The physician practice management (PPM) arena is a mixture of tailwinds, including the ability to expand ancillary services, and headwinds, including more expensive labor costs and antitrust pressures. 

In this episode of The Corner Series, McGuireWoods’ Geoff Cockrell speaks with Andrew Colbert, Senior Managing Director at Ziegler, a privately held investment bank, capital markets, and proprietary investments firm. Andy joined Ziegler in 2006 as a founding member of Ziegler’s Healthcare Investment Banking practice. He specializes in advising healthcare services and healthcare information technology companies on a spectrum of strategic and financing alternatives.

Tune in to hear Geoff and Andy talk about the physician practice management (PPM) environment and areas of opportunity, including the future of value-based contracting, the impact of a rising senior population, avoiding patient-acquisition expenses, potential around women’s healthcare, and what 2024 is going to look like in the PPM space.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods partner Geoff Cockrell as he and specialists share real-world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host, Geoff Cockrell, partner at McGuireWoods. Here at The Corner Series, we bring together thought leaders and dealmakers at the intersection of private equity investing in healthcare. Today I'm thrilled to be joined by Andy Colbert, senior managing director at Ziegler, and we're going to talk through prognosis on the PPM environment and areas of opportunity. But Andy, maybe if you could take a minute and introduce yourself and Ziegler.

Great. Thanks, Geoff, for having me on the show. So my name is Andy Colbert, one of the senior partners here at Ziegler. Been with the firm almost 18 years now, about twenty-year career in healthcare investment banking. Started my career at a firm called FBR and then was asked to come over to Ziegler in 2006 to help build out the M&A franchise here. And we've built out a team of about 50 M&A investment bankers. I carve out the PPM space as my vertical and area of expertise and really enjoyed the opportunity to work on about 60 PPM transactions over my tenure here at Ziegler, and look forward to diving into that over, call it, $5 billion worth of total value, typically working on deals in the 100 to 300 plus million dollar enterprise value range. So squarely in that lower middle market. These are typically companies that are, call it, 10 to 25 or 30 in EBITDA, and obviously get a chance to see a lot of the different sectors as well as private equity as well as strategic buyers. So looking forward to diving into that today.

So Andy, the physician practice management arena is a mixture of tailwinds and headwinds. For a while, it was all tailwinds, the ability to expand ancillary services and other reasons why people were investing in physician consolidation. There's also some headwinds now as labor costs have become more expensive, antitrust pressures, so it's more of a mixed bag. When you take all those pluses and minuses, what's your general prognosis on provider consolidation?

Yeah, I think it continues to be an area of opportunity provided that you're looking in the right areas and really thinking about opportunity for capital appreciation and real sophisticated market expansion. My view on the sector is the winners and the opportunities are really going to be more outpatient oriented models where there's an opportunity to really move service lines and capabilities from the hospital to an outpatient setting where private equity can really be an enabler for these physician groups to either invest and build out OBLs and ambulatory surgery centers and other technical operations, invest in ancillary service lines, as well as help facilitate the move to value-based care. I think some of the more challenging models are going to be the more hospital focused models that are just purely staffing oriented firms. Just given those models just don't have as much opportunity for real income expansion are a bit more challenged right now given just the cost of labor rising and not as many levers to move on.

That's my view of the opportunity in PPM. I do think that there's going to continue to be a need for these models as just there's a continued fragmentation in the physician landscape, much more so than we see in really any other healthcare services vertical. Just the fact that over 50% of all physician groups are still independently owned and privately held. And let's face it, I mean, the reality is with the challenges in the reimbursement landscape, the challenges in regulatory and complexity, my view is anything less than 50 physicians is going to struggle to stay independent. That creates real opportunity for these groups to really band together and scale and opportunity for private equity really be that catalyst to help bring these groups together. And a market like this I actually think is attractive because it enables some of these smaller groups to maybe get deals done in markets that historically maybe they weren't as willing or receptive to doing deals. And it feels like in today's market there's a bit more receptivity maybe than there was in prior years.

