What Do NFL Owners Know About Private Equity that Doctors Don't?

The National Football League’s owners just approved, for the first time, private equity investment in NFL teams. The new rule allows owners to sell up to 10% of a team to a PE firm, with some additional restrictions:

-- The PE firms have to hold on to each investment for at least 6 years

-- The PE firms have no governance rights

-- The PE firms are not allowed “preferred equity” arrangements, i.e. voting rights in excess of the percent ownership stake

In some ways it’s surprising that the NFL is taking such a cautious approach. Not only are these teams incredibly expensive, but NFL’s ownership rules make these multi-billion-$ investments incredibly illiquid. PE money could be quite helpful to any team owners who decide that they need or want to sell their stake. 

But from a larger perspective this makes sense. The value of a professional sports team is closely tied to the value of the overall league. Individual teams make money not just based on their own popularity, but also on the popularity of the league and the sport more broadly. So if you’re an owner with a multi-billion-$ stake in a team, you don’t want to take any chance of some other owner making short-sighted business decisions that could put any of the league’s value at risk. Social sanction appears to play a big role in this. Owners are a club of (mainly) rich white guys who trust each other, and who are naturally suspicious about anyone new who might want to join their club. That’s why they’re so insistent that owners need to be actual humans who are deeply invested in the business of football, not corporations simply out to make a buck. (Also, not a sovereign wealth fund. The NFL may be promoting its brand globally, but they’re not ready for a Saudi- or Emirates- or Qatar-owned team.)

[See also this previous Hippocratic Capitalism newsletter on sports betting, which makes a similar point.]

Relevance to the healthcare industry:

Private equity ownership of U.S. physician practices and hospitals has been growing. PE firms now own 8% of private hospitals in the US, along with a large proportion of physician practices in certain specialties such as emergency medicine, ophthalmology, and dermatology. But unlike the NFL, hospitals and medical practices have been allowing PE firms to take management control over their operations. And that leads to lots of problems. PE-owned hospitals and practices have many ways of boosting revenue and margin by cutting corners on quality of care.

Now, just like NFL owners, physicians in private practice often find themselves wanting or needing to sell their practice. Health systems and communities similarly seek to sell hospitals from time to time. And private equity firms can be attractive buyers. An attorney friend of mine who structures these deals tells me that physicians often prefer to sell to PE firms rather than to health systems, since health systems often deal with doctors in heavy-handed ways.

But physicians and health systems and communities considering a sale to private equity would do well to keep the following principles in mind:

1. When it comes to business ownership, human relationships matter. NFL team owners want to work with peers with whom they can negotiate over drinks in a nice restaurant. They don’t want a fellow team owner to be some sort of corporation, and they’re definitely not about to put up with shell companies. (There’s one notable exception to the identifiable-human-as-owner rule that I’ll mention at the end of this newsletter.) The healthcare analogy here is that the owners and leaders of hospitals and medical practices should be humans who live in the same community as their patient population.
2. Long-term commitment. When owners are in it for the long haul, such as the family that has owned the Chicago Bears for more than a century, they make decisions with a long time horizon in mind. As any business executive knows, it’s fairly easy to spruce up a balance sheet through moves that would be unsustainable in the long run. Slash your R&D budget, sell your real estate, basically offload any asset that isn’t delivering revenue in the next quarter or two. PE firms do this all the time to prepare a firm for resale, since sale prices are based largely on return-on-assets calculations. But such actions harm the firm over the long haul. In healthcare, short-term thinking doesn't just put the health of the business at risk; it puts the health of the community and individual patients at risk. And so the fact that over half of PE-owned medical practices get re-sold within three years is pretty concerning.
3. Mission first, revenue second. You can’t accuse NFL owners of being a bunch of socialists. These billionaires are as capitalist as they come. But they’re smart capitalists who know that revenue only comes from the hard work of building value (in their case, entertainment value) over the course of many years. Would a PE firm have this same sense of mission, either for football or for patient care?
4. If it's just about the money, then separate the money from operational control. The NFL's new rule is designed to allow (some) investment while severely limiting the ability of a PE firm to influence business decisions. In principle, a physician group could similarly take on PE investment while retaining control of their practice. Would that scare away potential PE buyers? Probably. But it would tell you where the physicians' and the PE firms' true priorities lie.

Now, I can’t do a newsletter on NFL team ownership without acknowledging the unique community ownership structure of the Green Bay Packers. (I also don't want my Green Bay-native brother-in-law to get upset with me.) The Packers are owned by the citizens of Green Bay through a system of stock shares which can never be sold (except back to the team itself) though they can be gifted to family members. The Packers are the only major US professional sports team with this arrangement. But it seems to work great. And in my opinion, it would be a great model for community ownership of healthcare organizations as well.