A perspective against private equity

You have probably already heard about the role of private equity money in veterinary medicine. If you are like most of us, though, its real meaning eludes you. Nevertheless, our collectively vague understanding of the issue tends to divide us into two camps: those who understand at least the basics of private equity investing, and, consequently, loathe it, and those who harbor no clear opinion, but suspect those who do are somehow constitutionally uncomfortable with capitalism. By the end of this column, I hope to explain the essence of private equity investing well enough to show there is nothing defensible (or even capitalist) about it. Even if you are one of the few fortunate veterinary practice owners likely to benefit enormously from it—trust me, there is nothing to love beyond what it does for your personal bank account. (I begrudge you not one penny of it. You have earned it!) Unfortunately, most veterinary practice workers assume they needn’t care about private equity or practice financing at all. I mean, if you are not poised to profit from it, why should you care? This is why: if you are a veterinary practice employee, it is the one economic issue most likely to have the biggest impact on both your career trajectory andyour quality of life over the next decade. Is that enough incentive to hook you? Read on… An overview So what is private equity financing/investing? To simplify it as it applies to veterinary medicine, private equity investment companies offer big investors a way to pool their money to invest in healthy businesses with great cash flow. Take American Veterinary Group (AVG), a fictional company I just invented. AVG borrows big bucks from private equity investors and uses them to purchase a group of veterinary practices with the hope of extracting greater profitability from our small practices than we can. Which is fair. If they can make more money at this business than we can then, sure, they should knock themselves out. After all, if veterinary medicine can be delivered with greater efficiency and higher profits then absolutely…they deserve their winnings. That is what capitalism is all about! There is a twist, however. The thing with private equity investing is those who engage in it enjoy economic benefits you might assume are illegal, but are not (stay with me now!). For starters, there is no downside to a private equity cash investment. If a veterinarian buys or starts a practice and the thing belly flops, we declare bankruptcy and suffer its consequences for a decade or more. If a private equity investor’s investment doesn’t pay off, they don’t have to pay up. If things go south, it is only AVG who loses (because they have borrowed against their own future cash flows), and private equity investors who win (because they have sheltered themselves from loss through a legal tax investment loophole called a “leveraged buyout”). What’s more, while you might assume it would be in their best interest to see AVG thrive over the long-term, a fast buck is always better for investors like these. (When you cannot lose your investment, speed of return is the most crucial variable!) So, it is typically most expedient to simply siphon off AVG’s profits as quickly as possible. Hence the term, “vulture capitalism,” and how the “greed is good” banking culture of 1980s’ Wall Street became synonymous with buying fat, happy companies and bleeding them dry. Thus, if private equity investors lose, they don’t lose. But if they do make bank off our practices by sucking marrow from our bones. They also––get this––get rewarded with a rock-bottom tax rate. So in addition to a no-risk investment, they also benefit from getting taxed way less than any of us on our personal (or corporate) income taxes. This means the rest of us are effectively subsidizing their no-risk investments. (The AVG guys are also getting taxed less, by the way, which is yet another legal tax incentive to use this investment mechanism.) To recap: People looking for a guaranteed investment on their huge sums (wealthy elites), or simply a place to shelter their money (think Russian oligarchs) are plunking down beaucoup cash to invest in companies that buy veterinary practices (they are doing the same in dentistry, nursing homes, hospice care, etc.). They cannot lose their investment, and they actually save on taxes, which we pay instead. What’s more, their perfectly legal financial incentives drive them to buy the strongest, healthiest businesses–and gut them, leaving desiccated husks in their wake wherever their dollars flow. For the privilege of investing like this they have to pay sizable fees, of course, but these go into the hands of bankers whose primary role is to broker deals, shelter money, move it around and, above all, make sure the banking and tax laws continue to support the status quo (primarily by funding political campaigns and hiring lawyers and lobbyists). Dollars vs. sense It is essentially a get-richer scheme for the economic elite and political class supported by your tax dollars. Which is bad enough; where it really goes off the rails for our profession is when it starts to affect the nuts and bolts of how veterinary medicine gets delivered. But wait, wasn’t this supposed to be a good thing for veterinarians? Sure, if you are a practice owner who owns a practice of a certain size (three or more full-time vets, typically), this is a good thing for you financially. Alas, is it good for your profession? How could it be? While we do not have enough data on private equity-funded veterinary practices to know exactly how it is affecting us yet (after all, the “private” in private equity means we do not have ready access to this intel), what we’ve gleaned from similar industries does not bode well for our profession. One business school-funded study into nursing homes, for example, revealed a 10 percent increase in mortality rates at private equity-funded facilities. Simultaneously, these facilities billed Medicare and Medicaid substantially more than other private nursing homes, leading to a double-dip scenario: more patient flow, which concentrates expensive services, and higher billing rates (which, incidentally, we pay for with our taxes). Yes, it is ugly from every angle. It does not take a genius to see how veterinary medicine stands to lose. Fewer independent practices means less autonomy, less opportunity, and lower incomes for every one of us. Profit-driven, rather than outcome-driven, medicine means lower quality overall despite a professed “higher” standard of care. Then there is the affordability issue… To be sure, not all private equity-funded companies employ unscrupulous, scorched earth tactics throughout. For example, in some cases, they are just buying our real estate and will happily mine the business for parts. In others, they want access to our clients so they can sell them a fuller spectrum of goods and services at economies of scale. These are sound, profit-maximizing business decisions that, while cold, depersonalized, and essentially extractive, speak to fundamentally ethical capitalist principles. The bottom line However, it is my assessment once financial incentives are aligned so extraction becomes the most reasonable approach, it will not be long before the ground gets torn up. After all, the primary reason we are such an attractive target is not just because we are flush with cash, but also because our veterinary practices are considered “undervalued” because we are “bloated.” This is how it looks to them: Our teams are overpaid, our patients under-treated, our facilities under-utilized, and our clients under-mined. Paying the minimum wages our teams are willing to accept (for long, inflexible hours and benefits designed to look better than they are), and charging the maximum our clients are capable of paying (in many cases for services our patients do not really need) is the unethical extension of pure, profit motive-driven veterinary medicine. Whether you agree these latter obscenities to veterinary medicine are widespread in private equity-funded establishments or not, we all know they are already happening to some extent in our industry. Once the very point of business becomes pure profit, once social responsibility and personal connection are fully sidelined, it seems logical to expect they would happen at a higher rate. In fact, to me, it seems deeply naive to expect they would not. It may not occur at first, or for a while. In fact, we have all been explicitly promised they won’t. Yet, they have also vowed not to tell us how to practice (and we all know how well that is going). Of course, if you are a new grad or you’ve never practiced outside a corporate setting, you may not know the difference, or care. And if they have their way, perhaps in the not-too-distant future, none of us will. Patty Khuly, VMD, MBA, owns a small animal practice in Miami and is a passionate blogger at drpattykhuly.com. Columnists’ opinions do not necessarily reflect those of VPN Plus+.

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A perspective against private equity

How private equity is killing veterinary medicine—quickly

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