On this episode of The Banker's Corner, Provident Healthcare Partners’ Senior Managing Director Rebecca Leiba and Managing Director Eric Major sit down with McGuireWoods' Geoff Cockrell to discuss investing in cardiology, a sector that has seen a sizable uptick in activity over the last two years. 

“What we're seeing in the specialty is that consolidation and investment seems to be moving at a pace that's far exceeding what we've seen in other physician specialties areas,” Eric explains.

Rebecca, Eric, and Geoff discuss what makes cardiology attractive for investors, the various avenues for acquisitions, as well as ancillary opportunities for cardiology practices, such as cardiac urgent cares and rehabilitation centers, which are becoming more attractive to independent groups and investors. From potential headwinds to growth opportunities, they cover all the trends they predict to see in the cardiology sector.

“I do think we are still in the early innings of this consolidation,” Geoff says. “Even if it's not a huge market, there's going to be quite a bit more activity and interesting future maneuvers…It’ll certainly be interesting to see.”

Featured Guests

Name: Rebecca Leiba

What she does: Rebecca is a Senior Managing Director at Provident Healthcare Partners. During her career, she has completed over 200 healthcare M&A transactions and has organized interactions between buyers, clients, attorneys, CPAs, and consultants through the entire transaction processes. 

Organization: Provident Healthcare Partners

Connect: LinkedIn

Name: Eric Major

What he does: Eric is a Managing Director at Provident Healthcare Partners. For the last decade, Eric has supported the planning and execution for deals pertaining to multisite provider-based businesses focused on surgical care and rehabilitation. 

Organization: Provident Healthcare Partners

Connect: LinkedIn

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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 Banker's Corner, a McGuireWoods series exploring investment trends, solutions and business issues relevant in today's private equity and finance 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. In the corner series, we bring together thought leaders and deal makers in the intersection of healthcare and private equity and talk about some of the more interesting sectors and new dynamics that are occurring in healthcare investing by private equity funds. Today I'm thrilled to be joined by our good friends at Provident Healthcare Partners. Rebecca Leiba and Eric Major are going to join us in a discussion of investing in cardiology, which has been a very hot area for investment over the last 12 or so months. Rebecca, let me flip it over to you to introduce Provident, yourself. And then Eric, we'll love to get an intro from you as well.

Sure. Thanks so much for having me on. My name is Rebecca Leiba. I have been investment banking for about 26 years and been doing healthcare investment banking with Provident for almost 25 years now. We are a middle market investment bank focusing on the healthcare sector. We have offices located in Boston, New York, and then I'm actually in Las Vegas.

Eric, maybe give yourself an introduction and we'll jump into some questions.

I'm Eric Major. I'm a managing director with Providence. I've been here about 11 years. I sit in our Manhattan office and focus a lot of my work within the physician practice space, including cardiology. So looking forward to sharing some more of our thoughts today.

So historically, I have not seen a ton of deals in cardiology over the last five plus years. Recently, that has all dramatically changed. Historically, the acquisition of provider practices was solely within the domain of health systems and hospitals. Eric, do you want to give a little bit of a summary of why that might have been the case and what's changed?

Sure. I think in cardiology, obviously the consolidation to your point has really been led by the systems over the last 10 plus years, and I think a lot of that came down to practices were dealing with certain headwinds within the space, whether it is predominantly reimbursement and other kind of challenges that these groups have been running into regulatory in nature as well. Cardiology practices sort of had two options. They could either remain independent, continue to grow and try to merge with other groups in order to get some economies of scale and survive some of the reimbursement challenges they ran into. Or, they could potentially join a health system, sell their equity, become an employed doctor or maybe even align with them through other creative structures like PSAs. And I think that route ended up being an attractive option for a lot of cardiology practices. So if you look at the market today, I think about 70% or so of the cardiologists in the US are hospital employed. 30% remainder are obviously independent practices.

What we've seen with those independent practices is there are becoming increasingly more opportunities to thrive in the market and a lot of that's changed as we're seeing more and more procedures being shifted into the outpatient setting. Cardiology practices that are independent, the systems are starting to benefit from those tailwinds in terms of the site of service. We're also seeing with cardiology practices that there are a number of different ancillary opportunities that these larger groups can pursue, whether it's things like PET/CT imaging, looking at cardiac urgent cares, kinds of cardiac rehab, building out office-based labs or even surgery centers.

