Gastroenterology investment dominated the specialty in 2019, with no signs of slowing down in 2020.
Here, NextServices President and Co-founder Praveen Suthrum examined the current PE landscape in GI and offered insights into the future.
Note: Responses were edited for style and content.
Question: How will the four established (and fifth possible) PE-backed platforms coexist and continue to acquire practices?
Praveen Suthrum: Initially, platforms tended to be regional first and national afterwards. In 2019, we saw a few national deals. The PE platform in Texas [the GI Alliance] acquired a group in Illinois. The PE platform in Florida [Gastro Health] acquired a group in Washington. Newer platforms [like US Digestive Health] will tend to consolidate practices in their home region first.
However, that doesn't stop conversations from happening across states. When a large or midsize practice puts itself in the market, it attracts bids from everyone. Investment banks will approach all the platforms on behalf of their clients to attract the best bids or determine strategic fits.
Through 2020, we will see merger and acquisition announcements of various mid-size or large GI practices. The PE platforms will compete to acquire and expand. And newer PE platforms will form in other regions.
Q: Three years down the road, what does the GI space look like?
PS: Three years down the road, we will see between eight and 11 PE and strategic platforms. We will see a significant portion of large and midsize GI practices consolidated into PE platforms or into alternative strategic platforms, like the one created by Jamison, Pa.-based Physicians Endoscopy and Silver Springs, Md.-based Capital Digestive Care.
Other players like Nashville, Tenn.-based AmSurg might come up with their own offerings. Companies like Eden Prairie, Minn.-based OptumCare might acquire a few GI practices. We will also see multi-specialty deals. Certain health systems will build GI divisions and acquire or partner with GI practices in their area. Some of these deals might fail, we just don't know which ones.
We will begin to see [PE firms exit] around 2022-23 when some platforms will move onto the "second bite" of the apple. Newer PE players will enter the market, but overall the net result will [lead to] larger, consolidated GI practices.
Other trends will play out, such as stool DNA testing becoming more common. Screening colonoscopy will increasingly become a lab test, and endoscopies will be more about diagnostic colonoscopy. Artificial intelligence-based endoscopy will become available [which will help] GI doctors increase [polyp] detection. These technology trends will also accelerate business consolidation, because GI practices will see the advantages of getting bigger and more sophisticated.
Q: How many deals do you expect to close in 2019?
PS: There are at least 16-20 deals in the works at various stages right now. Closing deals before the end of the year could have certain financial advantages. For example, if the valuation of the PE platform increases in January, then the practices joining the fold now will benefit from that upside.
Q: Do you believe this level of consolidation is good for GI?
PS: Consolidation is inevitable and it's not unique to GI. Large aggregators such as CVS and UnitedHealth Group create a trickle down effect across the spectrum. The entire healthcare industry is consolidating.
When hospitals in a certain region organize themselves to become larger health systems, it creates a risk for independent practices by impacting the referral network. In this environment, the consolidation of GI practices is necessary to remain independent for the future. The question is not whether consolidation is good or bad for GI. The question we must ask is how we make things better for GI.
In the 1990s, physician practice management companies tried to consolidate medicine. The reasons were similar — fragmentation, better contracts and so on. But PPMs failed badly, and it left a lot of debris. As the industry consolidates again, we must learn from the past and aim to do it right this time. Getting PE in GI wrong could have too high of a cost.