Ophthalmology off the Grid
Episode 61

Outlook on Private Equity

Host Gary Wörtz, MD, covers the topic of private equity with two different guests. First, Jim Loden, MD, offers some historical perspective on the subject, then later, Tal Raviv, MD, gives his thoughts on the potential benefits and drawbacks of private equity in ophthalmology.

Gary Wörtz, MD: As private equity enters the business of ophthalmology, it raises a lot of questions for those of us in the field. When is private equity the right choice? Aside from the windfall, what are the benefits of selling? What are the drawbacks?

In this episode of Off the Grid, Dr. Jim Loden talks about his personal experience and offers us some historical perspective on private equity. Jim is the founder of Loden Vision Centers, and his father was an ophthalmologist who formed one of the first comanagement, optometrically-driven companies, which was similar to a lot of private equity models we see today.

We discuss the lessons history has taught us, and whether private equity has the potential to be as successful in the surgical business as it has been in other areas of health care.

Later, I speak to Dr. Tal Raviv to get his thoughts on the matter. Is private equity good? Is it bad? Listen as we examine the pros and cons.

Coming up, on Off the Grid.

Speaker 2: Ophthalmology off the Grid is an independent podcast produced by Bryn Mawr Communications and supported by advertising from Alcon. For a full listing of podcasts for eye care professionals, go to eyetube.net/podcasts.

Gary: Welcome back to another episode about Ophthalmology off the Grid. This is Dr. Gary Wörtz, and I'm so excited that my good friend, Dr. Jim Loden, is joining us tonight to give his perspectives on private equity and also for us to hear a little bit more about his story. I know a little bit about it, but I'm excited to learn more about Jim's backstory.

Jim Loden is the founder of Loden Vision Centers. They have five locations throughout middle Tennessee. They do just a fantastic job of taking care of patients. They do it the right way. Jim is someone I’ve looked up to for a long time, someone that I go to for advice on all things ophthalmology. And so, Jim, thank you for coming on the program tonight. I'm really excited to hear your perspectives on private equity. But, even more than that, I want to hear a little bit more about your story, because I think it's very interesting.

Jim Loden, MD: Great. Thank you so much, Gary. Every time we have a conversation together, I always love it. Always have a good time.

Gary: We always end up laughing, don't we?

Jim: That's exactly right, and that's what life's about. Little bit about my background and where I'm coming from with some of my viewpoints on private equity.

So, I'm a second-generation ophthalmologist. My dad was an eye surgeon. He formed one of the first comanagement, optometrically driven companies, called Vision America, back in the 1980s. That company ended up merging with Omega Health Systems, and it was primarily an optometrically driven company, very similar to a lot of the private equity models that are out there today, looking for expansion in multiple markets.

The model seemed to be going fairly well, and my dad suddenly died in 1990, just dropped over dead of a heart attack. We sold the practice, because I was still in medical school, to Omega, and even after I moved back to Nashville, out of fellowship — I did a cornea fellowship with Frank Price and moved back to Nashville in '97—I went to work for a PPMC company.

My dad's old practice was not interested in hiring me in Nashville, and it was a little bit of a struggle the first couple of years. I want to put you in the perspective: everybody in 1995, '96, '97 was talking about these position management corporations, PPMCs, and how they were going to dominate the market, and the small-scale guy was going to go away, and you weren't going to be able to get on the insurance plans if you didn't join up with them.

And then, by 1999, you just saw this whole system imploding in on itself where they had done massive acquisitions but not really added any value in management. You saw big companies…going down the drain with it, and then a lot of the ophthalmology companies were struggling.

By this time, Omega Health Systems was starting to struggle. I didn't sell my stock in the company because they were my cross-town competitor. They were my number-one competitor, and they were just pounding me.

And finally, unfortunate for us in some ways, fortunate in others, they did a poor job of running the company, and lo and behold, it went under, and if you look around, there's a whole bunch of these companies in that time frame that just didn't make it. They couldn't add value, they couldn't produce scalability, and I was there. I was able to take over a lot of the referral business, and Loden Vision Centers just blossomed and grew and grew.

So, the first lesson is that the PPMC model didn't really work, and some of the storylines we're hearing today are very, very similar.

Gary: All right, I have to stop you because this is —

Jim: Yep, stop me there, as I'm telling the story. We've got more story to tell.

Gary: Yeah.

Jim: So, stop there.

Gary: So, here you are. You're in medical school, and that had to be a horrible tragedy, and we don't need to unpack that, necessarily, right now, but med school's tough enough on its own. You get out of residency and fellowship, you go back to the town where your father was a legend, cast a big shadow, had, I'm sure, a great reputation, and the practice that your father built would not hire you back. What was that like?

Jim: It was a little bit of a slap in the face, but under that model I knew that I would never have any equity ownership. I would strictly be an employee of an optometrically run company.

