Private equity in GI

Dear colleagues,

In this issue of Perspectives we will explore the business of medicine. With changes in reimbursement models and health care regulation over the past decades, private practice gastroenterology has evolved. Many gastroenterologists are now employed or are part of larger consolidated organizations. A key part of this evolution has been the influx of private equity in GI. The impact of private equity is still being written, and while many have embraced this business model, others have been critical of its influence.

In this issue, Dr. Paul J. Berggreen discusses his group’s experience with private equity and how it has helped improve the quality of patient care that they provide.

Dr. Michael L. Weinstein provides the counterpoint, discussing potential issues with the private equity model, and also highlighting an alternative path taken by his practice. An important topic for gastroenterologists of all ages. We welcome your experience with this issue. Please share with us on X @AGA_GIHN.

 
Dr. Gyanprakash A. Ketwaroo

Gyanprakash A. Ketwaroo, MD, MSc, is associate professor of medicine, Yale University, New Haven, Conn., and chief of endoscopy at West Haven (Conn.) VA Medical Center. He is an associate editor for GI & Hepatology News.

The Future of Medical Practice
BY DR. PAUL J. BERGGREEN

The future of medicine is being written as we speak. Trends that began in past decades have accelerated. Consolidation among massive hospital systems and health insurance conglomerates has gained momentum.

Physicians have been slow to organize and slower to mobilize. We spend our time caring for patients while national forces shape the future of our profession.

Courtesy Dr. Berggreen
Dr. Paul J. Berggreen

These trends have motivated many physicians to explore vehicles that allow them to remain independent. Creating business relationships with financial entities, including private equity, is one of those methods.

Before exploring those models, some background is instructive.

More than 100,000 doctors have left private practice and become employees of hospitals and other corporate entities since 2019. Today, approximately 75% of physicians are employees of larger health care entities – a record high.

This trend ought to alarm patients and policymakers. Research shows that independent medical practices often deliver better outcomes for patients than hospitals. Physician-owned practices also have lower per-patient costs, fewer preventable hospital admissions, and fewer re-admissions than their larger hospital-owned counterparts.

The business of medicine is very different than it was 40 years ago, when more than three in four doctors cared for patients in their own medical practices. The cost of managing a practice has surged. Labor, rent, and malpractice insurance have grown more expensive. Physicians have had to make significant investments in information technology and electronic health records.

Medicare’s reimbursement rates have not kept pace with these higher operational costs. In fact, Medicare payments to doctors have declined more than 25% in the last two decades after accounting for inflation.

By contrast, reimbursement for inpatient and outpatient hospital services as well as skilled nursing facilities has outpaced inflation since 2001.

Given these economic headwinds – and the mounting administrative and financial burdens that government regulation poses – many independent practitioners have concluded that they have little choice but to sell to larger entities like hospitals, health systems, or insurers.

If they do, they lose autonomy. Patients lose the personal touch an independent practice can offer.

To stay independent, many physicians are partnering with management services organizations (MSOs), which provide nonclinical services such as compliance, contracting, legal and IT support, cybersecurity, marketing, community outreach, recruiting assistance, billing, accounts payable, and guidance on the transition to value-based care.

MSOs are typically backed by investors: perhaps a public company, or a private equity firm. But it’s important to note that the clinical entity – the practice – remains separate from the MSO. Physicians retain control over clinical decision-making after partnering with an MSO.

Private equity is best viewed as a neutral financing mechanism that provides independent practices access to capital so they can build the business, clinical, and technological infrastructure to compete against the vertically integrated health systems that dominate medicine.

Private equity firms don’t “acquire” independent practices. A partnership with a private equity-backed MSO is often what empowers a practice to resist acquisition by a larger hospital or health care system.

The experience of my own practice, Arizona Digestive Health, is instructive. We partnered with GI Alliance – a private equity-backed, gastroenterologist-led MSO – in 2019.

My physician colleagues and I have retained complete clinical autonomy. But we now have the financial and operational support we need to remain independent – and deliver better care for our patients.

