Private equity investment in the medical environment is nothing new. But what investment considerations and challenges are specific to pediatric practices?

In this episode of The Corner Series, McGuireWoods’ Geoff Cockrell is joined by Tucker Moore and Chris O’Dekirk of Concierge Capital Advisory to discuss trends and issues related to private equity involvement in pediatric practices. Specifically, Tucker and Chris discuss how the retail-heavy aspects of pediatrics can be attractive to investors, how consolidation can increase the quality of care provided, and how incentive programs can mean pediatric offices have higher revenue.

Tune in as Geoff, Tucker, and Chris discuss all that and more related to pediatric practices!

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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, a partner at McGuireWoods. Here at The Corner Series we try to bring together thought leaders and deal makers at the intersection of healthcare and private equity and talk through either narrower aspects of investing or trends that we're encountering. Today, I've got two guests, Tucker Moore and Chris O'Dekirk, both are partners and managing directors at Concierge Capital Advisory. And we're going to spend some time talking about the narrower subspecialty surrounding pediatric care. And that is going to touch on some different aspects of both pediatrics in general and some of the narrower sectors that are conformed around pediatric care. But Tucker and Chris, maybe introduce yourselves and give us a little bit of background of Concierge Capital Advisory.

Sure. Thank you, Geoff. Thanks for having us on. Happy to give you some more background on CCA. It was founded by our other partner, Ross DeDeyn, in 2019 and it's a lower middle market boutique healthcare focused investment bank. So we deal transactions typically between $10 million and $200 million, but exclusively focused on healthcare services. And we're excited to serve that part of the market. We think it's an underserved part of the market. And with our backgrounds in healthcare private equity, we think we're uniquely positioned to provide a very high level of advice to sellers in that market.

So maybe jumping in, it feels like businesses that are built around pediatric care are in the earlier endings of consolidation and even formation. Before we get into narrower pediatric specialties, how would you describe the evolution of pediatric care as its own thing as opposed to being embedded within, say, urgent care more generally or other sectors more generally? How has pediatric care come to be its own subspecialty?

Sure. It's interesting. I think pediatrics is somewhat misunderstood in that everybody thinks that, you ask any pediatrician, I think you will get this answer, that none of them did it for the money. And then everybody stops thinking right there. It's like, "Well, it must not be a great fit for private equity." And I guess what we're here to tell you is that that's not necessarily the case. There are many incentives out there that make sense in that particular part of the market, that are unique to that part of the market and really they can benefit from these partnerships like other specialties have. Pediatrics is obviously unique in that the care of children is very different than the care for adults and they're on different schedules and different lifestyles and different developmental stages of the body and mind and whatnot. And so they need very unique specialized care and that's what they get at these practices.

But what's interesting is just how fragmented this is, even more so than I think other specialties are. You can think about any city and how many orthopedic practices or cardiology practices are in that city and there's going to be a number of them. But I think it pales in comparison to the raw number of pediatricians, both large or small practices in a given city because there's really not an instance where someone isn't going to take their child to the doctor. Now there's obviously some very high cost of care settings like the emergency room, the hospital. But these practices, they are certainly a lower cost of care than that and we think they can really benefit from more focused investing strategy that a lot of our private equity firms in the market are currently deploying, but obviously in different spaces.

Chris, maybe flipping a question to you. Primary care in general often bleeds between regular primary care and urgent care or episodic care. When you think of the pediatric version of that, how do you think about the general primary care aspect of it versus some form of either unscheduled or urgent care?

It's interesting, on the primary care side of things, I think where there's a lot of overlap between more general adult primary care versus pediatric. I mean you've heard about all the value-based care models and whatnot. And there are various stages of being implemented and that's been something that's been talked about now for what feels like 10, 15, 20 years. I'm not sure that there's necessarily a great answer in that general primary care or the pediatric primary care market is considered best practice. So as you weave that in from an urgent care perspective, obviously from a pure cost of care setting, that for a while now has been more and more attractive relative to your hospital alternative. So that dynamic, whether it's primary care on the adult side or pediatric care is very similar. But I think one of the points that Tucker alluded to as it relates to fragmentation in these markets, obviously there've been other specialties, dermatology, ophthalmology, dental, vet that have been receiving investment interest from the private equity world now for a while.