Gary: Okay.

Jim: So, there was not a lot of —

Gary: Your interests weren't aligned, maybe.

Jim: Yeah. I wasn't certain that that was going to work out for me, in my mindset, in the long term, Gary.

Gary: Okay.

Jim: So, it wasn't that traumatic of an experience for me, because I already had the idea that I wanted to be an operator myself and be a major part of putting the company together.

Gary: Right. And, were there some older guys who helped you in your venture when you were trying to get it — I'm sure your dad had a lot of friends who had been in the business. Anyone in particular come to mind? Anyone that helped you?

Jim: Yeah, there's two guys. They're legends in their time: Ralph Berkeley and Jim Gills. You know, both of them have given me tremendous advice over the years. You know, I think that's one of the things, I'm 53 now, I'm more than happy to give younger doctors advice because I've been in practice now for 21 years. It's hard to believe it’s been that long, but I've made some big mistakes, I've made some great success stories as well, and you learn from each one of them as you go, but, you can really sometimes narrow your learning curve down hanging out with some of these older guys because, it's kind of like the fashion industry, what comes around goes around.

Gary: Right.

Jim: It’s been there before, and it's just kind of repackaging some things that have come down the line many years before.

Gary: So, let's reframe this a little bit. So, basically, you get out of fellowship, and you're sort of seeing almost the height of the bubble of the PPMCs where things are getting rolled up, people are, as you mentioned, they're acquiring but not adding value.

They're basically trying to, maybe, package something together for that second bite, or they're basically trying to maximize what their balance sheets look like but not really undergirding that with a lot of organic growth or strength. And you found yourself in a position where your sort of almost at the height of the bubble, and then the bubble burst, and here you are to collect all the pieces and start Loden Vision Center in some very fertile soil where the deck has been completely reshuffled. Is that pretty fair?

Jim: That is a fair assessment. I bought my practice that I was working for from the PPMC in 1999 because it had just imploded. So, that was a great decision because I had some volume to build on…

Gary: Right.

Jim: …Some cash flow to build on. We were only doing about 350-400 surgeries a year, but it's a starting point. It's much better than going out and trying to open a store de nouveau by just hanging your shingle.

Gary: That's right. So, let's look at maybe a couple things. What do you think the PPMCs — we know they got a lot wrong. Is there anything you can look back on and say, "You know, they had some right ideas. Maybe they didn't apply them right, but maybe some of the thinking was correct?” What things do you think that, maybe, they got wrong? Because, it's easy to look at a model that failed and say, "Well, it’s just all wrong." Maybe it was all wrong. But, was there potential with the PPMC model?

Jim: Well, I'm not sure of that.

Gary: Okay.

Jim: You know, the term I really think we have to look at in all of this is scalability.

Gary: Exactly. 100% agree.

Jim: I'm trying to look back historically, Gary. Have we ever been able to scale surgery? You know, the dermatologists have been able to scale a little bit by using nurse practitioners and physician assistants doing a lot of their lower-level work. Anesthesia's been able to scale by using nurse anesthetists. ER doctors, it's a very scalable type of practice because people are there when it's an emergency.

They're not looking for the doctor with all the skills and personality and interviewing the doctor and deciding whether they want to have this guy do their cataract surgery or their LASIK surgery. You really don't see many success stories, when you try to find them in the industry, on surgical scaling. So, that's one of the big reasons why you would go with a PPMC company. It’s someone to help manage your growth by getting more lives…

Gary: Right.

Jim: …with your practice, more infrastructure, better billing, better economies of scale. But, history's not really proven that that's worked in the surgical business like it's worked in some other forms of healthcare.

Gary: Right. I got you, I got you. And, what I see happening sometimes, and this has been happening prior to the entrance of private equity, but I looked at some of the mega groups around the country and — this is not a criticism, it's just an observation — it would be that you've got a group of 100 ophthalmologists, maybe 50 ophthalmologists, and you've got 70 locations.

You end up having a whole team of IT professionals who are there to make sure the EMR is up to speed, and you've got 30 mid-level managers, and you've got millions of square feet under roof that you're paying for. So, there's really a difference between growth and scale. In growth, you're basically just keeping your return, or your margin, the same, you're just bigger. Whereas, scale, you're actually making more profit per dollar invested in infrastructure or marketing, and that's what I think is really attractive to a business owner or someone who is in private equity looking to figure out where they can scale because growth is just growth. It's just a bigger footprint of what you currently have. But scale, that's where you're actually making, you know, big strides in terms of profitability, and it's very difficult to scale something that is so personal as eye surgery has become and perhaps always will be.

Jim: It's very well-said. You, you just articulately said it right there: that's going to be the key issue, I think, going forward for these private equity companies now is, can they produce that scalable model?

