Looking Into the Crystal Ball: What Does the Future Hold for Private Equity and CV Care?

Illustration: Lee Sauer

Part 1 of the Private Equity Blog Series

Introduction

Private equity (PE)-backed deals are not a new phenomenon in healthcare (Figure 1). For years, PE has played a significant role in ophthalmology, orthopedics, emergency medicine and GI, to name a few specialties. Changes in the Centers for Medicare and Medicaid Services (CMS) rules have allowed cardiovascular procedures such as cardiac catheterizations to be performed within ambulatory surgery centers (ASCs), and other procedures like ablations could potentially be added to the ASC setting. Additionally, the CMS strategy has been to shift most historically hospital-based care and procedures to outpatient settings, reducing costs and benefitting the patient and provider experiences. Because of these changes, PE has shifted its focus from other specialties to cardiology groups in recent years.

Resources:

• Watch MedAxiom’s on-demand webinar on Latest Trends in Cardiology Group Partnerships and Transactions
• Learn more and register for the 2024 Physician Transactions Conference on Feb. 15 in San Francisco, designed to educate physicians and medical group executives on strategic transactions for physician groups. Insights specific to cardiology will be shared in two sessions:
  • Why so Many Physician Groups Are Pursuing Partnerships With PE Platforms and Other Larger Healthcare Organizations
  • How to Maximize Your Practice’s Value by “Getting Your House in Order” in Advance

Looking back at other historical trends, the Deficit Reduction Act and Patient Protection and Affordable Care Act fueled the popularity of transactions involving health systems acquiring cardiology practices in 2009. This drastically reduced ancillary payments for diagnostic studies within physician practices and influenced the overarching strategy for hospital integration and employment.

Returning to the present day, the new ASC rule changes, a push for value-based incentives, a growing Medicare population with increased comorbidities involving heart disease, and a shortage of cardiologists have created a viable investment avenue for PE to enter the cardiovascular landscape with the promise of a solid return on investments. When considering a private group perspective, the rising cost of providing care, and constraints on hospital capital, PE can provide an infusion of cash and relieve administrative burdens to capitalize on the future of cardiovascular care.

This is the first in a blog series that will focus on demystifying the PE process from beginning to end, including opportunity versus risk, roles of investment banks, and atypical partnerships with health systems and employed physicians. We will begin the journey with a forecast for what the future may hold for the role of PE in cardiovascular care.

A View of the Future Landscape

The growing shift of cardiac procedures from hospitals to ASCs is a key driver that has influenced PE transactions in cardiology. Medicare is in danger of becoming insolvent if costs are not reduced. Most Medicare beneficiaries require some cardiovascular intervention, with data supporting the increase in cardiovascular disease to rise to levels exceeding the supply of cardiologists to provide adequate care. As such, shifting care to lower-cost settings like ASCs makes sense for payors like Medicare, who reimburse most cardiology care to control the additional strain.

The MedAxiom think tank has opined the importance of and shift toward value-based care and operational efficiency for years. Many organizations are slow to adopt the ideology behind value-based care because they are still primarily reimbursed through a fee-for-service model. The recent pandemic also showed that the lack of creative value-based reimbursement models nearly crippled many health systems when they were not able to provide services during shutdowns. Still, providers handled care and strategically prioritized services by risk.

Many anticipate that the transformation of cardiovascular care will be through increased remote patient management and “hospital-at-home services” with a decrease in “click-and-mortar” solutions that focus on legacy care systems, treating only higher acuity patients in brick-and-mortar settings. In contrast, providers will increasingly guide care from a distance or in outpatient settings that require less expensive administrative infrastructure and physical space; reduce overhead cost; and improve patient experience, physician autonomy and physician engagement. Our cardiovascular economic outlook will shift from high-acuity inpatient to low-acuity outpatient care.

Medicaid is now the largest payor with an inevitable expansion on the horizon along with new market entrants of “payviders” (e.g., Optum, Humana, etc.), Amazon and other large corporations. These groups are looking at ways to manage the rising cost by creating their own in-house care options, implementing employer-led direct contracting, or steering patients to low-cost providers. There will be an inevitable race to gain and command market share through population health management.