But I think certainly on the pediatric side and probably to some extent on the primary care side too, I think one of the reasons that that's been a little bit less of a focus for some of these firms is that some of the rural health dynamics and incentives around that are not as well-known and easily executed upon as some of the other ancillary opportunities are in various other specialties. But that doesn't mean that those aren't really exciting opportunities from an investment perspective. And I think we're beginning to see some of these sponsors look more and more whether it's urgent care, whether it's adult primary care or pediatric care, that there are models that will work for their overall thesis and they can be a spearhead for growth similar to the thesis of any specialty. One of the reasons doctors partner with some of these firms is to accelerate their growth trajectory. And I think as private equity firms get smarter and smarter about some of the opportunities in these various specialties within pediatrics that they can execute on a very similar strategy to some of the more medically heavy surgically focused specialties.

One of the economic drivers of consolidation and some of the other specialties, and you alluded to it, is the fact that you can internalize some revenue streams related to ancillary services that you may have not had the scale to have, for example, in-office labs and other things. But there are more ancillary services, heavy sectors than pediatrics. Are there some similar dynamics as it relates to ancillary services or do they have to look for the benefits of consolidation elsewhere?

There are some. You're right that it's not as heavy. I always think of the heaviest ancillary as being orthopedics just with the ability to do physical therapy and imaging and whatnot. Within pediatrics, they do have a couple of levers to pull. There's some in-house testing they can do. Behavioral health, believe it or not, is incredibly adjacent. I think that's really under-discovered in the space as to how these two things can work more closely together. We've seen it firsthand. And so I'll allude to behavioral autism being just really close to this and possible that you can get these two sectors to really work together more closely than they are today. So I think a lot more to be discovered there, but definitely potential.

Some of the sectors that we encounter are very heavily retail-oriented. I'm thinking about on my own drive home, when I think of pediatrics, I can visualize a couple pediatric urgent cares. How retail-heavy are pediatric practices versus more traditional provider offers based?

Its interesting. It's almost like dental. Where you can go into strip malls and you can find pediatric practices. I personally think that's a good thing when mom and dad are going to Walmart and there's a pediatric practice adjacent to it in the strip mall or something. I think that's a convenience factor. I think these doctors have figured out where they need to be over time. But at the same time you often see them in medical office building settings as well. So they have the ability to feel a little bit more retail mostly because we're out running errands but the kid is also sick and we have a 10 o'clock appointment, so we're going to do both. So rather than driving into a hospital campus and a dedicated medical office building, I think it's helpful that they can be more conveniently located for parents.

When we say retail, that could mean a couple of different things. From a payer mix perspective, obviously a little bit different. There's still primarily insured patient population, whether that's Medicaid or commercial. But obviously there are other specialties that are true more retail in nature in the sense that you have a higher cash pay, higher self-pay component. It's still a pretty highly concentrated insured patient population. And obviously you get into the urgent care models and whatnot where you've got co-pays, where there are different models there. But relative to some other specialties from when you say retail, I want to make sure we clarify, there's still a pretty highly insured patient population here.

There are currently some macro level headwinds on provider consolidation. Whether that's antitrust or just maybe states looking carefully at whether or not consolidation is advancing the triple aims of improving outcomes, improving access and bending the system cost curve. As you think about pediatric primary care and relatedly urgent care and other versions of that, how would you build the thesis that consolidation within pediatric care is advancing those aims?

Yeah, it's interesting. Like you mentioned Geoff, there are a lot of headwinds and I think that's impacting healthcare private equity broadly rather than even just uniquely in PPM. I think PPM gets a lot of focus because this is where people go to get care. And certainly pediatrics isn't immune to that, just like any other specialty would be. In this case, I think it's just not getting any easier to run small businesses and these are no exception. Especially when the pricing is really mandated by either one, the government or two, large insurance companies to simultaneously have control over pricing but say you all can't find ways to consolidate and survive, I think are two sides of the same coin.

And I personally obviously don't think it would be fair to the doctors, to the business owners to put them in a position where they can't partner with one another. Because that's ultimately all that they're doing is partnering together rather than remaining totally independent and up against the world, if you will. So I'm optimistic that the consolidation trend will continue, that regulations won't change in a significant way that prevents this from happening. But of course none of us hold that magic pen, as they say.

