The women’s health sector is an incredibly diverse subset of businesses covering multiple specialties, including women’s health, fertility, and ancillary services. 

Kayla McCann Marty, an Associate at McGuireWoods, shares her expertise on women’s health investing, broadening how people think of the many different sub-sectors attracting regulatory and investor interest in the space. 

Ancillary services and connections from practices to the local health system are two of the ways Kayla sees businesses in this sector growing. For example, building surrogacy matching programs internally or utilizing referrals are both successful growth strategies that businesses can use to expand their footprint. 

Increased demand through market conditions, attractive ancillary services, and new opportunities for reimbursement are playing into the fertility market, which Kayla describes as “white hot.” These combined factors are contributing to the attention being paid to businesses catered towards women’s health. 

On this episode of The Professor’s Corner, Kayla and McGuireWoods’ Geoff Cockrell talk through all aspects of women’s health investing from growth models, regulatory concerns, and what to expect in the future from this very active sector of the market.  

Featured Guest

Name: Kayla McCann Marty

What she does: As an Associate at McGuireWoods, Kayla focuses her practice on healthcare transactional law, representing healthcare providers, including hospitals, ambulatory surgical centers, dialysis centers, physician practices, private equity funds, and lenders, in healthcare transactions and compliance matters.

Organization: McGuireWoods

Words of wisdom: “I think the next frontier of value-based care in the women's health sector is trying to bring in the cost of the total continuum of care by preventative care for a woman — from day one when they become pregnant, all the way through excellent care when they deliver their baby and maybe even on into pediatrics.” 

Connect: LinkedIn 

Notes From the Professor’s Corner

Top takeaways from this episode

★ There are many growth models worth exploring in women’s health. Some firms opt for de novo growth, while others will focus more on acquisition.

★ The fertility sub-sector is “white hot.” Increased interest in the fertility sector is due to a combination of factors. Demand is growing with more women utilizing fertility services combined with the shortage of physicians specializing in the field.

★ Do your research to avoid regulatory compliance issues. The number one area that can trip up investors in the space is not thoroughly reviewing state law restrictions on ownership, investment, and profitability of ancillary investments.

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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 Professor's Corner, 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, our podcast where we bring together deal makers and thought leaders at the intersection of healthcare and private equity and try to do deeper dives into more specific topics. Today, I'm thrilled to be joined by my colleague, Kayla Marty, one of the real up and comers in the legal world of healthcare and specifically the intersection of healthcare and private equity. Kayla works on matters in a lot of different sectors, but she's really cultivated an expertise in women's health investing, which covers a broad array of things. Kayla, thanks for joining, and maybe to start us off, can you talk a little bit about how you would segment the women's health investing market?

Yeah, absolutely, Geoff. Thanks for having me. I think that when we think about women's health, many people classify the market as women's health, fertility, and then other ancillary businesses that support women's health and fertility businesses. So maybe just to break those down a little bit. Many people view women's health as very traditional OB/GYN businesses. They often include MFM, or maternal fetal medicine, businesses and laborist programs, but that's really just cracking the surface in the women's health arena.

We've seen a real explosion in the fertility market, so different fertility businesses and their associated ancillaries, things like surrogacy matching, egg bank donation, genetic testing. All of those are sub-sectors of the women's health business. And then we see a lot of women's health adjacent businesses, such as large mammography platforms, both inside the women's health practices, but also as outside ancillary support investments. And then there are some smaller sub-sectors that focus on women's health surgical issues that really support the gynecological components of the business. But I think that that's a pretty wide spectrum and they have a lot of different issues that affect different ones. I will tell you, what I have seen lately is the fertility business is incredibly hot. It is an area that has garnered a lot of investment interest, and a lot of interest both at the regulatory and the transactional level.

And you discussed a number of different sub-sectors. Do you see usually, and maybe the answer is it's a little bit all over the board, but you usually see businesses as more pure plays within one of those sub-sectors, or do you see a number of them kind of patched together? How do you see the market looking from that perspective?

Yeah, I think it breaks down across some of the sub-parts. Some things that you typically see together and others that you don't. So just to break that down a little bit, in the pure women's health space, and what I mean by that is the pure sort of OB/GYN components of women's health, it's fairly common to see genetic testing labs within the practice entities. It's fairly common to see small mammography structures. And then it's very common to see a large laborist program, which effectively is the OB/GYNs that support only the hospital based practices. And then MFM providers sometimes you will see as part of a pure play OB/GYN business, although for a variety of different reasons, you often see them separate as well.

