Jason Porter of Baird is a leading healthcare provider investment banker with many specialties. But one area that he says is growing and occupying more attention from investors lately is fertility care and OB-GYN services.

Why? Both OB-GYNs and fertility providers present a range of opportunities for investors: they’re often seen more frequently by patients than general providers or other specialized providers, and advancing research and technology in the space continues to generate successful outcomes. The sector continues to push for more contracts and opportunities for value-based care. 

So what is it like to invest in this thriving yet complicated market right now, and how does Jason approach investment opportunities?

Tune in to this episode of The Capital Corner to find out. Host and Chair McGuireWoods' private equity group Geoff Cockrell sits down with Jason to discuss where the OB-GYN and fertility sectors differ, where opportunities in the sector are growing, and what providers and groups can do to be more successful as they shift to value-based care. 

Featured Guest

Name: Jason Porter

What he does: Jason is a Managing Director at Baird’s healthcare investment banking practice and a leading investment banker in the healthcare provider services space. At Baird, he focuses on physician and alternate site healthcare services. 

Organization: Baird

Connect: LinkedIn

Notes From the Capital Corner

Top takeaways from this episode

★     Investor interest in OB-GYN and fertility services is growing. This is because patients see OB-GYN providers more frequently than other doctors, creating more opportunities to provide value-based care. The quality of both OB-GYN and fertility care is also growing as new technology and advancements in medicine become available.

★     Approach the market with a construct in place. When it comes to settling compensation between providers and sponsors, it’s imperative to educate your provider on different compensation models and options beforehand. Then when the bids start coming in, you can walk them through “what it can look like in the future and what that proverbial second bite of the apple can be from an economic perspective,” Jason says.

★     Data is key to success in a system turning to value-based care. In order to be successful in benefitting both the payer and provider, groups need to provide data showing outcomes across practices. “There's no other way around it as the entire healthcare ecosystem moves to value-based care,” Jason says.

Contact

Connect with us on Facebook, Twitter, Instagram, YouTube.

Subscribe to The Capital Corner in your preferred podcast app so that you never miss an episode. 

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 Capital Corner, a McGuireWoods podcast, exploring investment strategies, capital structures, and topics relevant in today's middle market private equity. Join McGuireWoods partner Geoff Cockrell, as he and specialists share practical insights to inform your deal work.

Thank you for joining another episode of our Corner Series. This is Geoff Cockrell, a partner with McGuireWoods. In our Corner Series, we bring together thought leadership and deal makers at the intersection of healthcare and private equity. It's a super active space again this year. I'm thrilled to be joined with my good friend Jason Porter, Managing Director at Baird. Jason's one of the leading investment bankers in the healthcare provider services space, and he's developed some particular specializations in a few sectors. We're going to talk about one of them today, talking a little bit about fertility and OB/GYN. Jason, maybe give a brief introduction and then we'll jump into some questions.

Yeah. Happy to Geoff, and really appreciate you having me on. It's great to be here. I was trying to think back to the first transaction we worked on together, and to be honest, I think it was 11 or 12 years ago. It's always been a pleasure being either on the same side of you or even on the other side of the table. So I lead Baird's provider services sector coverage within our healthcare group in our global investment bank. Specializing, as you said, predominantly in the physician practice management space, where I've had the opportunity and fortune to work with a lot of specialties, a lot of practices and a lot of great companies over the years, as we've really seen an acceleration in the consolidation in the provider world. So, great to be here and looking forward to our conversation.

So maybe to start us off, there's been quite a bit of investor interest in fertility and OB/GYN. Maybe give your assessment of where that interest is coming from, why it's been so high.

Yeah. So, I mean, it's two separate sectors, although they're certainly related and there's definite convergence. Maybe I'll start with on the OB/GYN side and on the practice side. That consolidation and aggregation has been going on now for close to 15 years. I was fortunate enough to be part of one of the early transactions with Unified physician management when Aeries invested in them, when they were a 300 OB/GYN provider group in the state of Florida. And now they are far larger than that. It's been quite a successful outcome. And really, I mean, I think the thesis is a lot of, it's consistent across a lot of the sectors, but particularly in the OB/GYN side, it's really women and female primary care, and they're at the forefront and seeing their patients most frequently and more frequently than most other healthcare providers.

