Investor Interest Surges with Third Wave of Physician Practice Management Consolidation

Fertility Groups in Prime Position to Capitalize on Momentum

One of the dominant 21st-century trends in middle-market healthcare M&A has been the combination of standalone physician practices onto single management platforms—what is known in the industry as Physician Practice Management, or PPM.

Fertility groups are currently at the leading edge of PPM’s so-called third wave, with a spate of recent private equity-led transactions signaling private investors’ increased interest in the space. The pace of change can appear abrupt to practitioners in the specialty, but the PPM trend has a well-established history.

One of the attractions of the model for physician-owners is that it can free them from the burden of having to run the increasingly complex financial and operational side of their practices. By completing a transaction utilizing this structure, they get to maintain an ownership stake in their company (an element required by law in many states) while focusing on collaboration and innovation with colleagues and delivering quality care to patients.

The underlying thesis driving the investment is simple: Private equity investors combine multiple medical practices in a specialty area. Individual clinics may continue to operate separately or combine under one brand, but they share a back-office that handles accounting, billing, reimbursement, and other operational issues, all while creating synergies as the platform scales across multiple practices.

The trend first gained momentum in the 2000s with a wave of transactions that rolled up multiple dental and dermatology practices onto shared platforms. Similar trends later took hold in the vision care sector. In the 2010s, investors began applying the PPM strategy to a “second wave” of specialties, most successfully in oncology. Cancer is widespread, patients are willing to self-pay in many cases, and most treatment short of surgery is delivered in-clinic, so these practices fit the model.

As approaches have matured and the strategy has proven itself attractive for investors and physicians alike, additional specialties are likely to see robust consolidation activity.

Why Fertility in a PPM Structure?

In recent years, fertility groups have emerged at the head of PPM’s third wave. The trends driving this wave present unique opportunities for physicians operating in the fertility space and select additional sectors still in the early stages of PPM conversion.

PPM is most attractive to private equity investors when there is a clear line of sight as to how operational efficiencies can spur treatment innovation and market growth. In this sense, the fertility space is experiencing something of a “perfect storm.”

  • More women are delaying the start of childbearing into their 30s, more than any time before. In 1970, the average age at which mothers had their first child was 25; it is now 28. In 2016, birth rates among women 30-34 exceeded those of women ages 25-29 for the first time ever(1). While age negatively impacts fertility, medical and technological improvements have boosted fertility treatments’ efficacy and safety, effectively expanding the market for services.
  • More states are requiring private insurers to cover portions of fertility services. Currently, 15 states require insurers to cover both infertility diagnosis and treatment, while another two mandate that they offer infertility treatment coverage. In this group are some of the nation’s most populous and highest-income states: California, New York, Texas, Illinois, Ohio, New Jersey, Connecticut, and Massachusetts. The specialty is in a sweet spot: insurance coverage has brought treatment within reach of a significant portion of the population but has not yet become the dominant payment paradigm.
  • Large employers in the technology and professional services fields are also adopting fertility and reproductive benefits as employees are delaying parenthood for career opportunities.
  • In cases where insurance does not cover fertility treatment, would-be parents are highly motivated to pay out of pocket—and the average cost of a successful birth involving Assisted Reproductive Technology (ART) is more than $48,000. With disposable personal income continuing to grow at steady rates in the United States, there is no indication of slackening demand. And with patients paying in advance for services rendered over a three-to-six-month period, fertility groups have attractive working capital dynamics.
  • International trends are favorable:
    • China lifted its one-child policy in 2015—and is considering lifting the two-child limit—but continues to strictly regulate in-vitro fertilization and prohibit more advanced procedures, pushing many patients and clients to seek overseas services.
    • Other countries have strict bans against some or all forms of surrogate parenthood, motivating individuals and couples to seek fertility treatment from U.S. providers
  • The 2015 legalization of same-sex marriage in the U.S. and the growing acceptance of LGBTQ parenthood has opened a whole new market in need of fertility services.
  • Beyond their core business of fertility treatments, groups led by entrepreneurial doctors can quickly expand into high-margin side businesses like egg donation and freezing.

Doctors in the Driver’s Seat

The advantages of a PPM deal for physician-owners can be compelling.

  • The initial transaction allows doctors to take some liquidity out of the practice and invest it elsewhere while maintaining a significant ownership stake.
  • Accounting and collections operations are consolidated, allowing doctors to focus on the practice of medicine.
  • Similarly, facilities expansion, marketing, and practice growth can also be concentrated in specialized teams.
  • As insurers and reimbursement expand their role in fertility coverage, a consolidated back-office platform can support the hiring of experts who specialize in managing reimbursement risk and the revenue cycle.

Cascadia has advised on several transactions in the PPM and fertility space over the last 18 months, giving us substantial insight into the characteristics of the physician practices that investors find most compelling.

Platinum-quality practices show clear growth in their core service offerings, strong profit margins on services they currently deliver, and are operating near capacity. The most successful physician-owners can also clearly identify additional markets—whether geographic, demographic, or service areas—where they would focus if they had the backing of an institutional investor.

Catching the Wave

A physician-owner’s willingness to be proactive and do some homework in advance of a transaction can be a difference-maker. The “first-seller advantage” has been a dynamic that has played out across multiple PPM consolidation waves.

In the early stages of a wave, PE investors are willing to pay high EBITDA multiples to unlock potential synergies and assemble foundational building blocks of a local or regional PPM platform.

Once a platform is established and profitable for the investors, their motivation to consolidate remaining small practices in the area drops significantly—along with purchase multiples—sometimes by as much as 25 to 30%. At that later stage, eliminating the remaining competition to their powerhouse platform becomes less of a necessity and more “nice to have.”

What’s Next?

While we’ve focused on the fertility space above, there’s nearly equal PE investor interest right now in orthopedic practices and the physical therapy practices that often sit alongside them.

Behavioral health is at an earlier stage in the PE interest cycle than either fertility or orthopedics/PT, but this is the next PPM area poised to explode, driven by advances in telehealth and the fallout from the COVID-19 pandemic.

As the world emerges from the pandemic’s disruptions and the economy rebounds, investors have a tremendous pent-up appetite to put money to work in new transactions. Cascadia’s healthcare team is available as a resource should you wish to discuss the topics we’ve covered here or any other healthcare industry subjects. Please do not hesitate to reach out.

[1] Source: The Centers for Disease Control’s National Vital Statistics Report on births in 2016, published in early 2017.

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