So specifically something to know within the maternal fetal medicine area that I think is widely known in the women's health sub-sector but is not widely known among the investment community, is the really different reimbursement environment for maternal fetal medicine physicians, because they're actually trained as OB/GYN providers, yet payers across markets tend to pay them at much higher rates due to the very significant and complicated patient base that they have. So sometimes you will see those adjacent to women's health businesses, even if they're not included in them.

So that's the women's health side of the house. When you go into fertility, I think it's incredibly common and growing exponentially to see associated egg banks and egg donation structures within the fertility businesses, surrogacy matching, and then obviously sperm banks and sperm matching for expecting parents

In a number of different healthcare sectors we see different kind of growth models, where the theory is that you're either getting kind of payer contracting lift by better contracting. Maybe you're internalizing ancillary services. Maybe you're doing kind of rapid small tuck in acquisitions. In some of these women's health sectors, what is the thesis of a growth model?

So there's several different ways in which people have been growing from a de novo perspective through acquisition. Other mechanisms are through de novo service line growth, and then also partnership with outside entities, whether it be laboratory companies, hospitals, or other clinical providers. So just taking those one by one, by far the most common structure is the acquisition growth that is occurring at a practice by practice level on both fertility businesses and OB/GYN businesses. And their growth tends to be in onesie, twosie, small physician acquisitions, because the market remains extremely fragmented and it tends to be very difficult to grow solely by major acquisitions. And so you see a very common structure where like other sub-specialties, they may have one large PR platform acquisition and then have continual add on acquisitions, which is not unusual for other subspecialties as well.

And then you also frequently see structures in which they are developing brand new service lines. So for example, the latest and greatest service line tends to be genetic testing within the OB/GYN platforms and practices. And within that genetic testing structure, in order to really stand up an effective laboratory to provide those services, because the equipment is incredibly expensive, you often have to have 50 to 100 physicians in a regional market that's able to utilize that laboratory in order to get genetic testing really off the ground. To the lesser extent, you have to have a critical mass of physicians in order to support in-office mammography, but you can do that on a bit smaller scale with not as many physicians due to the offerings of different equipment.

And that's on the OB side, on the fertility side, we've seen an extreme prevalent of the building of surrogacy matching programs, the building of egg freezing and egg donation programs, and then also obviously sperm donation and fertility programs that have been really core to many of the fertility businesses for years. And so those are all things that we've seen being a real growth area for businesses within their own practice. And then separately, we have seen a prevalence of connection with local health systems through their laborist programs, because it can be a really great area of referrals and ability to generate ongoing and new business for different OB practices through staffing their laborist departments within health systems.

You mentioned that the fertility sub-sector has been white hot. What has driven kind of the specific increase there? Because we see a ton of deals in that space and some of these growth thesis of internalizing ancillary services and other things are prevalent in a lot of different places. What do you think has made it so white hot right now in fertility?

Yeah, so I think it's a couple things. I think it is market conditions and just sheer more demand. I think it is a greater willingness of payers to reimburse services and then also a structure in which it's just a very high ancillary, high compensated, sub-sector, which makes it attractive for acquisition growth. But there's a couple of things that go along with each of those topics. So one is demand. It is clear through data about reproduction that more women are utilizing or looking for fertility services in the market. And there's a real shortage of endocrinologists and other fertility based physicians. And so that in and of itself, I think is driving interest, because there's a lot of opportunities just for overall growth in the sub-sector based on demand.

The other thing is what people call mandated and non-mandated states. So states across the country split into a few different buckets. Some states mandate their insurance providers cover fertility services. And when they do that, it often has a decrease in overall cost or reimbursement of fertility services, but a sharp increase in volume. And that's a real opportunity in many states for fertility business to capitalize on that change in law which has been happening in a number of different states around the country, New York included, and probably the most prevalent.

And then the last component is just the ability to develop ancillaries. It has some really ripe untapped ancillaries, things like egg bank donation, like I mentioned earlier, surrogacy matching. All of those things from a regulatory perspective are becoming more common and more supported at the state level, which is offering some additional revenue opportunities that haven't been present in the past because of technological developments and really the law catching up with some of these clinical innovations. And so I think that you see that as just a really attractive area because it is one of the subspecialties that certainly is not stagnating. It's not losing individuals who are utilizing it. And it's really technology is increasing the clinical opportunity.

One dynamic that makes some of these areas a little different is a diminished governmental reimbursement. Obviously Medicare generally focuses on the older community, and fertility and OB GYN and other areas focus more on younger women. Given that dynamic, that there's a little bit less government reimbursement and you have a little bit less of some of the regulatory overlay when you don't have that government reimbursement, still there are regulatory issues and places where people can get themselves in trouble. What are some of the more specific areas from a regulatory compliance perspective or areas where people get in trouble in this sector?