Gary: Right. So, Jim, walk me through — I know you said you've had ups, and you've had downs, and you've made some financial decisions. I know at one point you had mentioned to me that you decided that selling the surgery center would be something that you'd be interested in. Are you willing to talk about that a little bit? Whether that was a good, bad, or indifferent decision?

Jim: Sure. So, this is very similar to what it would be like right now if you sold to PE for a seven multiple. So, about 12 years ago, I prematurely sold one of my ASCs to a publicly-traded ASC management company, and the storyline was really similar to what you hear today. You don't know what Medicare's going to reimburse in another 2 years or 5 years, you know.

You're heavily invested in ophthalmology. Why not take money off the table now? We're going to do a better job of increasing the payer mixes, we're going to provide cash for expansion of your business, we're going to do a better job at marketing this ASC and bring more patients to you. And, 12 years later, none of that's come to fruition. You know, it's just one of those things that, it was a learning experience for me, and it's given me a little bit of skepticism when I'm looking at the current private equity market.

You hear all these promises out there that they're going to build you and make you better, and you're going to give up this big income stream. Well, it's a lot of money, and if you kind of look at what I did, I sold for a several seven-figure number, which, at age 40, that was great. I thought I was just on cloud nine, but since then, I've basically doubled the size of the volume.

Gary: Right.

Jim: And, look at the value I would have now, Gary, if I had kept that, and guess who paid for all the growth?

Gary: You.

Jim: I did. You know, I brought new surgeons in, and for all you young surgeons out there listening, your managing partner's losing money on you probably the first year you're there, unless there's just a lot of volume and you're a hustler. So, you have to add more real estate, more exam lanes for every surgeon you bring in on. You have to have more staff.

So, again, back to your growing, and all that's nice, but it usually takes a year and a half to really ramp up every time you add a surgeon, and who's paying for the marketing, and who's working optometric referrals, and who's putting the work in to produce the CEs for the optometric referrals? Well, it's not the surgery center, right? It's the private practice.

So, you gave up a lot of income, and I think this is a key figure to look at, if you sell for a 7X multiple, it's basically the same as you borrowing money at a 14-15% interest rate.

Gary: Wow.

Jim: And where on earth are you going to find a guaranteed return of 14-15% out there in the marketplace today? You're really not. So, I think all of us would say, "My goodness, if I could get 14 or 15% interest on any investment, man, sign me up today, right?"

Gary: Right.

Jim: Well, you may have that within your practice, and you're going to sell it off.

Gary: Right, so you end up having a windfall of cash, but where are you going to invest that cash that's going to get even half the return that it's getting sitting where it's at in your surgery center?

Jim: Exactly. That's one of the big points, and one of the things I'm looking at is, PE guys keep knocking on my door, and one of the big things you have to realize is that there's going to be a reduced income to the shareholder for the retained earnings that they need to continue growth. I mean, what the private equity company is doing is, there's going to be a decrease in shareholder income to offset their monies put in to grow the practice.

Gary: Right.

Jim: So, that's one of those things you have to really calculate in, and then you have to look at what are their management fees going to be as well.

Gary: Right.

Jim: Are there hidden management fees? Are you going to make money on the resale if they're able to repackage it, re-sell it, do a recap? Is there going to be a set-in-the-contract resale price that if you don't meet your target growth, you're not going to get anything on the resale?

Gary: Right.

Jim: You know. These are all up in the air, and I'm not sure that I have the trust to trust someone to be my partner for 3-5 years to make that resale.

Gary: Right. Because, you're really married, and a lot of times they have controlling interest, and if that's the case, you know, you really do have to kind of follow their lead, and that can put you in an awkward position.

So, I want to ask one other question. This is something that I've been sort of thinking about and had a hard time articulating. I think I know how to ask this question, but private equity is having, in some ways, a disruptive effect on practice and surgery center valuations.

For senior partners, that disruptive effect could be looked at as positive because they're able to look at their practice and say, "Well, man. I've really built something here, it's really worth a lot." For example, I could go out right now and sell this practice to private equity for whatever, X multiple times, and you know, my practice is really worth a lot.

Well, so let's say you've got a younger surgeon that's coming onboard and saying, "Hey, I'm on the partnership track, I've put my 2 or 3 years in, I'm ready to buy in." Well, now the senior surgeon who's thinking about selling either the whole thing or part of the surgery center and practice to private equity is probably going to look at the younger partner and say, "Well, this is the market value for the practice. If you want half, or a third, or a tenth, it's going to be a 10, or 30%, or 50% of what private equity will pay."

And, to be honest, that's a number that young guys and gals coming out of residency, just trying to make their way, are going to have a real hard time coming up with. Do you have any thoughts on that, of what disruptive forces that might bring in terms of younger partners coming along and trying to buy in?

Jim: Yeah, exactly right. I've actually talked to some practice administrators that are struggling with this very issue, Gary, where they're scared that some very competent younger partners may decide to exit the practice if they're not included in the deal. You know, you have some practices where a lot of the doctors are in the 58-65-year age range.