So when you can get in early and when you can have patients coming into the system, you can really do a lot of interesting things. You're now seeing payers start to accommodate risk and value-based care elements. You've got providers clearly across the sector pushing for more and more contracts and abilities to take risks, to provide value-based care, to improve outcomes and to be rewarded for that. You've seen payers come across and be accepting of that, although maybe a little bit slower than some would have hoped. And then you've certainly got, particularly on the OB side, a significant portion vote in the Medicaid world. 40% of births I think are paid for and covered under Medicaid. And as states certainly increase the prevalence of managed Medicaid, the MCOs are looking at ways to manage costs to improve outcomes.

I think some of these larger practices that have broader data sets are able to much more effectively manage those costs both throughout the pregnancy, through the delivery, and I'd say very important now, postpartum as you get into more of a behavioral element. So that's been, I think a lot of the drivers on the OB/GYN side.

Then when you look at fertility, the tailwinds, just in terms of the demographics from an aging population, people delaying childbirth while struggling with fertility issues, it's continued to grow the sector, grow the cycles. You've got also a lot of technology and research and advancements in medicine, really increasing the effectiveness, reducing the time and the number of cycles that it takes to have a successful pregnancy and a successful outcome. So when you layer in a lot of the learnings, a lot of the teachings, the growth in it, and then the coverage side, where we're seeing a lot more employers, particularly in a challenging job market, begin to cover fertility treatment, you're seeing more successful outcomes. The coverage is increasing, and I think it's attracted a lot of investment in there now, a whole host of platforms that are rapidly consolidating the sector.

And it's one of the ... So I do spend my time in provider services, which tends to be challenging from a cross border perspective. Everything tends to be pretty focused, but fertility is one area where we started to see a decent amount of cross border activity, the big KKR, UV, RMA acquisition recently, which is a global player. So I think when you look at TAM, when you look at what the market is, you really have infertility, a global TAM and a global opportunity for groups to continue growing. So I think those are a couple of the factors that are leading to some of the investment that we've seen.

So you mentioned there very different businesses, but there are synergies. They obviously have very different payer mixes of government versus non-government. Doctor compensation is different. Ancillary services are different. How do you see these two businesses from the perspective of, are they better off as separate pure plays? Is there any integration of those two when you get to a certain scale? How together or apart are they?

Yeah. From provider standpoint, a reproductive endocrinologist and an OB/GYN are very different. They're incredibly differently compensated. So, I think it takes a special set of circumstances, predominantly driven by scale, to really fold the two into a comprehensive platform. For the most part, I think you've seen them grow independent of one another, although clearly there is overlap. There's communication, there's patient referrals going back and forth, but the majority of the OB/GYN platforms, traditional OB/GYN makes maybe 250, a little bit more than that. So in order to create a platform from a scale perspective, you need a relatively large number of providers. I think that's led to a pretty limited number of platforms out there. There are a handful for sure, but historically the ones that have been around for 8 or 10 years have grown quite large.

Whereas in fertility, you have reproductive endocrinologists that can make a significant amount of compensation given cycles, given reputation, given success, because fertility is one of the few areas where you can keep score and you can actually view what success looks like. So you can have a very small number of doctors create a platform, and that's, I think led to a far greater number of platforms, all looking to grow. Obviously the big example of bringing the two together is with Unified acquiring CCRM last year and really two scaled businesses. And when you have that level of scale, where you can have the referral channels, have the patient base to have it make sense, you can get through some of the potential channel conflict issues that I think people are nervous about when they're smaller, just owning both sides of that service.

Is the growth strategy on both of those more acquisition driven, which I would assume? How much room for De novo growth is there? What the growth strategy in these two different sectors?