Before we go further into the areas that you think are most interesting, let's pause for a second on the areas that you think may be more challenging. So let's take it maybe a more hospital-based staffing model. In looking at those areas, the premise is still there. There's lots of less than 50 provider practices where there would be benefits of consolidation, albeit you may not get the same ability to add an ASC, the same ability to internalize ancillary service revenue, but in those areas, the challenge is do you think that's ultimately a challenge in the model for those areas or is it a challenge in the pricing? Because you can think of it as it may be that those areas don't justify quite the same multiple and maybe don't even justify the multiples that some of those businesses were acquired at, but the prognosis can still look good maybe just at a different price. How would you separate whether or not that is a model problem versus a pricing problem?

That's a good question. I mean, I think fundamentally what it comes down to is what are the levers? I mean, taking a step back, when you think about private equity and the value add to a physician model, in the historical days, a lot of it was tied to rate expansion and rate leverage. And I think a lot of the early days of the Sheridans of the world, now Envision and whatnot, and some of the other models out there that are kind of similar models was really almost entirely predicated on the rate arbitrage. So acquiring a mega group in one market that has very healthy commercial rates and then buying other groups in the market that had less favorable rates and kind of leveraging that delta, if you will, to kind of lift everyone up and create expansion and profitability. That has become much more challenging and much more scrutinized with the more sophisticated managed care plans.

There's also just a lot more consolidation now in the insurer landscape, so there's just more scrutiny on those types of aggregations. And so if you take the rate arbitrage off the table, it does unfortunately remove some of the value add of these M&A models. And then really the question becomes what's the true value add that you're bringing through scale? Listen, there are some services, like revenue cycle management and some EMR and IT and other solutions that certainly can be provided at a lower cost at scale, but unfortunately I think those are fewer and far between relative to just the biggest elephant in the room, which is just the labor cost. And so I think the challenge is with the rising costs of labor and the shortage of these physicians, you really have to factor that into the model. And if the revenues are relatively fixed, that's more of a challenge relative to models where you have the opportunity to actually enhance revenue by investing in other services and other ancillaries.

And so I think that's really the question for these inpatient focused models. I think the real question becomes can you leverage those inpatient models to build other ancillaries and other service lines around them that can kind of expand wallet share and expand revenue capture, because I think that's going to have to be a critical piece. Or is there an opportunity to move into value-based care or capitation models so you can capture more of the wallet share relative to just continuing in a fee-for-service model. And so I would probably lean on it's more of a fundamental challenge with the model than it is ultimately tied to just valuation itself.

I'm still a bit more mixed in that I don't think that reimbursement lift is going to go to zero, be pressure on that, and the ability to kind of use market power to extract really large increases in reimbursement I think is going to become increasingly difficult and maybe correctly so. But there will still be some. Payers still have benefits of dealing with larger providers, and there's a certain amount of market power in negotiation that is not abusive and is unlikely to run afoul of antitrust pressure.

So I'm a little bit more mixed in the optimism around whether or not some of those businesses can still be valuable and accretive even if the reimbursement lift is less. And that may start to hold together when you're not paying 15, 16 times on something because in fact, I'm of the view as well that some of those very high multiples are also what was pressing the need for utilizing that market power. So a little bit of adjustment and valuations may take pressure off of how much of a rate lift you need, and there may still be room for that portion of the market to settle down into a productive pathway, but time will tell.

Yeah, no, I agree with that.

Maybe flipping over to some of the areas where you're more bullish, you mentioned the ability to lean into value-based contracting. Which sectors do you think have the most potential for that? Obviously you can pull together primary care and lean into Medicare Advantage contracting when we've seen a lot of that, but what other areas have the most potential for both governmental and commercial payer value-based contracting?

Yeah, it's a great question. I think historically where we're seeing the most focus is really models that involve the Medicare Advantage. Senior populations, just given those populations really have the most spend, for lack of better words. They're kind of managing the most annual expenditures in the system. And so if you're going to shift to a capitation model, you want to start with the populations where the spend or the annual capitation pool is the highest, right? And so that's really where you're going to start. Your focus is these more senior-based populations, and that's where you're seeing the likes of the Oak Streets of the world and the Ioras and some of these models that have gotten scooped up at pretty impressive valuations. That's really tied to the opportunity to really move from more of a traditional fee-for-service model to effectively becoming part of the underwriter, if you will.

