S05E91 The Impact of Private Equity on Plastic Surgery Practices

In this episode of 'Three Plastic Surgeons and a Fourth,' hosts Dr. Sam Jejurikar @samjejurikar, Dr. Salvatore Pacella @sandiegoplasticsurgeon, Dr. Lawrence Tong @yorkvilleplasticsurgery, and Dr. Sam Rhee @bergencosmetic focusing on the ramifications in plastic surgery. They explore the history and business model of private equity, the effects on patient costs and care quality, and share personal experiences and insights regarding potential acquisitions by these financial entities. 

The discussion also covers the challenges faced when physicians consider private equity buyouts and the impact on their practice, autonomy, and patient care. The conversation also touches on the broader implications for healthcare and compares the situation in other specialties like dermatology and ophthalmology. Despite the financial allure, is retaining autonomy and focusing on individualized patient care is paramount?

@3plasticsurgerypodcast #podcast #plasticsurgery #cosmeticsurgery #plasticsurgeon #beauty #boardcertified #aesthetic #3plasticsurgeonsandamicrophone ⁠#bergencosmetic ⁠#bestplasticsurgeon #beforeafter #aesthetics #realpatientrealresult #boardcertifiedplasticsurgeon #njplasticsurgeon #njplasticsurgery #nyplasticsurgeon #nyplasticsurgery   
#PrivateEquity #MedicalInvestments #HealthcareFinance #HealthcareEconomics #MedicalPractices #PhysicianLife #SurgeryTalk

S05E91 The Impact of Private Equity on Plastic Surgery Practices

TRANSCRIPT

[00:00:00] Dr. Sam Rhee: all right, welcome back to another episode of Three Plastic Surgeons and a Fourth. We have us, uh, we have with us, as always, Dr. Lawrence Tong from Toronto, Canada. His, uh, uh, Instagram handle is at Yorkville Plastic Surgery. We have Dr. Sam Jejurikar from Dallas, Texas. His Instagram handle is at Sam Jejurikar.

And our California Plastic Surgeon, Dr. Salvatore Pacella is from La Jolla, California. And his Instagram handle is at San Diego Plastic Surgery. Plastic Surgeon?

[00:00:38] Dr. Salvatore Pacella: At San Diego Plastic Surgery. Yep.

[00:00:40] Dr. Sam Rhee: Excellent, thank you. So, our topic today is private equity in medicine, especially in plastic surgery. So, in recent years, private equity firms have been gobbling up physician practices and have formed these very large, unfortunately powerful medical groups which are causing problems, mostly in the form of increased costs for patients.

And In a recent article from the New York Times last year, they said that in more than a quarter of local markets, a single private equity or PE firm owned more than 30 percent of practices in a given specialty, and in, uh, and when a firm controlled more than 30 percent of the market, the cost of specialties including gastroenterology, dermatology, Obstetrics and gynecology, the cost would increase to patients by double digits.

And now this is happening a lot to, to, uh, plastic surgeons as well. Um, even ones that we know. And so we're going to talk a little bit about the impact that private equity has had in medicine and in plastic surgery. But first, let me turn it over to Dr. Tong for the disclaimer.

[00:01:49] Dr. Lawrence Tong: All right, uh, this show is not a substitute for professional medical advice, diagnosis or treatment. This show is for informational purposes. Purposes only treatment and results may vary based upon the circumstances, situation and medical judgment after appropriate discussion. Always seek the advice of your surgeon or other qualified provider with any questions you may have regarding medical care.

Never disregard professional medical advice or delay seeking advice because of something on the show.

[00:02:15] Dr. Sam Rhee: So historically, in the past, doctors owned their own small practices, and that was the way maybe our parents or our grandparents had sort of experienced medicine in the United States, but more recently, private equity firms, which are financial companies that pool for money from institutional investors and individuals, they form funds, which then use to purchase companies with using debt and putting those companies into debt.

And they've been turning, they've done this in other industries and it's pretty common and they've turned to healthcare pretty recently and they've been buying many different physician practices and trying to basically corner the market, uh, in different areas, in different specialties with, uh, the eye of turning them around and reselling, uh, these.