Yeah, I think the number one area is glossing over the state law restrictions on ownership and investment and profitability of ancillary investments, specifically in the laboratory space within the fertility world. Even though there is not Medicare reimbursement for fertility services, and for that matter, there's actually no Medicaid reimbursement either in any state that I'm aware of and only a small amount of TRICARE reimbursement, there are many state laws that apply to commercial and governmental insurers that the commercial insurance component does not allow you to ignore.

So on the laboratory structure, which tends to be very prevalent in fertility businesses, I think that often people believe that because there's not governmental reimbursement that physician ownership in affiliated laboratories, physician ownership in affiliated imaging facilities, is okay or accepted or low risk. And I don't believe that that's the case. I believe that many states are becoming very savvy to protecting patients and keeping physicians investments out of healthcare entities that could in any way influence their referrals.

And I expect to see a scenario in which state AG's will continue to become more aggressive about these state laws over time, particularly when providers opt out of governmental pay or when their subspecialty does not reimburse governmental pay. The state AG's continue to have a real interest in protecting those patients from a scenario in which a clinicians decision making could be swayed by their financial interest in a laboratory or other ancillary activities. So I think that's probably the most common pitfall around these outside fertility investments or fertility ancillaries at the state law level even though they aren't reimbursed by government payers.

Are there kind of particular structural dynamics that you see in women's health businesses that might be a little different, whether that's joint venture structures with either health systems or maybe ASC management, ASC management firms? What structural dynamics do you see in these deals?

I think the most interesting structural dynamic, which is new and innovative and I've talked to several different clients about, is the ability to have a bundled payment structure, where basically take risk on the overall reimbursement in the women's health sub-sector. And this is usually cabined off into the OB/GYN side of women's health, which essentially is OB/GYN providers, for a lot of years, have been taking risk from commercial payers on where they send or where they deliver patients from a hospital perspective. So if you go to hospital A and the cost is $200, and if you go to hospital B and the cost is $250, the payer have been driving them to hospital A and reimbursing them better for taking their cases to hospital A. That's been a longstanding structure in the OB/GYN businesses across the country, and they've really taken it one step further, which is how can we take risk on the overall continuum of care that the OB/GYN drives?

So how do we obtain one bundled rate from a commercial insurer for the entire continuum of care for the patient, which includes hospital stays, anesthesia providers, ultrasounds, and then the professional care. And we've seen a real interest in that area, which is not entirely unique to women's health, but we are really only seeing it in other sub-sectors like orthopedics, which are very, very different than women's health. And there's been a real interest there both by payers and practices, and I think that's going to be the next frontier of value based care in the women's health sector, is trying to bring in the cost of total continuum of care by preventative care for a woman from day one when they become pregnant, all the way through excellent care when they deliver their baby and maybe even on into pediatrics. So I think that that's one of the more interesting components of structures that we see in women's health that we don't necessarily see in other sub-sectors

As the market continues to develop, who do you think will be the backend buyers of some of these larger platforms? Will it be ever bigger private equity investors? Will it be folks like Optum that are buying lots and lots of things? Who are the backend buyers of these as they get to scale?

Yeah, so I think that over time that will evolve, but I think as a step one, if you're a mid-sized healthcare women's health platform, I think in the immediate stages it's going to be larger private equity funds. We've seen many of these transactions and almost every one they have a very strong large private equity fund bid process. So I expect that to be the case, but I also expect to see an immense consolidation among women's health platforms.

So for example, you can see in the past several years, Unified has purchased many women's health practices, which include Women's Health USA and others. And I think that trend may be more common than people believe it will be, the consolidations of platforms as a whole. And then in the long term, yes, I think that people like Optum are very common buyers, but I don't think they're going to be the common buyers at this stage in most women's health evolutions. And I do think we'll see some go public. I really believe that. We've seen that in some other women's health adjacent areas. So for example, Progeny, which is a huge fertility payer, we have seen go public and we've seen many others getting close. And I think we're going to see some of that as well.

Well, it continues to be a very active segment of the market and we certainly expect to see more and more activity. It feels like it's still in the earlier innings of the development of women's health as a business model. Kayla, thanks a ton for joining in this Corner series. Your insights are always pretty sharp and helpful. Thanks again.

Yeah. Thanks for having me. I appreciate it.

Thank you for joining us on this installment of The Professor's Corner. 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.