Sure! But that cuts into the "keeping retiring doctors happy" piece. If your practice is worth $15 million but you only get 50c on the dollar because there is no buyer pool, you might be pretty grumpy.
To the broader picture though, this is a double edged sword if you want more private family practices. Less doctors are going to go through the work and cost of starting their own business if they have to take a haircut on its net worth at retirement.
I’m married to a physician in private practice, who owns their practice.
From the beginning, we’ve always been aware that when she retires in 15-25 years, we have literally no idea what if anything the sale of her practice might bring.
It could be essentially nothing (aka, the used value of the equipment, and it’s shocking how quickly even very expensive medical equipment depreciates on the used market).
It could be sustainability more, but that’d be a nice bonus, not something we can count on, or that any physician should count on for their retirement planning.
No retiring physician is owed anything for the “value” of their practice. And while on a personal level a PE buyout would be a nice bonus at the end of my spouse’s career, not getting it wouldn’t have affected either her decision to go into private practice, or her ability to.
Far and away the biggest factor preventing more privately owned physician practices is the fact that hospital-owned practices are often reimbursed around double for the same procedure as independent practices. This has shifted somewhat with the shift from “pay for service” to “value based care” models, but both put independent physician-owner practices at a tremendous disadvantage to large hospital systems.
And it’s a damn shame because private physician owned practices are a much more efficient way to care for patients.
> No retiring physician is owed anything for the “value” of their practice.
Not saying you are wrong, but this makes private practice different than any other small business. Pretty universally most businesses are evaluated by their capex. (If the medical industry is unique it's because there is no business to evaluate without a practitioner)
But 100% to everything else you said. Private practices are clearly superior in every regard except rent-seeking.
I think they meant more that you don't get some magic pass for years of service, kind of thing. If you have built up a paying customer base, odds are high that you can leverage that to another owner, no? No need for PE to get involved. Unless you are trying to maximize every penny you can get on that sale alone.
TL;DR: To a larger degree than most businesses, the physician is the value in a medical practice.
Let’s say you’re a dermatologist in Lincoln, Nebraska. You want to live there because of family reasons or whatever. You build a great thriving practice. You’re clearing $1m in profit annually.
(A high, but doable number for a dermatologist with a good private practice)
Now it’s time to retire.
First of all, you can’t sell a patient. Patients go where they want to. You also can’t sell medical records. Because laws. Nor really would you want to.
All you can do is sell patient habits, and tangible assets.
But of course the biggest asset is the physician themselves. And they don’t come with the practice when they retire.
Now sure. There are ways of driving non-directly-physician-derived lines of revenue in a practice. Maybe you have a nurse that does aesthetics. Maybe you sell skin creams or whatever. But generally, those lines of revenue are still broadly dependent on the physician.
So what you need is a physician who wants to move to Lincoln, Nebraska at the same time you want to retire, and buy your practice.
But even if another dermatologist did want to practice in Lincoln at the right time, why should they pay a bunch of money to you for your practice? They could just start up next door.
Sure, they’d have to buy some equipment and hire and train staff, but there’s a good chance they’d have to do some of that even buying your practice.
And truth be told, they know you’re retiring anyway, so why not just wait it out?
Plus, medical specialists are in short supply. Especially those who want to move to Lincoln at that very moment. (I’m being hard on Lincoln. I went there once and it was nice. I just don’t imagine it’s a destination most highly qualified medical specialists dream of moving to.)
So probably the actual value of your practice is “the number that makes it less of a hassle to buy you out than for another specialist to start up their own practice.” Assuming there is a specialist who wants to move to where you’re selling.
And remember, if such a person already exists, they already own the most valuable asset of your practice: a qualified medical specialist.
So in a traditional medical practice sale scenario, your valuation almost certainly isn’t going to be a multiple of your revenue or profit like a more traditional business.
And the location can be a real challenge too. I know classmates of my spouse who turned down salary offers in the $800k range in the rural Midwest (with the potential to earn much more in the future through partnership/ownership) in order to make less than half that in the cities they wanted to live in.
Even if your practice is in a desirable location, most of these issues still apply. It’s just much more likely you’ll find someone to buy your practice for some value and not have to shut it down and sell it for parts.
This is painting physicians as more unique than they are. Carpenters, artists in general, electricians, plumbers, etc. are all in roughly the same boat. A lot of trust built into a reputation that someone built.
Now, sure, the modern world doesn't built up on reputations as much. But the general idea is the same. Such that, yeah, you may find you have nothing that you can sell without you in it, if that is what you built. I'm not clear how PE somehow changes this. They are literally preying on customers/clients that are not savvy enough to know that what they actually valued left?
No, I would actually agree that those can be very similar situations from a “selling your business” standpoint, with the difference that while some of their professions have been particularly scarce for a few years, medical specialties have been scarce in many parts of the country for decades, and the pathway to become a medical specialist is highly capacity constrained, while the pathway to becoming a tradesperson is typically more demand (for people wanting to go into the profession) constrained.
I agree with that. I also think, for better and worse, a lot of us that moved around to find a place to live don't value the "reputation" side of things. I hate how hard it is to find services local. So much easier to just hit up Home Depot and such. Medical is, sadly, "what does my insurance/job support?"
If you remove the premium offered by people who just want to scrap the business for parts, and no prospective owners can afford it at your target price, is the business actually worth that much as a going concern?
It sounds to me like your hypothetical doctor might actually be upset that they can't get $2 on the dollar by selling to an unscrupulous party. You could view the PE premium as a way for the good doctor to benefit twice from all the tax benefits that they accrued over the years as incentives to keep their business around.
What on Earth makes a single-doctor practice worth $15 million when that doctor leaves? Or even $5 million, or even $1 million?
The patient list? It's a zero-sum game! Are these patients just going to stop getting medical treatment when their doctor retires? Or are they just... Going to go to the next clinic over?
There's something rotten here, and it's not PE buying practices. It's that the practice is worth much beyond the value of the particular physician working in it! If you're wondering why medical costs are ballooning in this country, shit like this is one of the contributors!
> What on Earth makes a single-doctor practice worth $15 million when that doctor leaves? Or even $5 million, or even $1 million?
He just pulled a random number. But to answer your question for $1M - equipment for one thing...? The business likely has a fair amount of debt on the equipment.
You are missing a qualifier: "at the current market price."
If you prevent or disincentivize PE from buying these types of businesses, the price would drop to the level of its new adjusted demand.