Uh, large groups at, at a profit. Um, now I'd like to ask all of you what your experience has been with private equity or what you know about it and, and, um, and sort of what you think so far.

[00:03:23] Dr. Sam Jejurikar: So, um, let's just take a step back and talk about what private equity is and how it's come, come about. So private equity is an investment description, um, where, where basically, and it's, and it's blown up over the last few years, but eventually you'll have a fund where you will have managers that decide they're going to get outside investors.

Like you said, institutional investors. or individuals who are going to give them a hundred thousand dollars, a million dollars, 10 million dollars to invest with them. These investors are expecting a particular return over a given period of time. And so typically a private equity fund, if they're going to make an investment in something, it's their goal to see about a two and a half to three X return in about a five year span.

Previously, you know, when private equity was kind of a new thing, 15, 20 years ago. It really wasn't medicine that was involved. It was plumbing businesses. It was a variety of private businesses that they would come in and it would be sort of a turnkey situation where a private equity fund would come in, buy a company, those people would get to walk off in the sunset.

But, um, starting with anesthesia, dermatology. Internal medicine practices 5 10 years ago became much more prevalent in medicine. What's different with medicine is it's not so much turnkey. They're not acquiring physician practices. Those doctors are still, they're getting a lump sum payment. That's usually, uh, you know, some multiple of what their, their practice is valued by the private equity fund, but they still work for that practice.

And private equity still has to get those same kind of returns. So how do they do it? Like you said, they use leverage. They take out some degree of debt. They will, um, cut costs. So a lot of times when a private equity fund comes in, employees lose their jobs. They'll try to pull things like they'll make, might create a call center.

If they acquire 10 plastic surgery practices, there'll be, instead of, you know, one receptionist per practice, there could be a call center, um, to try to, to try to cut costs. And then finally they raise prices. And so what, um, Um, and I don't know about you guys, if you've been approached by private equity to acquire your practice, I probably get six emails a week about private equity acquiring my practice and the larger practice that I'm affiliated with, Talis Plastic Surgery Institute.

And I'm sure you guys are in a similar situation. Um, you know, it's in some ways as a doctor, it sounds great to get a lump sum payment to have your practice acquired. But then you no longer own your practice. I don't know. Have you guys had the same experience with private equity approaching you?

[00:05:54] Dr. Lawrence Tong: I was, I was just going to say 1 of the other things that they, they do to generate the revenue is, uh, they strongly encourage the physicians, whoever the provider is to upsell as well. So, I think there's some, um, issues with that, because if you're going to be practicing 1 way and then told to practice another way, um, for, for, I think, a lot of physicians who don't feel comfortable with that, that's going to, that's going to be an issue.

[00:06:23] Dr. Salvatore Pacella: you know, when I think about private equity, I think about one guy. His name is Ron Tillman from Jerry Maguire. You know what he said? Show me the money, baby. Show me the money. So

[00:06:36] Dr. Lawrence Tong: thought you were going to say you had me at hello.

[00:06:39] Dr. Sam Rhee: That's a different, uh, uh,

[00:06:41] Dr. Sam Jejurikar: I was like, I don't remember Cuba Gooding Jr. 's character name, but clearly it was Ron Tillman. Okay.

[00:06:48] Dr. Salvatore Pacella: so the, and what, what I mean by that is, you know, in the, in the private practice model, or even in the foundational model, say where you work for a hospital or a nonprofit or something like that as a, as a physician. You know, there's, there's 1 layer of separation, right? You're, you're the physician and it's your job to run the practice and you have to have a bottom line, but when you're in private equity and you're that, you're in that physician position, there's a whole group of people standing behind you that need to get paid, right?

Board members and administrators and investors, et cetera. So, so you're really giving up that, that equity that, um, Potential for success to somebody else who's sitting behind you and providing support. Right? So, of course, that it's, I mean, it's no, it's no surprise that costs are going to go up. And people are going to lose their jobs and there's going to be a separation from profit to expense, right?

Um, you know, what I've seen here locally in the community, there was, um, a private equity group that just recently went bankrupt and I don't know how it's doing right now, but, uh, they're still operating and still, you know, taking care of patients, but I don't know financially how anything is structured.