And Geoff, what I'd add to that, one of the things that surprised me as we learned more and more about this is that we do laugh about this pretty frequently. Again, going back to the value-based care point, obviously it feels like every bunch of private equity firms have a thesis around that, usually in more adult primary care settings. But someone's got a perspective on it. All the payers have a perspective on it there. It's a great buzzword. And there are certain models out there that are being utilized, again, more on the adult primary care side of the world. But the pediatric rural healthcare programs in some of these states, they're actually pretty far advanced. It's effectively value-based care already.

So a lot of these practices, I would argue, are ahead of the curve from a value-based care perspective. Now what's the perfect answer to scale that through a consolidation strategy? That I think is still a little bit to be determined. But the practices themselves and the operations on a day-to-day basis and how you need to manage your patients. That thinking and that mindset's already built into a lot of these practices who are taking advantage of some of the programs that are in place already on the pediatric side, to me, can really be leveraged on a broader scale. And the groups that are able to hone that mindset and figure out the best way to scale it will be big winners in this segment. I'm fully convinced of that.

In the arena of pediatric primary care, is the model for growth principally acquisition driven or is it de novo driven or probably some blending, but which direction does it run heavier?

I think it's definitely both. What's really unique about pediatrics is I think the ability to do de novo is a little bit easier. It's a little bit more like urgent care, where you've seen them pop those up on every corner. You can do that in pediatrics as well and have these offices be one or two days a week or three days a week. As you hub and spoke it, if you will, and you go outside of urban areas. This is I think the part that's unknown.

That's where there are incentives for providing care in underserved markets like rural health clinic designations, where you might see two to two and a half times the rate per visit to go serve a certain area. So you could have a base of doctors in one city, but if you go 90 minutes outside of town and you put up a storefront there, a clinic, you're going to see a considerably higher rate. Which is really the only way to get higher rates in medicine is to respond to an incentive like that. And so if you can start to form that model, you can really see I think margin expansion.

And of course are doctors willing to fund that kind of expansion? Maybe, maybe not. They may be very comfortable, but they may have this idea that they want to do it. And then I think more on the de novo front is that being able to use nurse practitioners and physician assistants in a meaningful way, whether it's at the home location or these new de novo offices, it's a recipe for success.

And obviously you are serving an underserved market and these people do need care and they can't get it today. They're being forced to go to emergency rooms or they're being forced to drive 90 minutes into town to come see you. Whereas if you can go to them, you can increase your draw and receive a higher rate at the same time. I think pediatrics is also uniquely positioned to benefit from value-based care. It already exists with Medicaid in many states under the Patient-Centered Medical Home model where under certain outcomes and measurements that you receive additional income. So it's an upside only risk sharing model that is in the space and I think that a lot of folks don't necessarily know a lot about yet.

Yeah. And Geoff, one other piece on that, I mean while obviously the dynamics of the patient flow and the day-to-day of pediatric primary care is different than dermatology, cardiology, whatever, any other specialty, they're each unique. There are still the core benefits from the MSO strategy around enhancing recruitment of new providers, getting everyone on the same technology systems to allow for more efficiency, investing more quickly in de novos, investing in new capital equipment, whatever it may be. There are growth strategies that honestly there is a decent amount of overlap with some of the other specialties, just at a high level, you can execute on some of those same things. There're the same level of ancillary services that you can bring in-house? Probably not. So that growth avenue is probably a little bit more limited than some others, but some of the other perspectives that these MSOs take in other specialties can certainly be applied to the pediatric space as well.

In the pediatric arena, there've been some evolutions that I've seen in some aspects, but I want to ask you more broadly of, say, focusing on higher levels of acuity. You see that with pediatric home care where it's a different business where you're taking care of really sick kids in a home setting. What sort of models surrounding higher levels of acuity are you seeing more broadly in pediatric care?

I think you've said it, Geoff, I think the super high acuity stuff is home or hospital or specialist-based and is definitely not falling within the traditional primary care practices that we've seen and spoke with recently. I wouldn't describe them... The highest acuity is their sick care unit and then maybe on the behavioral side, they do see a lot of kids with autism, but they're not seeing those extra sick patients. And candidly, I don't think that that type of a practice practice is the right setting for that. I think they're much better served in home care, like you said, or at hospitals.