And, rightly so, they're looking at it as, "Hey, this is a great exit for me right now." You know, "I can capitalize on this market." But, for the younger partners, it's not a great thing, especially if they're entrepreneurial and really understand debt and don't mind debt.

Gary: Right.

Jim: Now, for younger partners that don't like signing a $5 million line of credit and personal guarantee, well, you may not ought to be at the big-time business. That's one thing we have to understand. It's not for everybody. It's stressful, you know, for guys like me that own 80,000 square feet of commercial real estate. I sign a personal guarantee for all of that.

Gary: Right.

Jim: You got to make that note payment every single month, no matter what. It can be a little scary at times, so you have to make sure you're in the zone that's right for you. But, you're exactly right: if you have a guy or gal that's really entrepreneurial and doesn't mind debt and wants to be the next growth of the practice, it puts them in a compromised situation with some of these practices because they're wanting to sell for the big 10X multiples, and really, that's not what even a lot of companies would pay in the past for a surgery center. We're seeing a real premium for the top in practices right now because interest rates still are fairly low.

Gary: Right. Again, these private equity folks, they raise these huge funds, and they have to find diversified investments that are not overlapping in risk with their other categories of investment, and I'm not saying private equity is bad, I just think it is an opportunity, and with any opportunity there are, you know, pros and cons.

And that's the thing, what the flavor of this conversation is really to say, "Okay. You know, this is an opportunity that's out there. Let's look at both sides of this coin to see where the risk might be." It's easy to see, you know, big numbers and think "This is great," but with that, I've always thought, "All right, it seems really good. Let's counterbalance that with some other factors."

Jim: Yeah. So, with that, let's kind of look at, when would a private equity deal make sense for you?

Gary: Right.

Jim: I've been to talks by Bruce Maller and Anthony D’Eredita with Trust Works.

I heard some really good lectures: when to do PE, when to not do PE. I think you really have it broken down into two situations. One is, you may see the older senior surgeons say, “This is a great way for me to exit and get some cash money, and I want to go out." But, for me, at 53, I'm not looking at that, and that's one of the things Anthony and Bruce mentioned is, don't look at the up-front money. You can't get caught up in that. The real reason to partner with private equity is if you have a well-defined business plan where you need capital to expand. That's where it really makes sense.

Now, on the converse of that, I'm going to throw out another storyline. At the OIS meeting, I was listening to a banker from Silicon Valley talk, and he's made a great statement. He said, "The most expensive form of capital is giving up your equity."

Gary: Hmm.

Jim: And, very true statement that any big-time business man's going to tell you is that if you can go borrow the money, you're better off borrowing the money for your growth than having to go out and give up equity for your company.

Gary: Right.

Jim: If you can afford that, you know. So, think about that. Do you have a well-defined business plan to grow, and do you need this capital to grow, or if you're comfortable with debt, can you go out there and acquire the funds yourself through the banking business?

Gary: Right. Yeah, and that can be stressful, and I've been on both sides of that decision, as well: borrowing a lot of money, and starting a practice, and paying that note before you and your staff and your equipment and before you pay yourself, you know.

And that's something that maybe docs 20 or 30 years ago were more accustomed to, I don't know if you get that sense or not, but it seems like in some ways, guys in my generation, or maybe a little bit younger, there's almost a sense of "I don't mind if I'm an employee." And that's not negative, it's just a different mindset, where I think doctors 30 years ago were like, "I want to be my own boss. I want to be, I want to be the rainmaker. I want to have my own practice." Whereas, there's almost been a mindset shift of, "I don't mind being an employee. It's fine. Someone else can take care of all the stuff I don't want to take care of." Have you found that as well?

Jim: We've found that as well, and like you said, there's nothing wrong with that. So, again on my storyline, I had a bad CEO a couple years ago that made some really poor decisions for the practice. I didn't take a salary for 2 years.

Gary: Wow.

Jim: Every single employee and doctor here got paid every single month while I wasn't taking a salary because that's your job…

Gary: Right.

Jim: …As the owner, managing partner. If you make a bad decision, you got to live by that bad decision, you know?

Gary: Right.

Jim: Now, this year I'm on the bounce-back. It's going to be a great year, and next year's even going to be better, you know? So, I'm going to make a lot more than a lot of doctors, but there's a lot of risk, and you have to understand that. There's going to be months, even in the LASIK business where you look at those spreadsheets, Gary, and you may lose $50,000 bucks, but then the next month you make $100,000 bucks, and then you're down $25,000.

Gary: Right.

Jim: You know, it just goes up and down, and it's kind of like watching the stock market. You've got to have a stomach for it.

Gary: That's right, that's right. Jim, any parting thoughts? I appreciate all your historical perspective on your dad's practice, on what's going on when you came out, and the things you've seen. Any final thoughts on where we're headed with this wild ride?