And, you know, it's been kind of evident in Southern California. They were acquiring practices for. Uh, about a year or two, and then they stopped acquiring practices and it was, it's no surprise to me that when they stopped acquiring practices, well, something financially might be wrong with the, with the business model.

Right? And if I was an older surgeon about to retire. Okay. And I still wanted to keep operating for a year or two. The idea of private equity, uh, private equity buyout sounds very good to me because, you know, quite honestly, 20 years ago, you could have sold your practice for probably a million dollars.

But now with the internet and, and marketing what it is, you know, these physician practices are not really worth what I think a lot of the older physicians think they are because there's patients are just going to go to the next person that markets to them. Right. So the idea of cashing out to a company sounds very good.

Okay. On the other side of things, if you're a young surgeon coming into a community that you want to go into, that can be very appealing. You're going to work for a company that's going to take care of you. It's all cosmetic surgery. I don't have to deal with any of the business phenomenon or the business issues.

And I can, you know, hang my shingle from a residency to a,

[00:09:13] Dr. Sam Rhee: uh, aimed

[00:09:14] Dr. Salvatore Pacella: But where private equity to me doesn't really work is everybody in between all those, all those surgeons in between mid career, because, you know, that's the kind of time that you're building your equity in your company or you're in your growth.

Right? And so it doesn't make a ton of sense to me to, to give that away to somebody. Um, Sam, uh, Jejurikar, you may feel otherwise. I don't, I don't know.

[00:09:39] Dr. Sam Jejurikar: You know, I've I've explored this a fair amount, um, just because we did get, um, you know, we, we, I've had conversations with private equity funds about acquiring my practice and our larger group. Um,

[00:09:54] Dr. Sam Rhee: I

[00:09:55] Dr. Sam Jejurikar: I think, you know, that it's always sounds. Attractive when someone is giving you a multiple of what your practice is worth, and when you're in that mid career point and they're offering you a 8 10x multiple of a large amount of money, it's hard not to listen to it, particularly when you Think about the tax advantages of, of them, of doing that.

You, you pay a lower tax amount cause you're paying capital gains tax. You're selling equity in your practice as opposed to real income tax.

[00:10:24] Dr. Sam Rhee: Welcome

[00:10:24] Dr. Sam Jejurikar: But you notice I've had the conversations, but ultimately myself and all of my partners came to the conclusion that it was not the right decision for us. We realized that with that loss of autonomy, we would no longer be able to provide that same customer service that we give to patients.

We could no longer ensure that our employees would stay employed. We, um, More importantly, what Larry was talking about, you know, I want to be able to talk to a patient and tell that patient what I think they need and not what I can tell them that's going to sell them the most amount of money and sell the most amount of product because now I work for a company who's trying to deliver a return.

And ultimately, the way that I would practicing medicine would be very foreign to me. Um, so I don't feel differently than you, Sal. I, I just explored it in a lot of detail and realized that it was not something that I ever want to do. Because when you are, when I am in that guy who has one or two years left in my practice, Private equity is not going to want me.

They want to be able to deliver a return that's going to last a much longer period of time to their investors. So for me, private equity is not something that'll, that'll happen, but I think my patients can rest assured that they're going to still have that boutique practice feel where, you know, they, they call my office, they get a call back or they talk to real people.

They're not frustrated. You know, they're, they're, They're used to getting that individualized attention, which I think is going away as, as these large institutions acquire more and more practices.

[00:11:47] Dr. Salvatore Pacella: You know, I think, um, when you, when you look at, um, The history of private equity in plastic surgery. This, this experiment actually existed about 25 years ago. There was a company out there called the Plastic Surgery Company that tried to buy out a bunch of practices and put them under one roof and have a big consolidation.

And that, that went bankrupt within a few years. So we've, we've kind of learned that lesson already, I think, in, in our discipline. Um, You know, there's, there's a reason, um, Toyota does what it does, right? And that's by economies of scale and efficiency, right? You, they make the same product. Each particular person does their job and they're able to efficiently create an automobile at low costs that they can sell for a profit. unfortunately, I don't think plastic surgery is like that because most of us do various different things at different speeds, at different qualities. Okay. It's not like say a dermatology office where, you know, the biggest procedure is a small little biopsy or excision. There, there's some economies of scale that can be done with High volume practices, and I think that the diversity of what we do as providers in plastic surgery is so out there that I don't see a way to really standardize that very efficiently.