So instead of the provider just getting paid a per-click fee for providing the care, they're now getting a piece of the premium dollar. And so I mean, the analogy that I would make is it's kind of like the evolution from Blockbuster where you paid per movie rental to now Netflix where you're paying a subscription fee. It's a monthly recurring revenue stream to Netflix. And I think that's the natural evolution that healthcare has got to move in. It's got to move from a per-click variable uncertain revenue stream to one where providers are getting paid a consistent fixed monthly fee. They're on the hook for managing the population and all the spend associated with it, but they also get to keep whatever's remaining at the end of the day. And so the onus is on them obviously to really drive a really efficient management of the population, spend money on care coordination, medication adherence, keeping these patients out of the hospital and really driving lower costs.

And so ultimately, I think this is a piece of the PPM and the private equity model that I feel like is not getting told in the national specter is just the fact that these models are ultimately saving millions and millions of dollars because that's the only way that they're actually getting profitability is through actually saving costs and cutting dollars out of the Medicare system. That, to me, is ultimately where I see the most opportunity in the PPM space is not models that are going to make money by increasing costs, but models that are ultimately saying, "Okay, by putting these pieces together and creating an integrated model where all of this is now aligned and fully integrated, we can actually cut out a lot of waste and inefficiency."

And I think that, to me, is really the opportunity where private equity has a really unique angle in a way that private practices just aren't going to have the capacity to do, and quite candidly, aren't set up that way because they're very much bifurcated in sideload specialty models as opposed to creating a fully integrated multi-specialty playbook like you're seeing with the Summit Healths of the world or the Dulys or the Kelsey-Seybolds where you're creating that fully integrated model outside of a hospital and really trying to only use hospital as last resort.

I agree that the value-based contracting is where the future lies. How do you kind of reckon, however, with questions around profitability of those models? The valuations indeed can be heady. We all saw Oak Street trade at a bajillion dollars. They've also not made a lot of money. How do you factor that into your assessment of that overall model?

Yeah, it's a great question. I mean, I think the challenge in their model was they're trying to attack that market purely organically by going out and building de novo clinics and trying to recruit patients to brand new clinics relative to other models, and where we've done work and represented groups like Tri-Valley Medical Group on their partnership with Webster Capital. We did Rancho Family and LightBay, we did Perlman and so forth with FFL Partners. All of those are very profitable models that have been able to be very successful around managing risk pools, keeping patients out of the hospital, but doing it in more of a traditional panel-based approach where you're leveraging relationships that these patients have had with providers for many, many years, in some case decades.

And so in my vantage point, I think the key to success is you've got to start with a provider group that already has long-standing relationships with these populations and then enable you to transition those from fee-for-service to risk. That's where I think the profitability is relative to models where you're having to go out and kind of build these organically. I think it's a big leap to expect that someone at 70 or 75 or whatever years old is just going to want to switch primary care providers overnight. And I think those are relationships that are built over decades. And so I do think it all starts with aligning with those providers that have those relationships and pulling them into the model.

Kind of avoiding the patient acquisition expense, which can be material.

Yeah, exactly. Exactly. And I think if you look at the seniors, ultimately I think what it comes down to is who owns the patient relationship. And that to me is ultimately going to be the winner in this equation, and in most cases it's not the health plan. It really is the PCP. And so I think starting with the PCPs and aligning with PCPs that have significant active panels, to me that's really the place you start with, not starting with the plan and saying, "Okay, let us go have a hunting license to go try to call on all your patients." I think that's a much more challenging angle.

If you move beyond Medicare Advantage and start looking at value-based contracting with commercial payers, a few years ago it felt like everything was going to go roaring in that direction. That evolution has been slower to materialize and especially slower to materialize in the sense of full capitation like you would have in a Medicare Advantage context. What do you think of the evolution towards value-based contracting on the commercial payer side, and where do you think that is headed?