Maybe pulling back the lens a little bit, given the size of practices that you're working with, what has been your perception of the up market? So if someone's buying a practice in a particular range, they have an ambition to sell that, grow it and then sell it to the up market. The level up market has been more difficult to piece through. We're seeing lots of businesses finding that buyer market more challenging. What's been your experience in the up larger buyer market?

I think we're unique, Geoff, in that we've been doing this long enough, we've got a significant background in private equity. So we've either seen significant exits while we were at healthcare private equity funds or while we've been at their portfolio companies. So we have seen that successful second bite at the apple and we've seen some very happy doctors coming out of that and great new partnerships beginning. So we're, again, optimistic on that. I think just like anything else, it takes time for a market to fully understand what they're buying and what they're going to do with it.

I think the market is digesting that now, but I also know that there was a lot of pent up activity from a quiet year in 2023 and that, from what I understand, there's a number of platforms that are coming out to market now and are receiving feedback positively that they'll have successful transactions. And ultimately I think the question is where do these go? And there's still a lot of room for vertical consolidation as well as we've seen with things like USPI and Tenet and transactions like that where it's going either the hospital route or the payer route, like an Optum United as a buyer for assets like this. Or even when you have significant supplier relationships like a McKesson or a Cardinal, there can be partnerships there that make a lot of sense as well.

Yeah, the only thing I'd add is some of the pediatric, specifically the pediatric primary care market, it's still pretty early. So some of these larger groups, if they're pegging themselves, and this is more of a valuation comment, they're pegging themselves against some of the other surgically focused specialties from a multiple perspective valuation perspective. I'm not sure pediatric primary care is at that level yet. And part of that is just there's less competition for those deals than there are in, say, ophthalmology or dermatology today where there are a boatload more platforms that are all competing for similar high quality practices. Does that materialize in the future as more and more MSOs are formed? Potentially. But I think with some of the larger practices out there, there's certainly a valuation question that needs to be answered. And that's sometimes pretty tricky depending on where expectations are with the partner doctors.

Where does transaction pricing land for pediatric primary care? It would seem that in an area where there's less ability to pull in ancillary services revenues or ASC revenues that you can get from scale, that would make it a more challenging pricing environment and especially in a more challenging market. Where does pricing fall for these?

Yeah. From a valuation perspective, I would describe it as healthy. Where I think that you're going to be able to partner with practices and companies for reasonable prices. I think largely due to the number of consolidators in the space right now. I think as that number increases, as we saw in the specialties from 2016 through 2022 as it became five consolidators of a space to 40, pricing obviously increased. So we're still early enough that you can buy high quality practices with excellent physician leaders and possibly a long timeline to retirement for mid to high single digits. I think it would take a lot in the space to garner a double digit multiple. You'd have to be of a very significant size, a number of partners in the practice, and we're talking 20 plus figures here, and also have a utilization of PAs and NPs and really just a model that's been built that's got a big moat.It's very defensible and also scalable.

And so I think that's what it would take to get into that double digits and garner that premium valuation. So I think it's healthy. I think the market is being met in the space right now, which is not the case I think in a lot of other specialties, as you alluded to earlier. I think that price discovery got a little out of whack pre-COVID and certainly immediately post-COVID, trying to put a lot of money to work into spaces. And I think ultimately the other spaces will return to Earth a little bit and then you'll see those secondary exits start to happen again.

Yeah. The one thing I'd add, Geoff, is a lot of this can be very state dependent. You could probably say that for other specialties too. But even I think it's more exaggerated in the pediatric market just given their Medicaid can truly generate a lot of cash flow in certain states and in other states, the program that the state has in place just isn't attractive enough. So whether or not how much patient access you truly have in a given state can matter a lot in determining the ultimate valuation. But I think from an ancillary perspective growth perspective, yes, it's not going to quite be at the level of some of the other specialties out there, but those have been trading obviously very healthy now for a number of years. I still think there's the economics work on both sides right now in the pediatric space, and I think that's going to continue to work in favor of the doctors over the course of the years as more and more investment gets made.

My conversations with private equity investors in provider services generally, one of the themes that I'm hearing more regularly now, which is different from before, is that there was a while where mere consolidation was a pathway to a successful company. And I think the idea that merely pushing together different pieces of EBITDA is completely a winning proposition. I feel like those days are waning and that for a business to be successful, it needs to have some secret sauce. You mentioned a moat, so some sort of barriers to other competitors maybe. In pediatric primary care, what would that secret sauce be or some versions of that secret sauce?

