The PE arms race — From the deal heard round the world to what's next in GI

On April 18, 1775, the shot heard round the world allegedly began the American Revolution; 87,986 days later, Miami-based Gastro Health partnered with Audax Private Equity, marking the first major PE-investment in the GI space.

From 'bad idea' to the next big thing
Miami-based Gastro Health was one of the first gastroenterology practices to explore and the first to partner with a PE company, selecting Audax Capital in 2016 after a two-year search process. The hunt for a PE partnership started in 2014, when a few practices saw the benefits of taking on a investor, Gastro Health President James Leavitt, MD said.

"I spoke to groups several times before we did our deal to see if they wanted to join," Dr. Leavitt said. "A lot of people thought it was a bad idea."

For Gastro Health and Dr. Leavitt, taking on a PE-partner was less about doing a deal and more about implementing a strategy and a vision. Gastro Health was already a prolific consolidation force, acquiring several practices from 2006 to 2014, and growing from 27 physicians to 47 physicians, but Dr. Leavitt said he had a vision for more.

"Since [we closed the deal], we went from 47 physicians in June 2016 to more than 120 today," Dr. Leavitt said. "And we aren't just a group of gastroenterologists. We're a platform company to delivery gastrointestinal care. … We have everything you need to deliver gastrointestinal care outside of a hospital."

Audax was one of the reasons Gastro Health was able to do this, Dr. Leavitt said. Where some PE firms look to "paint up the house and then sell it," Dr. Leavitt said Gastro Health choose Audax to help build a great company.

"[Audax] is known to build great companies," he said. "We feel they bought into our vision, understand our vision and helped us execute our vision. They help, not by telling us what to do, but by providing us resources or introducing us to resources."

"We've made great progress, not only increasing in size, but increasing in our ability to act as a robust platform to help physicians consolidate," Dr. Leavitt said. "...We're the best advocates for patients. [Audax] allows us to bring our platform to other places in Florida and soon several other states outside Florida."

Where we're going
Now, two years since the Gastro Health and Audax deal, the PE money is beginning to flow into GI again. Southlake-based Texas Digestive Disease Consultants closed a deal with Waud Capital Partners Nov. 2, 2018, and Atlanta Gastroenterology Associates partnered with Frazier Healthcare Partners Dec. 17, 2018. Both deals created GI-practice management companies, and both companies teased a coming acquisition spree. The GI practice landgrab is open for business, and the opening shots have just been fired.

Several analysts, including Edgemont Capital Partners' Luke J. Mitchell, believe "six to eight large" deals will close in the first half of 2019, with the potential for more to follow. Mr. Mitchell attributed the lag between the different PE-deals to practices conducting due diligence and changing variations following the Audax deal.

Austin (Texas) Gastroenterology and American College of Gastroenterology Practice Management Committee member Harish K. Gagneja, MD, echoed the sentiment. "I believe we will see many deals in 2019. PE groups want to deploy the money sitting on the sidelines, and medical practice buyouts are a great diversification for PE. GI is a very attractive target due to its ancillary income, and if any ancillaries are lacking, it can be developed after the deal with the infusion of resources from the PE deal," he said.

Digestive Health Associates of Texas member and ACG Practice Management Committee member Jay N. Yepuri, MD, said the first deals that closed were made up of practices that were large and consolidated and that we're just now beginning to see the results of the second wave, driven partially by investor pressure.

"PE firms are under increasing pressure to deploy money that their clients have invested with them," Dr. Yepuri said. "With deadlines for deployment approaching and traditional targets such as energy, oil and gas being stagnant, the medical group practice space has become an attractive alternative."

Threats to independence?
Although PE-investment brings about scalability and an influx of resources, how the investment will impact independent practices is still unknown.

Wichita Falls (Texas) Gastroenterology Associates Managing Partner and ACG Practice Management Committee Chair Louis J. Wilson, MD, sees many similarities in the PE boom to the investor-backed physician practice management companies of the 1990s, adding that independent practices seek investment in a somewhat cyclical nature.

Dr. Wilson, an independent physician, has reservations on PE investments. "[PPMS] turned into a big disaster for both physicians and investors," he said. "More importantly, I think the fallout from the failure of those arrangements resulted in the first big exodus from independent physicians to employment. … I'm afraid the PE deals will have a similar fallout."

He added independent physician groups have a variety of ways available to them to raise money, and he believes PE-backed groups face a higher level of risk than independent groups. Dr. Wilson said independent groups are looking to align, but want to do so in a way that retains their independence. While bringing on a PE-investor is one way, so is forming a clinically-integrated network. To Dr. Wilson, these networks present opportunities for independent practices to focus on quality and cost-containment. These networks can also negotiate with payers for better rates without having to sell a portion of a practice.

"I believe the success of independent practice depends on creating a culture of quality, meeting the needs of the markets, finding alignment across groups and providing the mentorship and professional development to new and future generations of [physicians]. PE cash will not do those things. Unless leaders in our profession step up to those challenges, the future of independent practice is uncertain," Dr. WIlson said.

Drs. Yepuri and Gagneja as well as Mr. Mitchell said the impact of PE investments will largely be market-driven.

"If a practice is in an area where they are competitively sound, [PE investments] will have no effect or a very little effect," Dr. Gagneja said. "In big metroplexes, where the deals have consummated or will happen in the near future, it will be very difficult to survive for small, independent practices."

If a practice is well-situated and made investments in quality reporting systems, valued-based care and has planned for future growth, "they probably do not have anything to worry about," Mr. Mitchell said.

However, Mr. Mitchell added if payer networks continue to narrow, PE investments could present a compelling case to smaller practices. "PE-backed groups are going to be able to make a very compelling case for themselves given the data they will have about clinical outcomes, patient satisfaction and access. Larger groups are able to make significant investments to drive quality and sophistication of care, which could be a huge competitive advantage in the future."

An unknown ending
The Treaty of Paris ended the American Revolutionary War, with Britain ceding much of its territory in the Americas to the U.S. The exact details on how PE investments will ultimately impact the GI field remains unanswered, but investments are fueling consolidation due to practices wanting security and relevance through scalability.

A lack of comparable data on PE deals, even from investment in other healthcare specialties, raises flags on how practices will benefit, yet the attractiveness of added resources with little to no impact on the clinical side is a hard proposition for independent practices to turn down. The fight to stay independent is underway, and as it advances, the world will be watching.

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