Private equity and its seemingly limitless resources have already changed the healthcare game for years. If the first brushes with PE seemed like drops in the bucket, the future looks a lot like a tidal wave.
Becker's ASC Review spoke with Edgemont Capital Partners co-founder and Managing Director Jeff Swearingen to learn more about PE in healthcare and how it will impact practices going forward.
Question: Why are PE firms investing in orthopedic practices?
Jeff Swearingen: We're in a massive period of consolidation across the payor-provider continuum and physician practices are clearly part of this trend. I’d drill down into the physician space and say orthopedic practices are part of the second wave of physician practice consolidation, with the first wave being the hospital-based specialties: emergency medicine, anesthesia, hospitalist medicine and, to some extent, radiology.
The first wave of consolidation has been going on for many years now. There have been some very large companies built through hundreds of acquisitions of independent hospital-based groups. For example, between 2014 and 2016, approximately 100 anesthesia practices were sold to a larger consolidator. It's has been a huge volume of activity.
The second wave of physician practice consolidation involves four or five office-based specialties - dermatology, ophthalmology / vision care, gastroenterology, orthopedics and, to some extent, urology. All of those specialties have several key characteristics in common: a heavy proportion of procedure volumes as part of patient care, the ability to push that volume to a practice-owned lower acuity setting, whether it's an ASC or office, a rising demand for the specialty as the volume and the morbidity in that specialty is tied to age, an underlying physician shortage in the specialty that is expected to grow with rising demand and a relatively fixed supply of new physicians coming out of residency, and the ability to offer multiple ancillary services associated with the specialty. All of these characteristics are appealing to PE investors.
We’ve seen tremendous private equity activity in dermatology and vision care, and PE activity is rapidly accelerating in gastroenterology and orthopedics. I expect to see several new private equity investments in orthopedics by the end of 2018.
Several PE firms realized very strong returns on their investments in dermatology and vision care through making an initial investment in a practice and accelerating that practice’s growth with follow on acquisitions of additional practices, expanding ancillaries, and building new clinics and increasing new clinician hires. I would expect to see PE apply that same, proven model in orthopedics.
Q: In relation to Miami-based Gastro Health's deal with Audax, what's the exit strategy for PE companies?
JS: Any PE-backed company is going to ultimately look to have some sort of exit event so the PE firm can realize an investment return. Audax is no exception. Typically, a PE firm holds on to an investment for anywhere from three to seven years with a five-year holding period most often cited as the industry average.
Q: What happens after a sale? Does the practice go to another PE firm? A management company?
JS: It could be either of those. What we've seen in healthcare is there is fundamental change occurring with the traditional lines between payor, provider, facility, pharmacy and physician practice blurring quickly through mergers and acquisitions. We're seeing hospital systems buying physician practices, and we're seeing managed care buying physician practices. Optum, a subsidiary of UnitedHealth, is now the biggest employer of physicians in the U.S. as a result of several acquisitions they have made, the largest being their recent purchase of DaVita Medical Group.
With this shifting landscape, it's hard to predict three to five years from now who the ideal buyer might be, but certainly if you've built a company of size and scale with good underlying clinicians and the data infrastructure to measure that clinical efficacy and provide superior outcomes data, there's going to be a lot of interest in that business when it’s time for a sale.
Q: What can orthopedic practices do to make themselves attractive to a PE investor?
JS: It's important to find the right partner for the orthopedic group to help the group meet its goals. We're obviously big advocates of doing that in a systematic, disciplined way that helps maximize the financial terms for the orthopedic group, and helps the group find and feel confident in their choice of partners.
Typically, the best way to get the highest and best price and to find the best private equity partner is to run an organized process and talk to many different qualified investors with strong experience in working in healthcare services. That list is actually quite long and there are more than just a few firms that are interested in orthopedics. From an orthopedic group point of view, the group is interviewing a potential partner as part of this transaction process. Finding the right partner is just as important as the financial terms of the transaction.
Q: In this wave of acquisition activity, is there a place for independent practices anymore?
JS: I think it would be a bit 'doomsday'-ish to say every physician will be affiliated. I think well-capitalized, forward-looking physician groups can remain unaffiliated, but I think independence itself is not a strategy. You need to be proactively investing in IT infrastructure, investing in growth, and not merely managing the practice for maximum cash compensation today. Have strong leadership in place — physician and administrative — to make sure you're proactively meeting the demands of a changing landscape.
Q: Is there anything else you'd like our audience to know?
JS: The key consideration is for independent orthopedic groups to make sure they understand the healthcare landscape and how it is changing at the national level and in their local market. If they choose to explore taking on a PE partner, it's important to do it in a systematic, thoughtful way with an advisor that's very experienced working with physician groups.