Generally speaking, the objective of a private equity firm, in its efforts to make money for its investors (typically large pension funds, wealthy investors and major institutions), is to outpace the market. To do so, firms look for strategic market areas that present unique opportunities, such as those experiencing significant pricing changes and new technology developments.
These firms also look for high levels of market fragmentation. That is why GI practices are starting to find themselves in the private equity spotlight.
Why GI? Why Now?
Over the past several years, healthcare has experienced massive consolidation in areas including payors, hospital systems and suppliers (pharmacy chains and pharmaceutical and medical device companies). Providers have experienced little or no consolidation other than large hospital systems buying their practices to secure referrals.
Tremendous fragmentation in GI groups exists today. Less than 5 percent of all gastroenterologists work in a group of 20 or more physicians, according to publicly available information. This presents an opportunity to aggregate physician practices to achieve economies of scale and market density, which private equity firms find appealing.
Also appealing are ambulatory surgery centers (ASCs), which have been a tremendous boon for the private practice of GI. When gastroenterologists invest in themselves in the form of opening and owning ASCs, they gain access to a model for providing better clinical care in a more efficient manner while saving money for the healthcare system. Private equity firms recognize the current and likely future value of ASCs and the importance they will serve in the efforts to provide more effective healthcare delivery.
While private equity firms, as non-healthcare entities, may seem like odd bedfellows for GI groups, a private equity investment in GI is possible under a management service organization (MSO). An MSO is essentially an investment vehicle that allows a non-provider to invest in a medical practice in a manner compliant with the corporate practice of medicine.
The Appeal of Private Equity
Why do private equity firms believe GI groups are interested in investments? GI groups are experiencing the growing administrative burden every medical practice faces. Couple this with increased costs in all areas of a practice operation, investment in electronic medical records, complexity with contracting, operational and financial challenges with new technology implementation, regulatory and reporting requirements, and physicians are being asked to do more administrative work unrelated to delivering patient care than ever.
Organic practice growth in GI is possible but difficult. It takes strong leadership, but more importantly, it takes time and capital. It is not surprising that most practicing gastroenterologists lack the time and willingness to invest the capital needed to merge entities.
Enter private equity and the MSO vehicle, which not only provide the capital needed to accomplish successful mergers but also accelerate the process. The MSO structure allows GI groups to pursue forming a consolidated practice under a single tax identification number, with the ability to grow and prosper. Other areas of medicine, including dentistry, dermatology, urology, primary care and women’s health, have widely adopted the MSO model. It is a model GI groups may find appealing as they continue to face mounting internal and external pressures, including the continued focus on consolidation within healthcare.
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