What if Private Equity Ran Medical Schools?
Dear Miss. Robertson,
Thank you for responding to our solicitation for a new Dean of our medical school. We are intrigued by your past experience and background in private equity. As you are well aware, things are changing quickly in sick care and the medical education establishment has been slow to adapt. You’ve no doubt heard about large healthcare companies and hospital systems being purchased for staggering sums by private equity firms.We intend to shake things up and are seriously considering alternative, non-traditional candidates like yourself.
Given the uncertain trajectory of basic research funding, dwindling state support for higher education, a broken medical school business model and threats to our clinical enterprise, it is clear that the model of recruiting academic triple threats that excel in research, teaching and clinical care is a dying model. Instead, we are looking for a person with a combination of leadership, entrepreneurship and innovation skills- the new triple threat.
Private equity is fixing and flipping sick care and medical services at an astounding rate and we can see why your skills should be applied to medical education.
- As pressure mounts on companies to maintain top-line organic growth and sharpen focus, more are looking to sell unwanted or noncore units. In certain situations, such as to win regulatory approval for a merger, companies are required to sell some assets. Divesting makes sense for companies; our research has shown that corporates that actively reallocate capital produce total returns to shareholders of 10 percent annually, versus 6 percent for companies that reallocate only infrequently. Healthcare companies seem to be catching on. Excluding businesses that were spun out as stand-alone companies, corporate companies divested a record $115 billion of healthcare assets in 2015. The value of such divestitures was twice as high in 2013–15 as in 2010–12.
- Price is often not the only factor in divestitures, which often require the buyer and seller to negotiate two agreements, one governing the purchase and one the transition of services. Many buyers are not equipped to manage these types of complex deals; others are unwilling. Sellers also find it preferable to move quickly toward negotiation with a single bidder. Private-equity firms skilled in managing these negotiations have an advantage. Furthermore, private-equity firms can also cultivate relationships with healthcare companies that strategic buyers (that is, other healthcare companies) would find difficult to achieve. In this way, private buyers may get a head start on divestiture opportunities and avoid a multibidder auction.
- Many private-equity firms have capabilities well suited to transform underperforming business units into stand-alone companies and improve their finances. Active private owners can add value through effective management changes (for example, adding leaders with a proven track record of success in running healthcare companies) and establishing regular and challenging dialogue with management through a new board of directors. Private-equity firms can introduce some discipline to the capital-allocation process and help their acquisitions pivot from capital preservation to funding ambitious growth and long-term strategic bets. These could include vertical integration (as seen, for example, in the acquisition of Nordion by GTCR’s Sterigenics in 2014) or growth through highly strategic acquisitions (for example, under JLL Partners ownership, Patheon acquired a series of companies to broaden its service offerings).
We realize that private equity in sick care has it’s downsides. However, things are not working now and we need to make some changes.
Some of the possibilities we envision include:
1. Divesting our medical school from state control since they provide miniscule financial support.
2. Cut costs to the bone
3. Re-examine our tuition model. As you know, some schools are eliminating tuition without any requirement that students pay it back, whether they can afford it or not. Others are proposing that all tuition should be eliminated, and after training is complete you should reimburse the school at 10 percent of your gross income for 10 years. Income share agreements first gained popularity with tech bootcamps. Now some traditional universities are offering the tools as substitutes for student loans and we are considering doing the same for our graduates.
4. Explore ways to securitize the future incomes of graduates to attract investment capital With Income Share Agreements (ISAs), the school invests first in the form of overhead, education, and support. The student pays zero (or little) money upfront, and is incentivized to secure a high-paying job. They pay an agreed-upon percentage of their income to the school, only when they’re gainfully employed. Put simply, the school doesn’t make money unless its students do.
5. Recruiting a new team with skill sets compatible with our financial objectives
6. Creating IT systems and innovation management systems that add value instead of costs
7. Looking to consolidate and roll up other medical schools that share our perspective and vision
8. Focusing on supporting those who are successful instead of wasting resources on trying to rehabilitate those who clearly do not have what it takes to succeed.
9. Using private equity networks to find the executive talent we need to scale our ventures
10. Using innovative financial products, like crowd funding and other securities instruments to assure an adequate return on investment at exit.
11. Offering online courses in a certificate program designed for potential biomedical entrepreneurs and others who want a more advanced understanding of basic and clinical sciences, medical technologies, innovation opportunities and healthcare systems.
12. A special program for veterans interested in acquiring advanced skills and training funding a new version of the GI bill
13. Integrating health policy, economics, innovation and entrepreneurship into our curriculum
14. Creating a second pathway for MD’s who do not want to practice clinical medicine.
16. Rethinking our admissions process to improve equity, diversity and inclusion to include admissions by lottery, eliminating the MCAT requirement, eliminating admission interviews and eliminating bias against those who attend community colleges or foreign medical schools.
We might also be interested in a divestiture,which we define as the sale of a business unit or division from a corporate parent, such as our departments of family practice or rehabilitation medicine, which have always been a drag on our earnings
To that end, you should be aware that effective next semester, we will be eliminating the 4th year of medical school in an effort to make it better, cheaper and faster. We will be eliminating “audition rotations”, cutting back on non-essential basic science course requirements, making clinical rotations mandatory in the first year and making clinical skills competency a requirement for graduation. Simply put, we are changing the 100 year old model of medical education to conform to the times.
Thank you again for your interest and we look forward to hearing your thoughts.
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