Jim: Well, I don't think it's going to stop because, one of the things you brought up, a lot of these PE firms already have the capital on hand. They have a limited time to invest it, so they've got to deploy that money. So, I don't think we're going to see anything slowing down on that. The economy is still, despite being one of the longest-running bull markets, it's running strong still as of today, and we're looking at all the growth in the senior care divisions of health care.

You see this across the board, a lot of growth, so I don't think this private equity's going to go away, even if there's a little bit of drop, correction in the economy. I think people just need to really back off, not look at the upfront money, and make sure you get a good consultant like Bruce or Anthony or somebody to really help you through the process, counsel you on it, and not just make a knee-jerk decision looking at the stars and all the gold from the upfront cash that might be generated.

Gary: That's wise, wise words, Jim. Thank you so much for coming on the program tonight. I really appreciate it.

Jim: Wonderful, Gary. Always a pleasure. Thank you.

Gary: Next, I talk to Dr. Tal Raviv, who owns his own practice in Manhattan, and is all too aware of the big conversation in ophthalmology surrounding private equity. We discuss the costs and benefits of private equity and whether it has the potential to change the culture of ophthalmology as a whole.

Gary: Welcome to another very special episode of Ophthalmology off the Grid. This is Dr. Gary Wörtz, and today, I am so excited to be able to have a conversation with my good friend, Dr. Tal Raviv. Tal, for those of you who don't know, practices refracted cataract surgery in Manhattan, and he's someone who I always look to when I have a question about something either clinically or in practice, and today we're talking about private equity, and this, I thought, would be a great conversation to have with Tal because he always brings a unique perspective to whatever we're talking about. So, Tal, with that preamble aside, bud, thanks for taking some time to talk to me tonight about this very interesting topic.

Tal: Thanks, Gary. Happy to be on the podcast.

Gary: So, Tal, we go back, actually, quite a ways. I think we met at an ACOS meeting many, many years ago, and maybe it was the first fly-fishing event that ACOS hosted.

Tal: I think you're right. Yeah, I think you're right.

Gary: I think we even did some promos for some MillennialEYE stuff in the river that day. I'll never forget that, and it was a fantastic meeting, and it was really great to meet you. So, fast-forward. I want to get a little bit into your practice, because I think that'll set the stage for our conversation. Why don't you give everyone a little bit of an overview of your practice and how your dynamic has evolved over the last couple of years.

Tal: Well, Gary, thanks so much for having me on. It's great hanging out and talking to you over the years, and I look forward to many more.

My practice is something that I started about 4 years ago, my current practice. I'm in my 15th or 16th year in practice, total. Actually, maybe 17 at this point. But, I started a practice 4 years ago after purchasing a retiring doctor's practice in Manhattan. I had a presence in Manhattan before, as well as Brooklyn. I was part of a partnership, but I decided to go my own way for many reasons, and you know, I've written about that, and you can read about that in MillennialEYE.

But now, I'm 4 years into practice. I have three other doctors that work here: two optometrists and one ophthalmologist, and primarily, we focus on refractive cataract surgery. Being a private practice, I'm actually affiliated with New York Eye and Ear, which is part of Mount Sinai Health System, a big player here in New York, and I also operated a surgical center.

But, I have control of my own destiny, and the practice has grown very well over the last 4 years, it's hard to believe, and I look forward to a bright future, but of course, for anyone that is reading anything, you know, ophthalmology, ophthalmology journals, or in meetings, the big conversation these days is private equity.

Gary: Right.

Tal: And so, when we had bubbles back in 1999, I remember everyone and your neighbor was talking about buying internet stock and everything else, and then that crashed.

Gary: Right.

Tal: And that sort of has that feeling now, that frothy feeling a little bit, where I am getting — I mean, I am a small practice, and I am getting hit to join this group that just got purchased or smaller, private equity-like vehicles that I've seen. Not just me, but I've talked to another colleague of mine in New York, and he's also getting hit up. So, there is so much money, there is so much, it's called "dry powder" in private equity, they have to use this money, that it's reaching the smaller — I consider my practice a growth practice — but it's reaching us all, and it makes me, of course, be worried about a bubble right now for that sector, as anyone would think.

Gary: Right.

Tal: What's your sense, Gary, over there. What are you feeling?

Gary: Yeah, you know, it's very interesting. This whole idea of private equity entering ophthalmology, I just have to say, it caught me off-guard because, you know, people have said for a long time that medicine is a great career but a horrible business, meaning that one can find great fulfillment in the practice of medicine for personal reasons.

You can have a career that you look back over your lifetime and feel like you have done a fantastic job for your society and humanity, but it's a race to the bottom, with declining reimbursement, various payers and plans want you to do more with less, and so I think the narrative that I have been accustomed to was that medicine, the business of medicine, is going to get worse and worse, year after year, and we just have to do the best we can to manage losses and try to do more with less.