There's a lot of these different ancillary opportunities that are becoming more and more attractive for these independent groups, and I think investors have sort of paid attention to those tailwinds. So they're seeing the tailwind and the cases shifting into the outpatient setting. They're seeing all the opportunities for ancillary services and obviously there's a significant addressable market here in terms of the healthcare spend going into cardiology. So really all of those factors are starting to generate significant investor interests in the cardiology and kind of broader cardiovascular space, which I think is why we're starting to see a lot of activity occurring particularly over the last two years or so.

Historically for private equity investing in healthcare provider services, you had kind of three avenues of money. It could be provider services, ancillary services and facility fees, and historically in particular, the facility fees, the only people who could kind of capitalize on those were hospitals and health systems. Obviously, heart surgery can't be done at an ASC, and traditionally very little else could have been done at an ASC. But in 2020 CMS relaxed some of the rules for those site of service requirements and opened up different locations where those services could be done, which opened up the possibility of replicating the model in that had been employed in other sectors where you acquire the provider services part of it and then layer in either ancillary services or maybe add an ASC and then bring the facility fees under that umbrella. And that all became much more available in 2020 than it had been before, which kind of opened up a little bit of a gold rush in pursuing those providers. Rebecca, kind of adding up those pieces, what has the landscape of deal activity looked like from your perspective?

We're definitely seeing an increase in, at least, in an excitement in the space. Right now, there's still a good amount of industry fragmentation. Most private cardiology groups are made up of one to five providers and those smaller groups are less likely to have the capital that they need in order to grow organically or recruit younger physicians or even invest in imaging technology or sophisticated EMR systems. So any sort of investment really supports their ability to continue to focus on that patient care and the patient outcomes while capitalizing on all of the reimbursement and opportunities that are available to them, and investors who can provide that capital and aggregate smaller groups into larger platforms can really position them for future growth. So it's really a beneficial situation for all parties involved and I think overall it really creates a good situation for both the patient and the provider.

Yeah, I think, Geoff, just to further that as well, I mean I think it's obviously very early innings in terms of investment in cardio, I think what we're seeing in the specialty is that consolidation and investment seems to be moving at a pace that's far exceeding what we've seen in other physician specialties areas like GI, urology, orthopedics/ it kind of took a few years for private equity to start to resonate with a lot of the independent groups and there's certainly a lot of skepticism in those early days of some of the first platforms forming. In cardiology we saw obviously Aries and Webster and few other large private equity firms, close platforms in the space and I think a lot of the independent practices are paying attention to that and are seeing the benefits of aligning with a management services organization backed by a large private equity firm. So the market's certainly moving very quickly, although it's still early innings and it feels to me like this will be a fairly quick wave of consolidation over the next few years of those 30% cardiologists that are sort of independent of the systems.

For sure, the kind of independent cardiologist is a small subset, and obviously the cardiology space is a lot smaller than say the obviously not to say dental space, which you see your dentist way more than you see your cardiologist. So much bigger industry, cardiology is much smaller and so it would be a quicker run through consolidation. You mentioned the 30% independent, what's your take on the available market? Obviously acquiring an independent group isn't as easy to wrap your head around then as a target. What about groups that are currently housed within a health system? There's ways to structure that from a tax and other perspective to make them a viable target. What's your sense of the openness of the market in kind of pulling physicians out of health systems?

Yeah, I think the platforms are certainly looking at that. The feedback we've heard from talking with various groups is that those deals tend to be fairly labor-intensive and obviously require a lot of work from a legal structuring perspective as well as potentially a lot of CapEx up front. If these practices don't own any of their assets, you're effectively pulling those physicians out of the system and potentially needing to build the clinics from scratch, invest in all the CapEx needed in terms of the technology and start to build out those ancillary services from scratch. So there're deals that tend to be a little bit longer, a little bit more labor-intensive.

But ultimately, I think a lot of the management companies recognize that they're focusing on the independent groups primarily for now, but eventually there's a significant part of the market that's hospital-based that they certainly want to explore partnering with and doing transactions with groups that are maybe hospital aligned, either employed or through a PSA, that's certainly one avenue that these groups are going to be exploring, and I know there's a couple of those types of deals ongoing right now on the market. And then also, potentially just looking at some of the employed physicians, individuals that maybe want to lead those systems and the management company might have a practice already in that market providing an opportunity for those individuals to leave if they want to practice outside of their non-compete and potentially get some equity within the management company. Those models we've seen have worked really well for practices that have explored that

For sure. We call it in the legal arena, maybe you all do as well. We call that an acqui-hire where you're not really buying a business, but you're doing almost a mini acquisition for either one or a small group of providers where you have something that's quasi-like a purchase price but is structured more in a compensatory format, but it otherwise looks sort of like a small acquisition. I also agree that acquisitions or hiring a bigger group out of a health system sends you down some really difficult structural pathways of you start to navigate the boundaries of, is there personal goodwill with this group of providers that can be sold as a capital asset from a tax perspective? Maybe, maybe not. You start to navigate some pretty intrusive dynamics around non-competes to the extent that those survive current FTC rulemaking, all of those dynamics are quite a bit more difficult to pull off.