Well, Geoff, yeah, I think we both echo your sentiment completely that the easy money is getting a lot harder to make these days. In pediatric specifically, I think it's ensuring that you're following the incentives that are in place. So we talked about a couple programs that exist and it's, does that exist for a platform in a market that you're looking to invest in? If yes, then you can come in and you can pursue that and have really significant organic growth without really making a lot of additional capital investments. So where you would typically say, let's start, the dirty word is stacking EBITDA in a state for pediatric primary care practices. Well, we're saying you don't necessarily have to do that. You can grow organically, stand up de novo offices, much more like an urgent care model, get state and federal incentive dollars to follow you that way.

It's funny because it's not just on the procedural side of things, it's also there's non-dilutive capital out there for building these clinics in the first place. There are state programs that will fund the building of a clinic in an underserved market and then you will also get the higher rate. So there's a lot of reasons to do it. And then I think it goes without saying that integration is always paramount. I think we all have heard stories in the market of platforms that just objectively did not integrate what they were buying and the market has punished them for that. And sometimes they've either had to go back to the drawing board or had to start having some very serious conversations with their lenders.

But I think today's platforms, especially in newer subspecialties like pediatrics, they know that now. And so integration's at the forefront, organic growth's at the forefront, partnering with the right doctors and the right stories at the right time is all very important. I think there's a lot of lessons learned from if you're a year away from retirement, this may just not work. And I think people have gotten more comfortable saying that that's okay, that it's not going to work, and we don't have to do every deal because it's an arms race. I think it's just a lot more methodical. People are being a little bit more patient and taking their time and building these platforms the right way.

One of the difficult areas, and this will be our last question to delve into, one of the difficult areas in having a successful provider business has been landing on the right form of provider alignment. As you're advising sellers in particular, and there's a lot of different versions of provider alignment, whether that is EBPC models, whether that is sub-MSO models, different things. What do you think are some of the more successful provider alignment models in pediatric primary care?

So I'm glad you asked that, Geoff, because I know you had a recent podcast with your partners about physician compensation. And loved everything you all had to say. Pediatrics is very unique in that I think additional models can come to fruition here, including a more standard base and bonus model I think is very commonly used in the space. Which obviously lends itself towards the potential for some operating leverage as you scale. If that's a model that is able to be deployed in the space, it could be good for the company and good for the overall equity value health of the investment. And so that is somewhat unique, I think, to pediatrics and probably adult primary care as well.

That being said, the models you mentioned as well are still out there and I think are great models. Obviously anytime you can incentivize the physicians and the providers in the practice to keep an eye on costs and not just their own individual revenues and collections if they're being paid on a percentage of collections or whatnot, I think that's a good thing. And so the scrape or split model, if you will, I still think is a good way to be used here. But it's not 100% necessary, especially as, like we said, there's not as many ancillaries, so it is just a little bit simpler of a business compared to some of the other specialties.

Yeah. I was just going to add from an equity perspective, most of what we've seen I think has been, and in pediatric primary care has lends itself more to not having that sub-MSO, Geoff, that you referenced and more having it at, call it the hold co-level or master MSO level, whatever you want to call it. But from a consideration perspective, I think you're still seeing 70/30, 75/25 type deals as it relates to cash and equity. And most of the time that equity is in the form of hold co-level equity.

That said, that doesn't necessarily mean as more and more platforms get established that that may change, but that's what we've seen for the most part now. And obviously physician alignment, something that everyone talks about, everyone likes to think they've got perfect. It is not an easy thing to put in place and structure in a way, not only at your original platform closing, but making sure that it's in place such that as you scale, you don't lose it. That's very easy to say, a lot harder to do. And so obviously the groups out there that have experience doing this in various other specialties can bring a lot of that knowledge set to the pediatric space. And I think there's a lot of overlap there from a pure alignment perspective.

Tucker and Chris, I think we'll end it there. I really appreciate you both coming onto the show. This has been a ton of fun.

Thank you, Geoff.

Great. Thank you, Geoff.

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 gcockrellatmcguirewoods.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.