Physician Practice Deals: An Insider’s View

Photographer: Daniel Acker/Bloomberg

• Attorney who led Sheridan Healthcare through multiple acquisitions gives acquirers, targets advice

• Good acquisition targets today are those in highly fragmented specialties, like obstetrics and urology

• Successful physician practice consolidations should improve practices while keeping physicians engaged

By Mary Anne Pazanowski

Physician practice sector dealmakers face many pretransaction challenges, such as identifying potential targets and developing practice models that offer the best solution for physicians’ woes.

One of the most active health-care industry sectors in terms of transactions volume, physician practices are being acquired by hospitals, management corporations, and private equity investors at an accelerated rate. So far in 2017 there have been roughly 30 percent more of these deals than at the same time in 2016, according to data compiled by Bloomberg Law.

The return on these investments can be huge. Envision Healthcare, a Nashville, Tenn.-based publicly traded physician practice management corporation, for example, had a net revenue of $1.99 billion in the third quarter of 2017—and that was after it took a $22 million revenue loss as the result of Hurricanes Harvey and Irma, according to the company’s regulatory filings.

Physicians also can benefit. In addition to sharing in the company’s financial gains, they generally are relieved of trying to maneuver through the many administrative and regulatory corridors facing their practices in an era of shrinking reimbursement. Private equity investors see money to be made through efficiencies that can be gained by consolidating operations, then selling the practice for a profit after two to five years.

According to Jay A. Martus, an attorney and health-care executive who helped steer Sheridan Healthcare Inc. and its predecessor through a myriad of transactions over 25 years, these deals have the best chance of succeeding if they forge partnerships with physicians that are designed to bring sustained and meaningful changes to their practices. Fragmented practice specialties—those in which physicians, with one specialty focus, practice in smaller groups—offer the best targets, he added.

Sheridan’s Strategy

Martus shared with Bloomberg Law some of the experiences he gained as an insider on these deals, while helping to grow a modest physician practice management company into the largest in its field, and suggested qualities acquirers should look for when deciding whether to acquire new physician practices.

Sheridan’s reputation drove its growth over the years, he said. It was known for integrating and improving practices, attracting well-qualified physicians, and providing top-notch professional services to hospitals, he said.

Sheridan “acculturated” practices, he said. That is, it made acceptable “constructive changes collaboratively with providers” in the practices it acquired. Doctors felt they had a “meaningful partnership” with the company that improved the quality and efficiency of the care they provided, he said.

Consolidations fail when a company acquires practices without transforming their operations or culture, Martus said. Just buying people and practices without making substantive operational changes and improving the practices is a recipe for disaster, he said.

Martus likened this approach to “just stringing beads on a string,” or building a confederation without integration, and with little thought as to how to make a practice better.

The Five W’s

Physician practice management companies desiring to expand should know what they want to accomplish through that growth, Martus told Bloomberg Law. Just like journalists, dealmakers should ask themselves who, what, where, when, and why before entering into a deal. Good investors have a “thoughtful strategy” that goes beyond mere aggregation, Martus said.

Successful physician practice deals are those that forge partnerships that embrace meaningful, real, and sustainable change.

Jay A. Martus,

He said, for example, company executives should examine how a particular deal, such as acquiring a new medical specialty, fits into their growth strategy. The company should determine what it can do to improve the practice and bring value to the doctors, patients, payers, and others who will be affected by the transaction, he said.

A practice acquisition won’t succeed unless the acquiring party thoroughly understands the practice space, Martus added. He suggested dealmakers examine how a practice area currently operates and explore how operations could change in the future.

Martus suggested dealmakers look several years ahead and predict how the practice area may be evolving. Just as importantly, they can ask how the practice can be operated more efficiently in a changing practice and reimbursement environment, he said. Sheridan succeeded because it was always thinking a few steps ahead, Martus said.

The biggest challenge for an acquiring company in the physician practice sector is getting people in acquired entities to embrace “meaningful, real, sustainable” change, Martus said. Acquirers must look at all elements of a practice as “a dynamic whole” and determine which elements are working and which might be improved without alienating the existing staff.