Yeah, it's absolutely predominantly driven by acquisitions. It's hard to be an independent provider when you've got consolidation that's taken place among the payers. You've got consolidation that's taken place among the systems. Being out there, being independent is challenging, and I think a lot of these platforms provide a lot of great services to have independent providers come in, allow clearly the clinical autonomy for them to continue to practice medicine the way that they want to, but provide the more challenging things, the payer contracting, the IT infrastructure, the compliance pieces that need to be integrated and a part of every practice that's out there. So I think that the consolidation, the acquisition strategy is certainly the predominant way. OB/GYNs, very broad, large population, with a whole lot of targets out there from a growth perspective. Fertility, less so. Fewer reproductive endocrinologists, harder to pull people out of residency. So I think the acquisitions is harder to create a De novo strategy out of that, given I think the limited pool of providers. So we've certainly seen acquisitions via heavily utilized growth strategy for that sector.

Part of the multiple creep is you get to scale and a lot of provider services businesses are driven by some of the same things. When you have scale, you can usually do a little bit better payer contracting. You might be able to dip your toe into value-based contracting, but there's also an ability to internalize ancillary services or bring in new business lines. What's the available ancillary services growth in these two sectors?

Yeah. I think that's right. When you think about the consolidation and the rationale for consolidations, it's not cost synergies. It's much more on the revenue synergy side where you're able to bring in, take smaller groups who maybe weren't utilizing every service possible and were outsourcing some and referring patients to other providers, and bring all that in. So on the OB/GYN side, you've got mammography, in office mammography, you've got labs. You've got I think clearly the value-based care contracting perspective. So that's some of the bigger components. And then on the fertility side, maybe less so around some of the more aggregating of, and adding of ancillaries. Clearly you bring in and providing your own lab is probably the biggest one, and making sure that that is all contained in house.

Yeah. We've also seen some ability to delve into related business lines, whether that's egg banks or other things that a smaller practice infertility wouldn't have the capability of doing, but a larger one could, which creates some other, like you mentioned, revenue synergies.

Yeah. I think that's exactly right. Egg donations, some surrogacy services that are out there. There are those related services that can be brought to bear in a broader organization. Absolutely.

One of the more interesting evolutions, and it plays out differently in different sectors, but one of the more interesting evolutions has been the evolving provider comp models, moving away from pure production to differing forms of revenue sharing or income repair models. What kind of comp models do you see in these two different sectors?

Yeah, that has definitely been an evolution. I think we've certainly seen revenue sharing. We've seen profit scrape models as well. We've seen differing levels of ancillaries. I think regardless of the flavor, I think where the focus has been historically, and the focus is becoming more so today, is really around income repair and what the platforms both on the fertility and on the OB/GYN side, the benefits they're able to provide back to their providers. So there's a huge focus in terms of tracking pre-transaction comp, whether it's for the platform group or for add-ons, versus post transaction comp and how that has increased, to what extent it's increased back to their original baselines and how those compare. And the more ancillary services, the more revenue, different types of businesses you can bring to bear, the more that has come into play.

I think on the fertility side, it's much more given the highly compensated nature around some of that profit scrape and less on the percentage of revenue side we're on. On the OB/GYN side, given the lower comp models, I think we see a far greater construct in terms of how these platforms invest in these practices, and then ultimately how those providers are compensated.

As a banker, when you're taking one of these companies to market, to what extent are you driving the buyers to a particular answer on that comp model versus just taking what comes in? And how do those discussions go with the doctors?

Yeah. I think you need to have a perspective to be able to share with your clients in terms of modeling out what a transaction's ultimately going to look like, and then approaching the market with a construct in place. Now, many groups have different models and I think some groups have more flexibility than others in terms of having multiple comp models within their own platform. So I think you want to approach the market with a construct. You want to have educated the providers in terms of what this might look like and what the various options are. So that then when you receive bids and offers from different platforms or different sponsors, you can really put them and try to convert them to more of an apples to apples basis, utilizing their basic construct, but then walking the providers through what ultimately this is going to look like for them, both today, the initial transaction value, but particularly with rollover equity, what it can look like in the future and what that proverbial second bite of the apple can be from an economic perspective.

