Private equity in gastroenterology: A train that’s left the station
Well, they are calling it the golden age of rectums! The trends are simple and straightforward.
First, baby boomers and beyond are aging and staying alive longer. The gut, a hidden culprit in many ailments, requires continuous maintenance. Colonoscopies. EGDs. Things that require services of gastroenterologists who are always in short supply (14,000 in the US).
Second, gastroenterology (GI) practices are fragmented like hotels were before Hilton. Regulatory, technological, insurance complexities are weighing GI doctors down. Frustrated with the burden of running practices, many doctors join hospitals. And discover that it's difficult to survive under the thumbs of demanding hospital administrators.
Third, there’s plenty of new money in private equity ($453 billion in 2017). Healthcare, one of the biggest problems of our times, is attracting PE interest, albeit quietly. Unlike earlier decades when IPOs were the main forms of exits, PE companies can now find exits by selling rolled up portfolios to larger PE firms. Plus, PE firms follow each other around.
Fourth, specialties such as gastroenterology can indeed improve revenues by streamlining billing, negotiating insurance contracts, adding ancillary services, and building a strong management team. All of these are possible with consolidation and investments. Given that physician partners don’t usually align, a third-party facilitator such as PE firm would find it easy to disrupt and consolidate.
The question really isn’t about whether PE involvement would be right for gastroenterology or medicine as a whole.
It’s too late in the day to ask that question. The train has already left the station.
Consider these announcements.
In 2016, Audax Group made major investments in both Urology and Gastroenterology.
In 2017, KKR bought Covenant Surgical Partners from DFW Capital
In 2017, Warbus Pincus bought CityMD, an urgent care chain
In 2017, Harvest Partners bought Katzen Eye Group from Varsity Health Partners
In 2016, ABRY Partners invested in US Dermatology Partners
In 2017, Varsity invested in The Orthopedic Institute
In 2016, Sverica Capital acquired RMS Healthcare Management, a primary care provider
In 2017, New Mainstream Capital acquired Cordental Group, a dental chain
The article lists more deals in behavioral health, hospice, women’s health, ER and so on.
Notes from the field
Given my company’s business, I’m particularly plugged into gastroenterology. At a recent GI conference, we noticed that one of the newly consolidated super groups even had a booth. I met physician-owners who were exhibiting at the conference so that they could court other doctors and eventually buy them out.
What was more interesting is that they were looking for sophisticated technology solutions. And were considering experimenting with computer vision to detect polyps (finding polyps is something that GI doctors routinely do via colonoscopy).
Naturally, I wondered what it’s like for a doctor to work in a PE-run organization versus a hospital. Like with any large organization, the super groups were run by small boards and a CEO. Firm decisions were made by the board. A larger ("rubber stamp") board passed the rules further down. These decisions were rolled out to the army of doctors across the organization.
Someone I chatted with said, "The pros were that they had better insurance contracts." And cons, I asked quickly? He shrugged, “Well, they will eventually get their way!”
Plenty of mid-sized GI groups I spoke to were still wondering what to do. Expand by merging with other groups? Sell-out to a hospital? Be found by a PE firm that’s eager to consolidate? Wait and watch?
I found examples under all models.
A group we work with has been consolidating regionally by acquiring solo and other mid-sized GI groups. A potential client whom we never got around to working with sold out to the local hospital that wanted to create a “state of the art” gastroenterology department. Some others entertained PE conversations across several GI groups only to discover in the end that all talks collapsed. Because the partners wouldn't see eye to eye. Many others were watching from the side lines.
If you amplify these signals, you’ll surely hear the songs of consolidation.
It's warming up. The ice is melting. A little quickly now. New rules are forming. No one knows what exactly those rules are. But they are forming anyways. And when they form, the lake will start freezing. Again. To stay frozen for a long time.