It's a good question. I think fundamentally the challenge is that on the commercial side, particularly when you're dealing with populations predominantly that are younger, healthier populations, there's just not a huge risk pool to manage. So the dollars, the proverbial subscription pool, if you will, is just not super significant. But what ends up happening is you got spikes where the costs are not coming through more. These aren't patients usually that have long-term chronic diseases. It's usually more accidents or cancers or things like that that are often not as predictable. The other challenge with the commercial populations is they tend to be a little more transient. Medicare knows that Medicare is going to be on the hook for these individuals from 65 all the way through, whereas the commercial carriers, they live in the world of a year-to-year contract model, particularly the ones where they're not fully insured.

I think the opportunity is more the self-insured employers. That, to me, is where I see more the opportunity in the full risk side. And I think that is where I do think the opportunity is is kind of going direct to these large national corporations that have hundreds of thousands of lives. The challenge is that a lot of those corporations are relatively spread out, so that becomes just more challenging, is you do need a national network. But to me that's ultimately where I think things end up moving is providers getting to a scale where they can directly contract with some of these large national employers and basically self capitate. And that's where I think you're going to see much more opportunity than going through the plans.

Certainly opportunity in that, albeit a smaller slice of the commercial and private self-insurance arena that leaves a lot of healthcare dollars that may be less conducive to value-based contracting at a meaningful level. There do appear to be some areas where you can lean into maybe not capitation style contracting, but more condition-based, bundled payments, say, orthopedic practices. You can expand bundled payments beyond hip and knee replacements to do other things. So there are areas outside of full capitation where I think there's opportunities. What other areas do you think or sectors lend themselves to those sorts of contracts?

Yeah, I mean, I think what you're going to see in the traditional commercial side is probably more shared savings type models where they're not maybe full risk, but there's incentives around various quality performance or various preventative screenings, things of that nature, focusing on certain areas, for example, breast cancer screening or prostate screening. Those are areas where I do think there's a lot of opportunity for greater focus and adherence to guidelines.

I think some of the other things that are going to be interesting are what happens with some of the fertility-based models. It's no surprise that we're having children later and later in life, and that's leading to more need for fertility services. How does that get kind of bundled into the insurance programs? Also, thinking about some of the opportunities around women's healthcare, just generally speaking. And the opportunity to think about sharing in some of the savings around natural birth or C-sections. So I think it's probably going to be more focusing on certain of these more narrower defined episodes and trying to drive savings and risk around them would be my gut feel as opposed to just blanket risk programs around all commercial, because I think that's just harder to price without having a lot of historical data on the populations.

Last question, and we'll turn this to more general. 2023 has been choppy on deal activity in the PPM space. What's your anticipated 2024? There's a lot of platforms that have been in private equity portfolios for 4 or 5, 6, 7 years, so there's a lot of sale pressure. There's still some headwinds in the market. What do you think 2024 is going to look like in the PPM space?

I think it's going to be a year where the deal markets are back open. Obviously you're seeing a lot of optimism in the public markets, which is a great signal. You're seeing signs that interest rates are really kind of nearing peak or hopefully at peak, which is going to create more optimism in the lender and create more opportunity for financing. So I think once those floodgates start opening and you start seeing kind of the mega LBOs getting done again, it's going to kind of trickle all the way down. So you need the big 500 to billion dollar deals getting done, changing hands from sponsors, creating a new wave of capital coming in and creating optimism for growth that then focuses M&A at more of the, call it 10 to $200 million tuck-in opportunity, and it all trickles down. And so I think you're going to start seeing that.

You may also see some scenarios where you see some of these platforms merging together and some of the existing investors maybe taking some chips off the table, but rolling into the new entity. I'm optimistic around that. I also think based on where everything's heading, there are also some interesting models that are involving hospitals and payers as kind of interesting third party joint ventures. That really isn't something you had seen necessarily as much historically, but we're seeing a lot more of that and a lot more appetite for some of these more traditional local stakeholders getting involved in some of these private equity models, and I think that's a good thing ultimately, because it's a win-win for the various ecosystems.

Andy, I think we could talk for quite a while on these topics, but we'll end it there. Thanks for spending a few minutes. This has been a ton of fun.

Yeah, thanks for having me. Looking forward to catching up again.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.