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Late Night With Chip & Paulie 13 (January 19, 2023)

In this discussion, Chip & Paulie, along with finance expert Santi Castaneda, examined the complexities and implications of private equity in pediatrics. They highlighted the reasons private equity is attracted to medical practices, such as reliable cash flows and potential cost-cutting opportunities, while also noting the potential conflicts of interest between investor obligations and patient care. Ultimately, whether selling to a private equity-backed firm is a viable option depends on individual circumstances, including financial needs, career stage, and the desire to maintain clinical autonomy.

Guest: Santi Castaneda

Download Slide Deck Here

Summary

1. **Discussion on PE Firms in Healthcare**:
   - Santi details how PE firms provide capital, financial expertise, and resources to grow businesses, including healthcare practices, by improving patient experience, operational efficiency, and revenue growth.

2. **Example of Ice Cream Shop**:
   - Paulie provides a simple financial example using an ice cream shop to illustrate how PE firms increase the value of businesses through cost rationalization and profit maximization, setting the stage for a deeper dive into PE in medical practices.

3. **Impact of PE on Medical Practices**:
   - The panel discusses potential conflicts of interest between PE's goal of maximizing returns and the medical profession's obligation to patient care, highlighting concerns over replacing physicians with less expensive clinicians to cut costs.

4. **Valuation and Sale Considerations**:
   - Factors like fair compensation, non-compete clauses, contract structures, and the financial health of the acquiring company are emphasized as crucial considerations for practices contemplating a sale to PE firms.

5. **Sector-Specific Discussion**:
   - The conversation delves into why pediatrics, despite its reliable cash flow, is a relatively recent focus for PE, due to factors like lower revenue compared to other specialties and high Medicaid exposure.

6. **Succession Planning and Retirement**:
   - Mature practices with owners near retirement or lacking succession plans may find selling to PE firms beneficial, while younger practices must weigh long-term financial implications and potential loss of autonomy.

7. **Future of PE in Healthcare**:
   - PE firms typically have a 5-year investment horizon, seeking to grow practices before selling to other PE firms, larger publicly traded companies, or healthcare systems.

8. **Recommendations and Closing**:
    - Santi advises due diligence by consulting with peers, understanding contract specifics, and ensuring financial stability of acquiring firms.