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March 31, 2021
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.
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.”
The advantages of a PPM deal for physician-owners can be compelling.
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.
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.”
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.
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