Good Targets

Good targets for consolidation in the physician practice sector include practices in highly fragmented fields, Martus said. Practices that can benefit from an influx of capital that will enable them to create growth, build better facilities, recruit more and better doctors, and present opportunities to negotiate better payer contracts make good targets, he said.

Sheridan, for example, initially concentrated on consolidating anesthesia services, then expanded into “complimentary” specialties, Martus said. Anesthesia services at the time were highly fragmented—that is, there were lots of small practices consisting of professionals who provided that specialty. Today, the anesthesia practice sector is dominated by about five companies. Consolidation in that practice specialty “is very far along,” Martus said.

There are, however, several practice areas that are still fragmented. These present good areas for more consolidation, Martus said. Orthopedics, obstetrics, dermatology, gastroenterology, and urology appear to be good specialties for further consolidation, he said.

Looking beyond the specialty, Martus told Bloomberg Law that small practices with entrepreneurial-minded physicians make for good acquisition targets. These are physicians who would like to grow their practices, but haven’t the scale to negotiate good payer contracts or the capital and resources to recruit physicians and grow organically, he said.

Martus also said investors should look at the health-care industry as a chess board. The white spaces represent practices in the same field that are available for acquisition. As the practices are bought up, there is less white space, as in the anesthesia practice sector.

The green spaces represent organic growth areas—that is, geographic or practice areas where it might make sense to start a new practice or build an existing practice, Martus said.

Target Practice’s Concerns

Acquisition targets have concerns as well, Martus said. Physicians want to know what plans the acquirer has for their practices.

Physicians want to know how their lives will change as the result of a transaction, Martus said. For example, physicians will ask what effect the deal will have on their lives, revenue, income, style, control, and benefits.

Martus said physicians should ask acquirers what plans they have for the practice’s future. Acquirers should have references—people physicians can call to see how a prior acquisition is working.

A private equity firm’s goal is to make an investment, grow and improve the practice, and then sell the practice for a return on investment after a few years. Thus, acquirers should be prepared to answer questions about how they’re going to improve the practice and what will happen when they decide to sell.

There are a lot of “me-too” investors around today, he said. These parties see physician practice acquisitions as a way to make money, but don’t appear interested in putting any effort into improving the practices.

Physicians, however, should get something more out of deal than just money, he said.

A Brief History of Sheridan

Sheridan was formed in 1994 following a private equity investment in a 40-doctor anesthesia practice. Now common, private equity investment in the health-care industry was a relatively new concept at the time, Martus told Bloomberg Law. The transaction consolidated anesthesia service providers in Florida.

The company went public in 1995. Around the same time, several other physician practice management companies started acquiring practices, as did hospital corporations like Tenet and HCA Healthcare Inc.

The physician practice sector at that time was dominated by very large companies with lots of financial backing, Martus said. They grew quickly, but focused on aggregating practices without doing much to improve them, he said.

Then one of the largest, MedPartners, failed. Stock prices declined, and physician practice management firms became “pariahs” on Wall Street, Martus said.

Another private equity firm, Vestar, bought Sheridan in 1999 and took the company private once again. Two more private equity sales occurred in 2004 and 2007. In 2014, Sheridan became part of AmSurg, the largest provider of ambulatory surgical centers in the country.

AmSurg merged with EmCare Holdings Inc. in 2016 to form Envision Healthcare.

Closing Thoughts

Sheridan succeeded because its owners stressed improving practices and sharing the resulting value with its physicians, while not disrupting their lives, Martus said.

“Corporatizing” a physician practice “is a huge strategic mistake,” Martus said. Physicians need to feel like they have an ownership interest in the practice despite its acquisition by a private equity firm or corporation. To do that, Martus suggested acquirers use “meaningful persuasion,” not coercion, to effect change. He said firms shouldn’t put doctors into a position where they feel like “cogs in a wheel.”

New owners always should keep physician satisfaction in mind, Martus said. It’s often more expensive to acquire a practice, then lose doctors and have to hire new ones, than to keep the existing physicians happy, he said. Sheridan always had a high retention rate, he noted.

“Stability within the organization is an important measure of success,” Martus said.

To contact the reporter on this story: Mary Anne Pazanowski in Washington at

To contact the editor responsible for this story: Peyton M. Sturges at