But if it's 70% of the market, it would seem that the acquisition and consolidation wave that is storming into cardiology is going to start looking at that 70% bulge bracket as well. Another question that I see a lot in different sectors is the idea of bringing together subspecialties that may have historically been in separated practices or all of them kind of working together at a health system. In cardiology, you might see kind of interventional radiologists, a vascular surgeon. There's a lot of different subspecialties. How are you seeing that as a business model for consolidation, kind of pulling together these subspecialties that may have not been pulled together before?

So I'd say a lot of the groups we're looking at tend to lead in with general cardiology and then layer in a more full continuum. There are a lot of PE platforms that see the opportunities to bring those subspecialties together into one continuum to be able to provide for all of the patient needs. You have your cardiologists, your interventionalists, the EP physician extenders, maybe vascular surgeons, OBLs, ASCs. If you're able to bring all of those things in-house, it's obviously going to provide for a much better patient experience. But there are challenges there and you need to pay attention to the unique situations for each of the groups.

And I would add, Geoff, I think the cardiac surgeons, they're still largely hospital employed. We haven't really seen platforms add a cardiac surgeon practice to their platforms. I think that's probably largely driven by at this point, the cardiac surgeons are very much bound to the hospital for all their procedures, and oftentimes they're not in clinic seeing patients like a general cardiologist is. So there's still certainly an aspect of the continuum of care that I think is still largely hospital-based and will likely stay that way for some period of time. But certainly the platforms we've talked with are looking at potentially adding a more surgical focused components to their businesses, whether it's cardiothoracic surgeons and other physicians that are operating predominantly in ASCs and OBLs with some hospital work as well. They're certainly looking at opportunities to sort of go down the acuity spectrum and provide that full continuum of care, to Rebecca's point.

We talked a little bit about the liberalization of CPT codes that can be performed outside of the hospital, which brings you to the realm of ASCs that are connected to these cardiology practices. From your perspective, in talking with groups that are looking to sell, there seem to be two different models, one where it already exists and there's an ASC that's already connected to a practice. Then there's also the possibility that it doesn't exist, and that's a growth strategy where if you could cobble together enough providers, you could also probably add a surgery center. How are you seeing that play out in deal dynamics? Is it better to already have a surgery center in place or is the potential for it the actual attractive part?

I think it's a combination of the opportunities available. Different states, different setups provide for different opportunities. Some of the groups that we've worked with have already had that built out ASC, and that's been a real advantage. You need to make sure that you structure the transaction in a way so that it works for all of the parties, but that's what the lawyers are for. And so we usually rely heavily on them to make sure that the structure is compliant with all of the regulatory requirements. Some of the PE groups that we see really focus on that facility play and want to be in those is non-CON states where the ASC has a lot of opportunities. Other models see it as attractive but isn't a contingent aspect of the transaction.

And I'd say we've seen there's not a ton of cardiac ASCs open yet in the country. I think you're starting to see them pop up in, to Rebecca's point, a lot of those non-CON states, Arizona, Texas, Florida, where there are some practices that have opened them. But it's still relatively new to the space. And I think the model that these investors are employing is certainly going to be market specific. We have seen some platforms are very focused on the ASC opportunity and therefore you'll probably see them stay within a lot of those southern states and in markets where a surgery center is feasible over the next year to 18 months, whereas some of these certificate of need states like New York and in Connecticut and otherwise up here in the northeast, it could take a few years to develop those ASCs and it might take a hospital joint venture to do that.

So I think investors are still attracted to those markets and are seeing an ASC as an opportunity down the road, but are more focused on the other ancillaries that these groups can provide as well as looking at office-based labs and building those out since that's typically a much less stringent process to develop.

So talking about office-based labs, can you describe what the value proposition for going down that path is and why that is still kind of an open path versus one that a cardiology practice would've already gone down? What's the value proposition and how can a private equity funds' additional capital play into that?