So, I think for me, I was just very surprised to hear that big money, smart money, is getting into ophthalmology. Was that your sense at all? Did that, did it catch you off-guard? Let's start just right there. Did it surprise you when you started hearing rumblings of this a couple years ago?

Tal: It was a little surprising, but if you look at healthcare, it's actually going to be one-sixth of the economy, so if you think about it that way, it's ballooned. It's out of control in many ways, and ophthalmology is one of those specialties that's outside of the...it's unique, just like dermatology and perhaps dentistry, and that's because we have some procedures that are self-pay and are outside of controls of third parties like insurance carriers, thing like that.

And I think that's what's interesting to private equity, and it's already occurred in other verticals. They've done it with dentistry, and they've done it with physical therapy practices, and ophthalmology's sort of the next dermatology, is something that just makes sense to them.

Gary: Right. So, let's, let's sort of dive into this. You know, I have been reading Ray Dalio's book, Principles, which is very good. If anyone is looking for a good book, it's a great one. It talks about the principles of investing. It talks about money managers, how they look at investments, and it's a very interesting book just on a lot of levels.

But, one thing that he mentioned in that book is that it's very good to have investments, and this is sort of investment 101, so it's not like, groundbreaking, but it's good if you have a portfolio or you're managing a portfolio, to have investments that are not only diversified but diversified in ways that aren't related to each other.

What I mean by that is, investments that are so different that even if all of oil crashes, for example, you have investments that are insulated from, potentially even like, petroleum. You look at healthcare as one of those, maybe, insulated and divergent investment categories where I think, if you do have a lot of dry powder, like the private equity companies do right now, they are not only looking for a good growth and return on investment, I think they're also looking for a new category that's potentially insulated and diversified from bubbles bursting in other categories that may have already matured.

Tal: I think you're exactly right. If you look at the, you know, the experts, the financial people can look at the in-flows and ex-flows of money, and there's a lot going into private equity precisely because of that. People are sensing that we may have reached the top of the boom years that we've had in the stock market, and this is a way for sovereign wealth funds and pension funds and private investors to put 15, 20, 25% of their assets into something which is non-correlated, or at least less correlated, exactly as you say: to diversify risk. And, because of that, the coffers have swelled.

From my understanding, as I have some friends in private equity in New York that do this, they don't drop ophthalmology. They're kind of intrigued by the whole thing, but when they want to have the money, which has been a problem in the past, but now they have that part, they must spend it or else they have to return it to the investors.

Gary: Right. And, that's very interesting, and I don't think a lot of people realize this, but you know, the way these guys generally make their money is they just collect as much as they can, and they sort of live on the two and twenty deal. Usually their fees and what they make is 2% of whatever the size of the fund is, and you're investing in, actually, 80% of the deal, not actually 100% of the deal if you're an investor.

So, it's very interesting. These guys just raise tons and tons of money, and actually, they have an enviable problem of "How do I now take all this money that I've raised and place good bets so we get a return?" It's an actual problem, especially for these funds that have, you know, potentially hundreds of millions or billions of dollars. Where do they invest that? They've got so much capital, maybe that's why we're coming on the radar at this point.

Tal: It is. And so, here's the thing, I've sat down to talk to so many people, and they are financially very intelligent, but they're intelligent, financially, at a very high level, of the mergers/acquisition type level, not a practice management level, which is, like, another world, another universe, as you know, and a lot of the pitches are, "Hey, doctor, you can practice medicine and we'll take care of everything else." But that's not accurate. They're not really going to be doing that.

Let's put things where they are. Private equity are trying to make a deal and get out within 4-7 years.

Gary: Right.

Tal: That's just how it works. They're not shy about telling you that upfront. They're very transparent about that. And, if they do well the doctor will do well as well because they usually want you to carry some of that ownership into their entity. Private equity: is it good? Is it bad? It can't be both.

It depends, of course, on the price, and I think a very good gauge...You say, "How do you make money?" I am working as hard as I can. I am doing very well. You need to grow 20% more in the next 4 years of my practice? I mean, that's not possible, and I feel like I'm a very productive surgeon.

A lot of the practices don't want to sell later on in their career, thinking, "This is a losing proposition." But, their math is not that math, and that's what I've sort of seen and learned, and their math is basically to pay a high multiple to a large, productive practice that's considered a platform practice. We've heard about them, we know the people who have sold, and they've done really well, and very smart move on their part, in many cases.

Probably, from what I can see on the outside. And, these practices are getting very large multiple on EBIDA, and you can look up that number, but that's sort of how we measure, after salaries are paid, what's left over in the practice. And then, they add smaller practices, like mine, for example, a smaller number of doctors, and they pay a much lower multiple to those.