[00:13:03] Dr. Sam Rhee: yeah, I, I think there's some question in my mind about whether private equity in healthcare in general is a good idea. Let alone plastic surgery. As we've talked about, saddling companies with large amounts of debt, cutting costs, raising revenue, uh, increasing, uh, what you charge, uh, does not, it's hard to translate that into high quality healthcare.

And there are maybe some certain types of specialties in which, like you said, it might be more streamlinable, the patients might be more. amenable to, uh, finding efficiencies. But as you both, as all of us know, if you have 10 patients who want a breast augmentation, that does not mean 10 patients will get the same breast augmentation.

It might mean two don't even get them. They get something else. Two might need a lift. Two might need a very large implant. Some might need a small implant. Like there is no, As, as you have outlined, Sal, there's, there's very individualistic, uh, tendencies when, and the same surge, or if you have two plastic surgeons seeing the same ten patients, they may end up deciding, on different outcomes for all of those 10 patients.

There is no single best way of treating many of what we see. It depends on our skillset. It depends on our experience. It depends on our location. It depends on our relationships with these patients in terms of how long we've known them. And so, um, knowing all of that. It blows my mind that I can see like that a private equity firm would feel that, um, they can apply what they have done in terms of clothing manufacturers and apply that to us.

You know, um, it,

[00:14:59] Dr. Salvatore Pacella: let's say So you're an ophthalmologist and all you do all day is cataracts, um, or LASIK. It's the same operation if, if X then Y, if Y then Z. You know, that it seems very amenable to a business model in that regard. You know, we're, we're kind of a finger painting of, of that, you know,

[00:15:20] Dr. Lawrence Tong: Yeah,

[00:15:20] Dr. Sam Jejurikar: remember that, I mean, they're trying to squeeze their margins. So if it's, even if it's a LASIK surgeon, that's doing that, they're always trying to figure out how can I get a bigger return? So can I do it with fewer employees? Can I do it with, um, can I raise prices to generate that? And the overall mission, yeah.

Like the, You know, I think, you know, I don't know if any of us have a formal mission statement for our practice, but it's something along the lines of delivering high quality care when you bring in an outside private equity fund. The mission now becomes to deliver the highest returns that you can. To outside investors and it changes.

Sam,

[00:15:55] Dr. Lawrence Tong: yeah, I think that, um, the, the point that, uh, Sam Rhee, uh, had made mixing of, you know, private equity and healthcare is, uh, something that, you know, has, has questionable, um, I guess, goals, uh, that don't necessarily go along with each other. And, you know, if, if, um, if you work for a hospital, uh, You know, the administrators, even though, you know, there is, they want to generate some revenue from that.

Their goal is usually to provide good health care, not to make the, you know, the most money that you can. So I think that, um, the other point was how plastic surgeons are very individualized. I think that plastic surgery is not something that's easily, uh, you can convert into a commodity. And I think that that's the, the issue there.

I think actually a lot of medicine, you can't. Just commoditize. Um, so I think that from what I see anyways, it's, it's something that probably won't work in the long term. I know that it's had pretty good success in dentistry and in veterinarians, but I think for healthcare, it's a little bit different.

[00:17:14] Dr. Sam Jejurikar: what were you saying that the, the study that, um, that you were quoting that there's a, did you say a 30 percent increase in healthcare costs or am I imagining that?

[00:17:22] Dr. Sam Rhee: know, if, if, If a private equity firm owned or controlled more than 30 percent of a market, the cost of care would increase by double digits in that local market. And they've proven that in OBGYN, dermatology, and gastroenterology. So, so that is, I mean, but that is the PE playbook, right? You control enough of the market, you can start increasing the prices to the consumer and they have no choice to go along with it.

And, and, uh, that is a very. Tried and true, uh, proven way for them to increase their revenue and to return more value to their investors. Just keep, you know, but you can only do that if you control enough of the market where people can, don't have much choice other than to go to you at that point.

