Between the Spreadsheets Issue 10: Private Equity vs. Health System Acquisitions – Similarities and Differences for Physician Practices

By Wayne Pryor and Courtney Zozulia

May 25, 2021

It is imperative to understand the different motivations and legal considerations of private equity and health system buyers in order to ensure that physician interests are fairly represented during an acquisition.


Key Trends Driving Private Equity and Health System Investment

Healthcare currently presents an extremely attractive opportunity for investment. Interest in the sector is bolstered by favorable macro-conditions, including an aging population and increasing healthcare expenditures, as well as historically strong returns.

Physician practices, in particular, are receiving attention from both private equity and hospital systems due to a high degree of fragmentation, heightened financial pressures, and the shift to value-based care. While consolidation disrupts the provider ecosystem, private equity and health systems are both eager participants. According to Avalere Health and the Physicians Advisory Institute, hospitals acquired 8,000 medical practices and 14,000 physicians left private practice to work in hospitals between 2016 and 2018. Likewise, the Journal of American Medical Association reported that private equity deals with physician practices more than doubled between 2013 and 2016.

Physicians seeking alternatives to independent operation sit on the other side of the transaction. According to a survey of physician medical groups conducted at the peak of the COVID-19 pandemic, 53% of respondents were worried about their practices surviving, and “roughly 20% to 40% were considering partnering with a larger entity, selling their practice, or becoming employed” (McKinsey).  To many physicians, independence is neither sustainable nor optimal for future operations, with financial stability prioritized when making practice model decisions.

Current deal volume within the physician practice space reflects investor optimism. 45 physician practice transactions were announced or closed in January 2021, surpassing that of the life sciences, pharmaceuticals, HCIT, or medical device sectors (Bloomberg Law). This demonstrates a favorable environment for acquisitions.

Transaction Focus & Key Considerations

For a private equity investor, a physician’s business model presents ample opportunity for benefits of scale through add-ons and consolidation. Often, the investor acquires a multitude of practices or high-margin ancillary services (e.g., pharmacies and laboratories) to spreads costs over a wider basis, continuing to “tuck-in” targets within an established portfolio. This model is extremely attractive as the tuck-in acquisition price is often 30-40% less than the initial investment in the platform.

Private equity involvement tends to be a shorter duration than a health system’s, with exits occurring three to seven years after the initial investment in the form of an IPO, third-party sale, or secondary buy-out to another PE sponsor. Above all, creating equity value, offering competitive compensation for physicians, and delivering operational efficiencies are top priorities. To achieve this, capital from debt or wealth funds is utilized to target average annual returns of 20% of more.

Moreover, there are significant legal considerations regarding private equity ownership and involvement, most notably the Corporate Practice of Medicine Doctrine. Although conditions vary by state, the doctrine can enforce strict prohibitions against non-physician ownership in professional medical service providers or milder restrictions over a physician’s medical judgment. For states with a strict doctrine, private equity involvement without direct investment exists by way of a management company. The physician group will transfer non-clinical assets to the management company, although principal professional assets, such as the physicians, medical records, or payor agreements, must be retained and owned by the physician entity.

In addition to structural challenges, sufficient physician representation through governance and equity interest is a key concern for private equity firms. A private equity investor may seek board representation with super majority voting or reserved power (required investor approvals) to protect the investment. To ensure appropriate board representation for physicians, a Clinical Board Committee focused on medical decisions (e.g., protocol amendments and pricing policy) can be established.

Meanwhile, health system involvement focuses on long-term strategic fit, deriving synergies from clinical integration and care delivery. A long-term relationship is often the norm, with the partnerships lasting approximately 15-20 years. The health system has a vested interest in the integration of specialty services, especially those with quality, safety, and performance initiatives for value-based reimbursement. The transaction is typically financed by operating funds, retained capital reserves, or debt sources for asset acquisitions. A health system will have far more involvement in day-to-day operations, and physicians report upwards within the organization. While physicians forgo independent ownership or continued equity, they find protection from declining reimbursement rates, high operating costs, administrative burden, and potential negative impact from reimbursement changes.

Buyers of both types need to conduct transactional diligence, though private equity places additional value on prospective earnings and growth. High risk areas like billing and coding compliance, physician arrangements, and HIPAA compliance should be evaluated as well. An external consultant or attorney may be brought in to perform the necessary assessments (including claims audits or compliance reviews) to support transaction diligence. As continued interest and strong deal volume ensues, physicians must consider the nuances of a transaction with each respective buyer to arrive at a deal that is advantageous to both parties.

At Mazars, we understand your challenges and have extensive experience helping healthcare organizations maximize the value of their investments, from acquisition to exit. With a strong track record in the healthcare sector, we have the expertise and resources to guide you to success, whether you need assistance identifying potential acquisitions, performing due diligence, tax structuring, post-transaction integration, assessing regulatory and compliance pitfalls, or management consulting, audit and tax services. For more information, visit

Wayne Pryor, Partner |

Courtney Zozulia, Staff |


Wayne Pryor has over 30 years of experience in the healthcare industry, with a focus on transaction services. He has worked on over 400+ buy-side and sell-side transactions in every sub-sector of the industry, ranging from $1 million to $10 billion deals. Prior to joining Mazars, Wayne was a Managing Director in a large national accounting firm’s Transaction Services Practice, where he focused on the healthcare sector.
Courtney Zozulia is a transaction services associate with Mazars focusing primarily on providing due diligence to private equity groups, investment banks and other financial institutions. Prior to joining the  Mazars, she was an experienced Business Consultant at EY. Courtney has passed all four sections of the CPA Examination, fulfilled the New York experience and educational requirements, and is currently awaiting licensure from the state.

Disclaimer of Liability

The information provided here is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

Mazars USA LLP is an independent member firm of Mazars Group.

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