Yeah, I think in a lot of states that have a certificate of need for an ASC, OBL might not necessarily have the same restrictions. So New York, for example, I know you can build an office-based lab without a certificate of need, but the ASC could be really challenging for a cardiology group. So in those types of states, an OBL is an opportunity to benefit from some facility fees, albeit not at the same level as an ASC, but it could at least provide an opportunity to monetize and diversify into the facility spectrum for some of these cardiology practices.

So you'll have some of the interventional physicians doing procedures in the ASC. And then we've also seen cardiology practices actually employ vascular surgeons just given the overlap in the patient base. And you have vascular surgeons that may be employed by the OBL and they're doing procedures in the OBL as well. So the cardiology practice can kind of drive volume to that OBL, have the vascular surgeon there or multiple vascular surgeons and then have the interventionalist doing procedures in there as well. So just provides an opportunity to capture some of that facility fee, although it's not as lucrative as an opportunity and certainly not as diverse from a procedure base as an ASC.

We've talked about some of the tailwinds, some that are general to all providers and some specific that apply to cardiology, whether that's liberalizing the site of service rules and other dynamics. What might be some of the headwinds in this sector that you think folks will encounter?

I think in terms of headwinds, I mean I think we touched on this earlier, but obviously from an investor perspective, especially these large investors that are putting significant dollars into the space, I think they're going to start to run into the number of independent groups that are looking to do private equity or either going to make a decision over the next couple years to move forward with PE or decide to stay independent and sit on the sidelines as this consolidation happens. So from a market perspective to get to the returns that these investors are looking for and get to the size and scale that particularly some of the larger private equity backed MSOs are looking to get to, they're going to obviously have to start to move into some of those hospital-based groups. And I think as we talked about earlier, that can be a little bit of a challenge from a deal of structuring perspective.

One of the dynamics to explore is partially it's historical that these cardiology practices have longstanding deeply ingrained relationships with the hospital and the health systems. A lot of that driven by, that's where most of the work happened, but for other reasons how should a platform, a private equity back platform, think about their relationship with the health system or their opportunities for joint ventures, whether it's through an ASC or otherwise? How should they think about the relationship with the local health system?

Well, I think there's still going to be services that need to be provided in a hospital setting, and so maintaining that relationship is going to be important. Structuring arrangements where services that might have traditionally been in a hospital setting but could be performed in an ASC are going to be, I think, one of the items where there are opportunities to have a hybrid model where the physicians or the private equity groups can partner with the hospitals in order to provide a better coverage service for the patients.

Yeah, and I'd say we've seen from practices, the relationships with health systems in their market are generally going to be positive. However, how ingrained those practices are with the health systems can vary pretty significantly market to market. So we've seen some practices that generate a pretty substantial amount of their revenue tied to directorship and call pay type positions with the systems, and they might have a fairly substantial amount of their referral volume coming from the health system as well.

So obviously maintaining that healthy relationship with the health system is really critical for that group to continue to grow and thrive under a private equity model. On the flip side, we've seen some groups that have good relationships with the health systems, but they've been able to develop models where they rely very little on the health system beyond maybe some operating room space for them. And groups that have accomplished that generally are groups that are going to have same day patient access where they have capacity to provide coverage to patients within a 24-hour period of when they need to be seen.

That can be formalized through a cardiac urgent care, or it could just be informalized through having capacity within their existing clinics to see those patients. And by doing it that way, they're effectively providing patients an opportunity to go to their practice and be seen by a cardiologist in lieu of potentially going into the ER. So they're sort of disrupting that referral pattern where they're getting more direct access to those patients. And then on top of that, developing really good community relationships with the PCPs and other specialists within their market that are independent of the system. And by structuring it that way and kind of building their practice that way, they still have a really good relationship with the health system, but they're not necessarily relying on that system to grow and survive. They're self-sufficient in the model that they've created, which I think tends to be a really good blueprint for practices to develop into. However, it can be very difficult to sort of transition in that model depending on how the group has been structured over the years.

Adding that all up, I do think we are still in the early innings of this consolidation. Even if it's not a huge market, there's going to be quite a bit more activity. And I do think the more interesting future maneuvers are going to be: navigating around the segment of the market that is currently employed at health systems, navigating the complexities of doing a transaction with those providers, and then also figuring out how to have a beneficial, constructive relationship with the health system going forward. It'll certainly be interesting to see. I think with that, we'll call this episode to a close. This has been super interesting and I really want to thank both of you for joining me. It's been a ton of fun.

Thanks so much.

Yeah, thanks for having us.

Thank you for joining us on this installment of The Bankers Corner. To learn more about today's discussion, please email host Geoff Cockrell, 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 McGuire Woods 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.