We are helping create ‘too big to fail’ today. And then, who’s going to come to the rescue? Taxpayers — you and I.”