PE will be a strategic force in capitalizing on these changes for cardiovascular care. Like the race for payors, there is also a bit of an “arms race” in PE with an influx of market entrants. However, this PE saturation will likely dwindle down to several top firms after consolidations and acquisitions are finalized in the next two to three years as the platform groups are situated. The race began with the largest competitors to scale efficiencies and perfect the product line. The smaller, less experienced firms looking for a piece of the action will be forced to sell and back out of the space as cardiovascular services are under intensifying financial pressure. So much of this change is happening at a rapid pace, making it difficult for less experienced cardiovascular-focused PE entities and management service organizations to successfully adjust. As such, partnering with the right firm is imperative for any healthcare provider, group or health system to sustain margins in the future. See Figure 2 for the cardiology PE-platform market overview.

Considerations and Reasons to Explore Strategic Partnerships

The aforementioned drivers and disruptors in healthcare have ignited cardiovascular groups’ interest in differing transactions from PE and hospital alignment models. There is no one-size-fits-all for PE deals or hospital alignment models. There are multiple considerations that should be made before engaging in the process for your group (Figure 3). A potential strategic partnership may be beneficial to certain groups. However, it is not right for every group, and some groups will decide that staying independent is their best option. First, evaluate the market for strategic alternatives before deciding to “stay the course” and assess the pros and cons of each option to make a fully informed decision for your long-term success (Figure 4).  

Figure 3

Top Reasons to Explore Strategic Partnerships:

1. Monetizing “True Value” of a Medical Practice

• Influx of cash from valuations and growth potential. Entering the market early to capitalize on the next wave of buyouts.

2. Future Risks & Uncertainties in Medical Practice

• Continual changes in payor reimbursements to control cost.
• Influx of competition from health systems and healthcare disruptors.
• Continued growth of direct employer contracting with self-insurers.
• Shift to value-based care models.
• Population health management-PCP providers in large, controlled networks that will direct care/referrals.

3. Benefits of Larger Corporate Infrastructure for Growth and Success

• Capital investments to fund expansion.
• Cost savings with consolidated resources for administrative functions and supply chain savings through group purchasing.
• Experienced executive team for strategic direction and operational oversight.

Key Considerations for CV Groups:

• Value-Based Payment Models
  • Shift from fee-for-service payments to outcome-driven/risk payment models.
• Market Consolidation
  • Titan companies formed through mergers and acquisitions that will dictate population health (referral sources) and capital strength to dictate change in their favor.
• Reimbursement and Regulations
  • Continued uncertainty on reimbursement and regulatory changes that will squeeze the smaller players out of existence.
• Direct Contracting
  • Self-insured employer programs will be increasing direct contracts to manage cost. Expertise is necessary in this area.
• Capital for Healthcare IT and Ancillary Expansion
  • Cost of doing and growing business is rising at a faster pace than reimbursement. Difficulty in staying abreast with new technology and resources needed for adequate expansion efforts.
• Focus on Outpatient Setting
  • Procedural care is moving out of the hospital and into ASCs and office-based labs (OBLs) to control cost.
• New Normal Post-Pandemic
  • Doing more with less is a requirement. Our world has changed, and we cannot expect to go back to the way it used to be. Innovation is necessary.

Conclusion

Predicting the future role of PE in cardiovascular care is a little bit like looking in a crystal ball. The winners of the arms race are yet to be defined and the complexity of the landscape may leave the future vision of healthcare a bit hazy. But the shift toward providing cardiovascular care through outpatient settings (ASCs, OBLs) and remote patient management will certainly cause a domino effect, causing PE to be here to stay. To better understand the future, we need to dive into the present processes of PE transactions, which will be the focus of the next blog in this series.

Figure 5

Figure courtesy of Gary Herschman, Co-Chair of Health Care Transactions EBG Law, Epstein Becker & Green, P.C. Law Firm.