Private equity investors have started getting more involved in cardiology in recent years, echoing their rise in radiology, dermatology and other specialties.
Consider, for instance, the sudden rise of multiple cardiology-focused physician practice management platforms in the United States. Cardiovascular Associates of America, operated by Webster Equity Partners, US Heart and Vascular, operated by Ares Management, and Partners First Cardiology, operated by Varsity Healthcare Partners, have all started gaining significant momentum by scooping up smaller cardiology practices and increasing their market share.
Why are private equity investors so interested in cardiology right now? What does this influx of investments mean for other practices?
To find out, we reached out to Roger D. Strode, a partner with the global law firm Foley and Lardner LLP. Strode, who works out of Foley and Lardner’s Chicago office, has years of experience working on deals between private equity investors and healthcare providers. He has represented the “buy-side” in some of those deals, helping firms make the smartest investments possible, and he has represented the “sell-side” in other deals, helping ensure smaller physician practices get the benefits of new ownership, while still maintaining their own identities.
Strode spoke to us at length about this key topic. Read the full conversation below:
Cardiovascular Business: Before we start to focus on cardiology, can you share some quick background about the impact private equity investments have made in the healthcare space?
Roger D. Strode: This trend of recapitalization transactions—we also call them physician recapitalization transactions or physician practice management transactions—first really started in the hospital-based specialties such as anesthesiology, radiology and emergency medicine. Those were the specialties where practices were getting gobbled up early, and the idea was that these investors could amass enough physicians in one market that they could have leverage with managed care payors.
Private equity investors then started to look at other specialties, and the next one they got really focused on was dermatology. Patients of all ages need dermatologists, right? And it includes a lot of elective procedures as well. Dermatologists also do not need to worry about hospital relationships, which was very attractive to outside investors.
The procedural-based specialties were next. Gastroenterology is a good example, because it’s based on procedures, there are outside facilities involved, there are ambulatory surgery centers (ASCs), there are professional fees and technical fees to receive, medical imaging examinations come into play—it’s all very lucrative.
What makes cardiology so appealing to investors right now?
Cardiology started to gain momentum when cardiovascular surgeons started seeing their case volumes go down as a result of progress being made by the interventionalists and diagnostic cardiologists. You suddenly didn’t have to perform surgery on as many heart patients; you could use a balloon or a stent instead, for example, or maybe just treat the issue with medication. Those case volumes were going down for these surgeons at the same time that malpractice rates were going up, so the surgeons started moving into the hospitals. The hospitals were happy go gobble those surgeons up, of course, and then other cardiologists also started going back to the hospitals as well. This was at a time when, to be honest, hospitals were not particularly good at employing doctors. They were good at acquiring doctors, but not at employing them—and this ultimately led to a lot of doctors once again leaving the hospitals.
All of that movement is one big piece of this trend. Another thing to keep in mind is, the demographics of cardiology are really appealing to private investors. Patients are getting older—and they are also living a lot longer, thanks to great cardiology care—and that means there are suddenly more patients than ever who need a cardiologist. Throw in the looming cardiologist shortage and that makes things even more attractive to an investor.
In addition, Medicare is allowing more and more procedures to be done in outpatient settings like ASCs as opposed to in the hospital. That’s a boon for the physicians who can own those things—and it’s a boon for private investors who can invest in them as well. You’re suddenly getting both the professional fee and the technical fee, and it becomes a whole new income stream for physicians.
Finally, cardiology procedures remain widely valuable. They’ve very profitable, and some of these hospitals and cath labs are printing money at this point. Again—this is all very appealing from the perspective of an outside investor.
What is the long-term strategy of these investments? Are the practice management platforms looking to eventually sell to a bigger investor? Are they hoping a major player like Amazon or CVS may want to acquire them down the line?
When these investors start buying smaller practices, the physicians at the practices will typically get a combination of cash and equity in the new company. If it’s a $100 million transaction, for instance, maybe you give $60 million to the doctors and the other $40 million is given to them in the form of equity. Then the investors do this again and again, bolting new practices on to their established platforms, and they hold onto those assets for five to seven years.
The goal would be to eventually sell that platform to a bigger investor—but who is that big investor? If your platform started with a handful of cardiologists and now it has 500 cardiologists, who is going to buy your team of 500 cardiologists and everything they have to offer? Maybe it’s just a much bigger investor. Maybe it’s an insurance provider. They could even look to eventually go public—that’s what you’ve seen in radiology, for example—but radiology and cardiology are very different, because radiology management platforms typically only invest in the doctors, not the imaging equipment or the imaging facilities.
Ultimately, we’re still waiting to see what the next step will be when it comes to private equity investments in cardiology. It hasn’t happened quite yet.
From the perspective of these cardiology practices being acquired, is this generally seen as a positive development for them? Do they retain their identity? Do the investors get involved in patient care?
There’s an important legal issue to keep in mind here. State laws, medical boards—they all frown upon investors wanting to get between the physician and the patient. Risking a layperson getting in the way of a physician-patient relationship is a big no-no. It just can’t happen.
Doctors make all decisions about patients and they make all decision about patient care. They make all decisions about clinical protocols as well. The investors are to stay out of it. But remember—these investors are all very sophisticated when it comes to these things. They understand what the deal is, and they don’t want to get involved in those things. These investors and practice management platforms want their doctors to be happy. They want to help pay for a new electronic medical record, they want to build new ASCs and office-based labs.
Investors also bring in seasoned healthcare executives to help manage these platforms. This is exactly why, for example, Cardiovascular Associates of America brought in Tim Attebery, a former CEO of the American College of Cardiology, to be its CEO. And that’s just one example.
What do the individual cardiologists tend to think about private equity investors coming in and looking to acquire their practice? In general, do they embrace the potential of new management? Do they fear unwanted change?
Well, it often depends on how far they are into their career. If I’m nearing retirement, let’s say, I’m going to be all in on any outside investments. They’re generally going to make more money as a result of one of these investments—and for the cardiologist nearing retirement, that’s exactly what they want. You’ll make more retiring from one of these management platforms than you would have made retiring from your smaller practice.
For the cardiologists in the middle of their careers, it’s a little different. They may say, OK, but what’s in it for me in the next five or seven years? What are you going to do for me before you eventually look to sell again to another investor? And if it sounds good to the cardiologist, they’ll stay put. If it doesn’t sound so good to the cardiologist, maybe they’ll leave the group. You certainly see that happen from time to time. There are no hard feelings, but at the same time, cardiologists leaving can cut down the price the practice is ultimately sold for—so there is a lot to consider.
The younger cardiologist, meanwhile, has perhaps the hardest decision to make. Here they are, fresh out of training, and they are suddenly faced with potentially spending their entire career working for private equity investors. Is that what they want to do? Maybe it is, maybe it’s not. The investors may need to sweeten the pot for some of those individuals, give them enough equity to make them participate.
Do you think these investors will ultimately be successful? Has watching this play out in other specialties helped you predict what will happen in cardiology?
There have been colossal failures in dermatology and radiology, for example, but there have also been colossal successes. We’ve seen fantastic investments and we’ve seen horrible investments. It really comes down to how good the goods are, how good the professional management is and whether or not the private equity sponsor is as good at buying and operating practices as it thinks it is.
Note: This conversation was edited in parts for length. Click here to read an analysis Strode wrote for the Foley and Lardner website about private equity and cardiology.
Michael has more than 16 years of experience as a professional writer and editor. He has written at length about cardiology, radiology, artificial intelligence and other key healthcare topics.