[00:18:13] Dr. Salvatore Pacella: Yeah. And, and, you know, like, uh, uh, Larry, you made a good point about, you know, how is this any different than a hospital system acquiring physicians and. You know, providing care to a larger group of patients and you hit the nail on the head there, which is it's a different mission. And it's a completely different business model, right?

Like some service lines lose money. We know that they lose money because there are other service lines that subsidize them because they're very profitable at the end of the day. The goals are either a foundation model of staying afloat and making no profit, or a model of making small profits with the intention of delivering high quality health care that you reinvest back into the company.

It's a completely different model. There's no other third party over the top of this, you know, trying to glean as much investment out of the care as possible.

[00:19:07] Dr. Sam Rhee: What do you think about Instead of P. E., physicians controlling larger groups, and this is really hard because trying to get large groups of plastic surgeons together is

[00:19:19] Dr. Salvatore Pacella: Herding cats. Yeah,

[00:19:24] Dr. Sam Rhee: you know, we don't work well together, but I would say one of the largest groups that have worked well successfully in the country is your group, Dallas Plastic Sur, you know, Institute of Plastic Surgery.

And so what would you say, like, let's suppose, um, there are different markets or different areas in the country where people are facing challenges, uh, as plastic surgeons, would it be feasible for, for surgeons to work together in at least a loose kind of affiliation with each other to try to, um, do something similar, but Still control what they do.

[00:20:00] Dr. Sam Jejurikar: I think it's feasible, but very, very, very challenging because our group, Dallas Plastic Surgery Institute, we are 11 separate practices that have an affiliation through a holding company. And even with that, there are many disputes and lack of consensus About virtually every topic in terms of how we are going to manage the group moving forward. There are benefits, though, that I think you could all sort of agree to, which is, you know, Sal used the term economies of scale earlier before. One of you guys did. There are economies of scale when you have multiple plastic surgeons, whether it's purchasing power, but we have that right now through some of our national organizations where You know, we can, we can buy implants or medical supplies for, for lesser amounts.

We, we're able to do that because of the size of our group and we're able to do things like that. And, but we still don't shortchange employees. We still think it's important that we're able to, um, you know, to deliver high quality care. We're not in an insurance model. You know, I do a hundred percent aesthetic practice.

People do not come to Dallas Plastic Surgery Institute because they're interested in cost savings. Um, when you're talking about, um, dermatology or anesthesiology or ophthalmology, things that are more medically related, you know, the very thing, when you start getting a lot of doctors together that are controlling their market, you start creating a.

Oligopoly or a monopoly. And, and ultimately that's never going to control costs for the consumer. And so I think where plastic surgery is concerned, because let's face it, it's not inexpensive for patients and people are not coming to our group for, for cost purposes, you know, I think it's feasible. I just don't know how it's feasible while still maintaining high quality care.

[00:21:50] Dr. Salvatore Pacella: you know, uh, Sam, one of the, one of the groups that comes to mind that has been in existence for a number of years is in your neck of the woods, Sam Brie, uh, the Long Island plastic surgery group. You know, that is a group of a tremendous amount. I think there's several hundred of them. If I don't, if I don't, if I recall,

[00:22:06] Dr. Sam Rhee: Oh, I thought

[00:22:07] Dr. Sam Jejurikar: I thought it was, no, I think it's like 20. It's like 20.

[00:22:10] Dr. Salvatore Pacella: oh, really?

I 100 and something. Okay. My mistake. But, um, but, you know, their model is very unique because. You know, they, they create an environment where they're able to negotiate insurance contracts across the tri state area very nicely, um, for their benefit. But they do not compete geographically. The way each practice is structured is like, you know, Sam's practice, but, um, but geographically unique, right?

So every particular plastic surgeon is in a unique town or enclave in Long Island, Manhattan. Upstate New York, et cetera. And so they, they create a situation where they're, they're not competing against each other. Um, and so it's, uh, you know, despite their success, I just don't, I don't see it happening with a lot of practices across the country.

I think it's very challenging.

[00:23:07] Dr. Sam Rhee: There's just so much individuality with surgeons. That's, that's the problem.