So, I'm just going to pick random numbers, and let's say they pay 12 multiple for a large practice, and they buy the small practices for as low as they can get them: two, three, four multiple, and then they aggregate those to a larger number after 4 years and sell the whole thing for a 14 or 15 multiple. So, they don't really have to improve anything. They don't have to improve anything except get a larger number and sell it. So, it sounds foolproof, except, you know, when you can't sell it at the end, and that's what happened in the late 90s.

Gary: Right.

Tal: It just crashed. And some of these will sell, and some won't, and I think the advice many ophthalmologists have gotten, which is good, is if that initial payment you're getting — and make sure to get most of it in cash — and some of them will say, "Oh, you've got to roll this into and trust the business." Well, you may trust your business, but how about the other 10 that they're going to put together? Who are those businesses? They don't really know. If that money you're going to cash is going to put you over your retirement goals and nest egg, then by all means. And, if it's not, then you've really got to think long and hard about it.

Gary: Right. I think that's a really great explanation of, sort of, how the math works. They're aggregating all these practices together and sort of cost-averaging so they end up getting a giant practice at a relative discount, bundling it all together.

Tal: Yes.

Gary: And then, showing profitability, and then hopefully kicking that off in 4-5, 6, 7 years to some secondary entity. That all sounds great, and to be honest, I am, you know, I guess a capitalist, free market capitalist at heart.

I hope that doesn't cause people to not listen anymore, but my line of thinking is, if you're a businessman and you're a doctor and you're doing things ethically, I don't begrudge anyone from making a good living. You know, you pay your taxes, be a good citizen, but look: if you're at the end of your career, or even mid-career, or earlier, and you get a fantastic offer, I would never fault anyone, or think less of anyone for taking a potential great windfall or payday.

But, we also have to say "at what cost are we selling?" And that actually diverges in a couple of different directions. The first cost is to your own, I would say, legacy/professional enjoyment/the enjoyment of the other partners in your practice who may or may not have gotten quite the same deal that maybe the senior partner got. What is the cost there toward sort of the overall quality of medicine that will be practiced going forward, and loss of control?

I guess the other side to that is really, you know, you do sort of lose control in some ways. You know, are you going to be dictated what lens you're going to use, what phaco machine, when you're going to be able to upgrade to a new technology? Those sorts of things.

That’s one side. And the other is, what is the cost to the profession? This is something that I wrote about in an article, and so I'd like to kind of get your thoughts on both of these, for the loss of control, and also, if this is successful, let's say that this is fantastically successful, is it bad in some senses that ophthalmologists may lose that business savvy or turn themselves into more or less doctor technicians, where you're showing up, you're doing what you're being told to do based on algorithms, which isn't all bad, but potentially, it has the potential, I think, to really change the culture of ophthalmology that's made it so special, potentially. So, what are your thoughts on either of those things?

Tal: Well, I think you're right on in both. I think part of the economics that I just mentioned, with the multiples and everything we described, the big factor, of course, is the doctor's earning potential goes down immediately after the deal. To get a larger EBIDA, which is what's left over after salary, you have to normalize, you have to decrease your forward salary.

So, you're basically...Gary, you're an investor of your own company, and of course, we have the opportunity to invest in other companies, but how many of us want to invest a big part of our future revenue stream from our practice into an entity created by a private equity, which is never, which existed yesterday and will today? So, that's what they're asking to do.

Everyone takes a pay cut. So, that's the third thing. The loss of control, I think, is a big factor, Gary. I'm a big believer in capitalism, as you are. I think that's what drives the best to go into medicine, and we need that for innovation and for great health care delivery, and that's not what's happened in the last 5-10 years. The best have gone to business schools, perhaps, and they're not managing doctors.

You’d better be ready, with private equity, to have a 30-year-old MBA running the show. And nothing wrong with that, except you just have to be prepared for that. I'm a strong believer [that the way for] health care in this country to continue having the leadership role that it's had in the past in innovation is for physicians to ultimately be in a position of leadership.

I think once we lose that…you can run a practice, but you won't draw the best, and the best minds won't necessarily go into the field, and so we could have negative consequences.

I think with these private equity deals, these are too short. Maybe if they were 5-year deals, I'm not sure if that's going to influence things. I think this will come and kind of pass a little bit, but there are other financial structures taking place, these holding companies now, that, just like they're buying all their instrument devices now, everyone's kind of merging. And, now, holding companies are buying and holding, sort of the Warren Buffet method.

It's happening in ophthalmology, too, and that will also change physician ownership, and that can lead to exactly what you were talking about, where eventually you'll join a practice, some of your earnings will go to this greater entity, and you'll just plug along, everything very formulaic, and you know, there won't that entrepreneurialism, I don't think. Maybe there's ways to keep that in there, but it'll be different.