For example, we led the development of a GI-focused, population-based clinical dashboard that aggregates real-time data from almost 3 million patients across 16 states who are treated by practices affiliated with GI Alliance.

By drawing on that data, we’ve been able to implement comprehensive care-management programs. In the case of inflammatory bowel disease, for instance, we’ve been able to identify the highest-cost, most at-risk patients and implement more proactive treatment protocols, including dedicated care managers and hotlines. We’ve replicated this model in other disease states as well.

This kind of ongoing, high-touch intervention improves patient outcomes and reduces overall cost by minimizing unplanned episodes of care – like visits to the emergency room.

It’s not possible to provide this level of care in a smaller setting. I should know. I tried to implement a similar approach for the 55 doctors that comprise Arizona Digestive Health in Phoenix. We simply didn’t have the capital or resources to succeed.

Our experience at Arizona Digestive Health is not an outlier. I have seen numerous independent practices in gastroenterology and other specialties throughout the country leverage the resources of private equity-backed MSOs to enhance the level of care they provide – and improve patient outcomes and experiences.

In 2022, the physician leadership of GI Alliance spearheaded a transaction that resulted in the nearly 700 physicians whose independent gastroenterology practices were part of the alliance to grow their collective equity stake in the MSO to more than 85%. Our independent physicians now have voting control of the MSO board of directors.

This evolution of GI Alliance has enabled us to remain true to our mission of putting patients first while enhancing our ability to shape the business support our partnered gastroenterology practices need to expand access to the highest-quality, most affordable care in our communities.

Doctors caring for patients in their own practices used to be the foundation of the U.S. health care system – and for good reason. The model enables patients to receive more personalized care and build deeper, more longitudinal, more trusting relationships with their doctors. That remains the goal of physicians who value autonomy and independence.

Inaction will result in more of the same, with hospitals and insurance companies snapping up independent practices. It’s encouraging to see physicians take back control of their profession. But the climb remains steep.

The easiest way to predict the future is to invent it. Doing so in a patient-centric, physician-led, and physician-owned group is a great start to that journey.

Dr. Paul Berggreen is board chair and president of the American Independent Medical Practice Association. He is founder and president of Arizona Digestive Health, chief strategy officer for the GI Alliance, and chair of data analytics for the Digestive Health Physicians Association. He is also a consultant to Specialty Networks, which is not directly relevant to this article.

Thinking Strategically About Gastroenterology Practice
BY MICHAEL L. WEINSTEIN, MD

Whether you are a young gastroenterologist assessing your career opportunities, or a gastroenterology practice trying to assure your future success, you are likely considering how a private equity transaction might influence your options. In this column, I am going to share what I’ve learned and why my practice chose not to go the route of a private equity investment partner.

In 2018, Capital Digestive Care was an independent practice of 70 physicians centered around Washington, DC. Private equity firms were increasingly investing in health care, seeking to capitalize on the industry’s fragmentation, recession-proof business, and ability to leverage consolidation. Our leadership chose to spend a weekend on a strategic planning retreat to agree on our priorities and long-term goals. I highly recommend that you and/or your practice sit down to list your priorities as your first task.

Capital Digestive Care
Dr. Michael L. Weinstein

After defining priorities, a SWOT analysis of your position today and what you project over the next decade will determine a strategy. There is a current shortage of more than 1,400 gastroenterologists in the United States. That gives us a pretty powerful “strength.” However, the consolidation of commercial payers and hospital systems is forcing physicians to accept low reimbursement and navigate a maze of administrative burdens. The mountain of regulatory, administrative, and financial functions can push physicians away from independent practice. Additionally, recruiting, training, and managing an office of medical personnel is not what most gastroenterologists want to do with their time.

The common denominator to achieve success with all of these practice management issues is size. So before providing thoughts about private equity, I recommend consolidation of medical practices as the strategy to achieving long-term goals. Practice size will allow physicians to spread out the administrative work, the cost of the business personnel, the IT systems, and the specialized resources. Purchasing power and negotiation relevance is achieved with size. Our priorities are taking care of our patients, our staff, and our practice colleagues. If we are providing high-value service and have a size relevant to the insurance companies, then we can negotiate value-based contracts, and at the end of the day, we will be financially well-off.