You touched a little bit on value-based contracting, and those can take a lot of different flavors, whether that's pure capitation type structures or bundle payments. In these two sectors, what does value-based contracting look like?

Yeah. On the OB/GYN side, I think the initial push has been around the pregnancy and bundling both full service for the pregnancy, as well as postpartum, which can incorporate a behavioral element, having a single price, and really, regardless of the outcome. I think you can have within that construct, or you can have full upside, downside risk. You can have shared savings out of the baseline and you can have pay for performance. There's even spectrums of that, but that's where I think most of the payers are focused right now, is on fixing a cost per pregnancy, and then having the providers, with the aggregation of data, the sharing of best practices, reducing C-section rates, reducing NICU admissions, because that's where the cost with preterm labor is astronomical compared to a normal course pregnancy.

On the fertility side, it's a little bit interesting. You're almost seeing some of the benefit players come in with something creative, because so much of the funding is either private, personal, or employer, more and more employer funding from self-insured employers. You're having groups look at the provider landscape, identifying who the best providers are, where those employees should be directed in terms of being able to go. And then what are the steps that they should take? Should they take first line, second line, third line, or depending on some biometric information, some specific patient medical history, should they jump straight to third line and eliminate first line and second line, which are likely to be unsuccessful and then just ultimately increasing the accurate cost? So really monitoring and navigating which types of fertility treatments should be implemented to reach the most successful outcome with the least cost.

Bouncing back to the OB/GYN value-based contracting, you mentioned that there's such a wildly different cost that can occur. A lot of pregnancies are within a fairly narrow band, and then early term ones are astronomical. Given that binary outcome potential, what scale does a OB/GYN need to be at before you can really contemplate that risk absorption?

Yeah, it's certainly hard in a small practice to take full downside risk in that scenario. You can probably get away with something on shared savings or upside only. But look, I think you need data around the pregnancies of your providers and the outcomes. There's no other way around it, as the entire healthcare ecosystem moves to value-based care. The only way to do it effectively and to do it where there's true benefit for both the payer and the provider is to be able to have the data around the outcomes within your specific practice. So whether it's 100 providers, 200 providers, I don't know where it is, but you need to have the visibility into your outcomes to get extremely comfortable from a correlation perspective in terms of where you are going to go, where you're comfortable setting rates, where you're comfortable setting benchmarks so that these value-based contracts can be beneficial to you overall as a group. And the only way to do that is with scale.

As far as putting together the market of things to buy, you mentioned that there's some differences in the available targets. How much on the bottom end do you see smaller aggregators or smaller funds putting together the first steps or is everything that is of any scale at all being gobbled up by a much larger platform?

Yeah. Yeah. I think on the fertility side, things of scale are becoming their new platforms. So it's, I'd say more traditional to what we're seeing in other markets, where things of scale command materially higher multiples. The platforms that are out there, they're completely comfortable paying a high multiple for the initial platform, but they want to average down that multiple over time with additional acquisitions, and so struggle to pay a premium multiple for an add-on. And that's consistent on the fertility side.

On the OB/GYN side, it's actually a little bit different. The vast majority of the large groups know each other very well. So historically, there were four or five or six consolidators that were out there that can talk to those groups when those groups are ready to do a transaction and each offer a little bit different flavor. So the large group would pick whichever one they wanted to join, and that's how the industry evolved. There are now a couple of smaller entrants that have made the move to get in, and I think they'll be successful in terms of aggregating and acquiring smaller groups that are out there, and doing it maybe in terms of just a higher volume of transactions, but less big individual transactions that are transformative from their size.

Jason, I think we'll call it a wrap there. You always have tons of insights. I really appreciate you joining for this episode. We'll have to do it again sometime.

We'll look forward to it. Thanks for having me, Geoff.

Thank you for joining us on this installment of the Capital 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.