Gary: So, let's look at the potential plus side, and by plus side I don't necessarily mean, you know, you get a payday, you get to take some chips off the table. We all understand that as being the very obvious plus side to private equity. But, is it possible that the 30-year-old MBA has something to contribute that some of us could tremendously benefit from?

You know, I'm humble enough to realize that, you're good at the things you do, you're good at the things you study. If you don't study business, and I surely didn't in school, I was too busy studying for my MCAT, and went to med school. So, is it possible that these MBAs out there who understand the good foundational principles of business can apply those to ophthalmology and maybe even, in a smarter way, start negotiating for more lucrative contracts?

Start figuring out they're controlling more percentage of a market in a given area? Will they have more leverage with payers to say, "No, you know, our practice isn't going to participate with this unless you give us a better compensation for X, Y, and Z code." What do you think the upsides would be? With having, you know, private equity involved from that side?

Tal: I think, yes. The answer is, there are going to be some smart private equity managerial folks that can, in a short period of time, boost a practice and fix — I think it won't be in the nitty-gritty, I think it'll be "Let's put some money." They're going to be out getting money. "Let's put some money and build this surgical center here, and let's do this here, let's put these two prices together."

I think it'll be things like that, of that nature, but what I haven't heard yet from any of the private equity deals, and there's lots written about it, is that anyone's negotiated better contract numbers. I still think that even the largest of players is still relatively small, and I think even the new Amazon and Berkshire Hathaway and JP Morgan, they're going to have a time even negotiating, and they're gigantic.

Gary: Great.

Tal: So, it's not that that's not the avenue that's going to occur right away. Maybe in the long term that's the hope, and so if you have the thing on the market, if you are the only ophthalmologist, eventually, yes, you will have some control over that. Everything's possible, but I think it's a lottery ticket. I think it's hard to predict.

Gary: Well, and I think that the anxiety, from what I've heard from others who are either going through this process or have gone through the motions and maybe decided to back away, is that they're worried of disruption, and especially when interests aren't necessarily aligned.

You know, I've heard from some folks who went through the process and decided to say no because they said, "You know what? If I want to buy a new laser, I want to, I want it, I don't want someone to tell me I can't. If I decide that it's better for patients, even if I decide that, you know, I'm going to make less money, but I feel like I'm doing a better job for my patients," and that's a trade-off you're willing to take.

One of my friends basically said, "I don't want someone telling me that I cannot do this or that just because it's going to be financially not quite as good." That's where misaligned interests can start breeding a little bit of discontent, and that's where I'm a little bit worried. You know, ultimately, I want the best for private equity companies, and I want the best for my physician comrades and colleagues because if this deal goes really well, then it actually is best for everybody.

If it goes badly, then it's unlikely that we build upon this model and make it something that could be really beneficial down the road. I feel like we're really in the very beginnings of figuring out what is a good deal, how do you evaluate if it's a good deal, and even figuring out how do we keep our interests aligned to the level that allows physicians to still have a voice in some of those decisions.

Tal: I think you're exactly right. I've seen examples on the negative end where a physician sold, and not long after, all of a sudden, the larger entity felt it was better to have a second surgeon go into that location because that surgeon was promised, you know, access to this market, and so you can imagine, it's just not good. Now, most private equities don't want to rock the boat, but remember, eventually, even if you do sell 5 years later, you're still working. If you're young in your career, who's the second group?

Gary: Right.

Tal: I mean, you have zero control over that. You have some control over the first group. So, like I said, the people that are talking about private equity, the doctors that are happy, most of them, I believe, have done well with that chips off the table. That's a big part of it. That’s for any of us, because we can start from zero, build it again if we have to, knowing we're financially secure, so.

Gary: Right, that's exactly it. Tal, thank you so much for sharing your evening with us, giving your perspectives on this. I find it to be a very interesting time to be an ophthalmologist. Again, this is something that took me a little bit by surprise, and I feel like I'm playing a little bit of catch-up, trying to do my homework on what opportunities are out there, as well as what potential risks might be hidden in the weeds. So, thanks for sharing your evening with us.

Gary: Private equity doesn’t show signs of slowing down in ophthalmology. If you own your own practice, it’s likely on your mind. As Jim said, if you have an offer, find a good consultant to counsel you through the process. Don’t make a quick decision without considering the situation from all angles.

Of course, there is the big payday to consider, as well as the benefits of being led by someone who understands the principles of business. On the other hand, there’s the loss of control over decision-making and the potential loss of entrepreneurialism in ophthalmology as a whole.

As Tal said, he would never fault anyone for wanting to take the windfall, but he urges people to ask, “At what cost are we selling?”

With that, thanks for listening to Off the Grid. Until next time.

Speaker 2: Ophthalmology off the Grid is an independent podcast produced by Bryn Mawr Communications and supported by advertising from Alcon. For a full listing of podcasts for eye care professionals, go to eyetube.net/podcasts.

12/13/2018 | 52:24

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