In contrast to the list of priorities a physician would create, the private equity fund manager’s goal is to generate wealth for themselves and their investors. Everything else, like innovation, enhanced service, employee satisfaction, and great quality, takes a back seat to accumulating profit. Their investments are made with a life-cycle of 4-6 years during which money is deployed by acquiring companies, improving the company bottom line profit through cost cutting or bolt-on acquisitions, increasing company profit distributions by adding leveraged debt to the corporate ledger, and then selling the companies often to another private equity fund. Physicians are trained to provide care to patients, and fund managers are trained to create wealth.

The medical practice as a business can grow over a career and provides physicians with top tier incomes. We are proud of the businesses we build and believe they are valuable. Private equity funds acquire medical practices for the future revenue and not the past results. They value a medical practice based on a multiple of the portion of future income the practice wants to sell. They ensure their future revenue through agreements that provide them management fees plus 25%-35% of future physician income for the current and all future physicians. The private equity company will say that the physicians are still independent but in reality all providers become employees of the company with wages defined by a formula. The private equity-owned Management Services Organization (MSO) controls decisions on carrier contracts, practice investments, purchasing, hiring, and the operations of the medical office. To get around corporate practice of medicine regulations, the ownership of the medical practice is placed in the hands of a single friendly physician who has a unique relationship to the MSO.

In my opinion, private equity is not the best strategy to achieve a successful medical practice, including acquiring the needed technology and human resources. It comes at a steep price, including loss of control and a permanent forfeiture of income (“the scrape”). The rhetoric professes that there will be income repair, monetization of practice value, and opportunity for a “second bite of the apple” when the private equity managers sell your practice to the next owner. Private equity’s main contribution for their outsized gains is the capital they bring to the practice. Everything else they bring can be found without selling the income of future partners to create a little more wealth for current partners.

The long-term results of private equity investment in gastroenterology practices has yet to be written. The experience in other specialties is partly documented in literature but the real stories are often hidden behind non-disparagement and non-disclosure clauses. Several investigations show that private equity ownership of health care providers leads to higher costs to patients and payers, employee dissatisfaction, diminished patient access, and worse health outcomes. The Federal Trade Commission and Department of Justice have vowed to scrutinize private equity deals because of mounting evidence that the motive for profit can conflict with maintaining quality.

In 2019, Capital Digestive Care chose Physicians Endoscopy as our strategic partner with the goal of separating and expanding our back-office functions into an MSO capable of providing business services to a larger practice and services to other practices outside of our own. Physicians Endoscopy has since been acquired by Optum/SCA. PE GI Solutions, the MSO, is now a partnership of CDC physician partners and Optum/SCA. Capital Digestive Care remains a practice owned 100% by the physicians. A Business Support Services Agreement defines the services CDC receives and the fees paid to the PE GI Solutions. We maintain MSO Board seats and have input into the operations of the MSO.

Consider your motivations and the degree of control you need. Do you recognize your gaps of knowledge and are you willing to hire people to advise you? Will your practice achieve a balance between the interests of older and younger physicians? Becoming an employed physician in a large practice is an option to manage the concerns about future career stability. Improved quality, expanded service offerings, clout to negotiate value-based payment deals with payers, and back-office business efficiency does not require selling yourself to a private equity fund.

Dr. Michael L. Weinstein is a founder and now chief executive officer of Capital Digestive Care. He is a founder and past president of the Digestive Health Physicians Association, previous counselor on the Governing Board of the American Gastroenterological Association. He reports no relevant conflicts.

References

The FTC and DOJ have vowed to scrutinize private equity deals. Here’s what it means for health care. FIERCE Healthcare, 2022, Oct. 21.

The Effect of Private Equity Investment in Health Care. Penn LDI. 2023 Mar. 10.

Olson, LK. Ethically challenged: Private equity storms US health care. Baltimore: Johns Hopkins University Press. 2022.