[00:23:11] Dr. Lawrence Tong: so this phenomenon has not migrated, uh, up north to Canada. Uh, I don't know of any, uh, practices, uh, even in Toronto that, uh, have been sold to private equity. I might be wrong about that. But from, from, um, your perspective, do you know? surgeons who have done this and how do they feel about the new situation?

What is the feedback that you're getting?

[00:23:36] Dr. Salvatore Pacella: No comments.

[00:23:39] Dr. Sam Rhee: Uh, I ha I have a friend who's an oral surgeon and, uh, he knew fully what he was getting into in terms of the money he was getting, the amount that he would have to work and. He thought he could handle it, but he does not like it. Let's just say he does not like it. Even though he was paid an enormous amount and he was fully prepared to work the amounts that they expected him to work now that he's in, he's hip deep in it.

I think if he could take it back, he, he would.

[00:24:13] Dr. Lawrence Tong: And what are the main issues with that? What is he not like?

[00:24:17] Dr. Sam Rhee: Uh, I think the lack of control, like all the little, little changes they're making, which he didn't really sort of anticipate. Like you said, like when you start cutting costs, like it's when you get nickel and dime here and there, like the kind of supplies you get to use or, you know, um, stuff like that, like that, that just, it just wears on you.

I mean, I don't know. I think one of the reasons why it was a pleasure, not a pleasure, but one of the things, you know, I worked at large hospitals and we all did for a long time and we had very little control about a lot of what we did. And then once, um, I went into private practice for myself, I had complete control over everything that I did.

And I feel like if someone tells me what have to use or, you know, when I, I need to operate or, you know, Uh, all of these little things in my life, like, that wears on you after a while. I mean, it really does, and I think that that can be an issue.

[00:25:22] Dr. Sam Jejurikar: Yeah. I, I know several physicians, um,

[00:25:25] Dr. Sam Rhee: I can't hear you,

[00:25:26] Dr. Sam Jejurikar: who you, you can't, you can hear me now.

[00:25:30] Dr. Sam Rhee: I can't.

[00:25:31] Dr. Lawrence Tong: I can hear you.

[00:25:33] Dr. Sam Rhee: Is it me?

[00:25:35] Dr. Sam Jejurikar: I don't know.

[00:25:35] Dr. Salvatore Pacella: Is this thing on?

[00:25:41] Dr. Lawrence Tong: I can hear

[00:25:41] Dr. Sam Jejurikar: Can, uh, okay. Okay, so, um, so, yeah, I know several physicians, um, all of whom very similar to what Sam just said, but if you take a step back, you know, why do people sell it to private equity? Private equity will tell will tell physicians that they can run their practice better than they can. They can do it more efficiently.

They can make it more profitable. I don't think anybody actually believes that. Everyone is generally just motivated by the payout and the aspect that, um, you know, it's their exit strategy out of medicine because physician burnout in a lot of different specialties is pretty substantial. And pretty much every physician I know who was on the verge of burnout, who was looking for the payout just got burned out a lot quicker once they sold out to private equity.

Um, I don't know very many doctors that are that happy with it. And then I have a very good friend who's actually a pretty prominent attorney in the Dallas area. We were getting dinner, uh, and I was sort of talking to him about some of the discussions that I was having with private equity funds. And he just said, Sam, do you need the money?

I said, no, no, I don't, I don't need the money. He's like, then don't do it. His entire His entire practice is representing private equity groups in their disputes with physicians when these deals have gone awry. And he just said, there's so many things that physicians don't realize are going to happen to their practice, that unless you are financially strapped, you should not do this. So it was very, it was very persuasive. So

[00:27:10] Dr. Sam Rhee: with that, thank you very much, guys. I think that was very illuminating, at least for me. And any time I get an inquiry about private equity, I'm going to Throw my cross and holy water at them and make sure that they stay far, far away. So, yeah,

[00:27:25] Dr. Salvatore Pacella: you guys noticed this cuteness right here? This dog? That's Hawk. He's just, just came on, crashed on the couch. He loves the, loves to talk about private equity and finance.

[00:27:36] Dr. Sam Rhee: I know let's, let's find out what he has to say anyway. Thank you so much guys, as always. And, uh, until next time we'll talk then.