Partnering with a private equity firm can be a strategic decision for cardiology practitioners and leaders considering growing and advancing their practice. But approaching a partnership requires thoughtful examination of several key areas.
Fueled by success in other healthcare sectors, private equity (PE) firms began consolidating and investing in physician practices over two decades ago. Early PE investments focused on hospital-based specialties, and later shifted to primary care and procedurally focused specialties (e.g., dermatology, ophthalmology, urology, orthopedics, gastroenterology).
More recently, PE activity has emerged in cardiovascular (CV) practices, often coinciding with the development of CV ambulatory surgical centers (ASCs). This trend is compounded by the continued rise in demand for CV care, financial margin erosion, and historical challenges with hospital-physician alignment.
PE firms often serve as a catalyst for driving consolidation of physician practices within a market, with a supporting business model designed to create economies of scale, standardize and improve operational processes, and leverage technology to enhance efficiency, productivity, and profit. By creating a more efficient, lower-cost network of care delivery, this model presents several advantages and considerations that should be thoroughly evaluated.
Market Factors That May Fuel PE Activity in Cardiology
Cardiovascular Disease Prevalence
Cardiovascular disease is projected to increase more than 30% by 2060. The sheer volume of patients who will require access to CV care ensures ongoing demand for services. Early detection strategies, remote monitoring, AI algorithms, new therapies and technology, and expanded indications for treatment will all continue to broaden the opportunity to invest in CV care delivery.
Cardiology Procedures Shifting to the Outpatient Ambulatory Setting
While there is still variation in state regulations governing CV procedures in ASCs, the Centers for Medicare & Medicaid Services (CMS) has signaled an intent to shift low-risk interventional cardiology and electrophysiology procedures to this setting. While this shift will represent a major loss of revenue for hospitals and healthcare systems, there is significant potential upside for PE investors, despite the high cost associated with practice acquisitions and development of de novo CV ASCs.
Ongoing Challenges with CV Practice Integration into Healthcare Systems
The past 20 years have seen a decline in the number of physician-owned CV practices, with most cardiologists across the country now aligned with a health system. The Medicare fee-for-service cuts to office-based diagnostic testing beginning in 2005 played a central role in this shift. A sharp decline in reimbursement made it difficult for independent physicians to maintain positive margins in their practice, and as other operational costs in private practice rose while reimbursement stagnated, the number of practices moving into a hospital or health system alignment model climbed at a steep rate.
Looking back, we can recognize that many of the cardiology alignment models over the past 10 to 20 years were very transactional in nature. Health systems often sought to integrate cardiology practices using a traditional primary care practice model and assessing results through metrics designed to measure performance in primary care practices. As a result, cultural and operational integration has languished, and over time, the decline in practice revenue and increases in overhead have escalated into sizable losses for health systems. This lack of integration has prompted some CV practitioners and programs to consider a PE partnership as a viable alternative to their current health system alignment model.
Hospital/Health System Margin Erosion
Still recovering from the pandemic and managing in an inflationary environment, US hospitals and health systems are experiencing razor-thin margins. Cardiology practices owned by health systems are typically not self-sustaining, and they generally do not create margins within a system-wide physician enterprise since most of the revenue generated by diagnostic testing is attributed to the organization’s hospital-based outpatient service. As other practice overhead costs have accelerated, the overall losses related to cardiology practices loom larger on the health systems’ balance sheet.
Stakeholder Considerations
The decision to partner with a PE firm requires considerable diligence, given the significant impact a partnership can have on care delivery. The way that vision, values, and economic incentives align is important to understand at the outset of any partnership conversation, and consideration of various stakeholder perspectives is a helpful starting point.
Physicians
Cardiologists who are aligned with a health system but want an alternative will find that reentry to independent practice is costly. PE investments may provide a source of support for capital and operating expenses. Similarly, cardiologists in an independent employment model may turn to a PE firm for financial support to invest in overhead and capital, most notably in building and operationalizing CV ASCs.
Of course, cardiologists who crave independence may fear a loss of autonomy by aligning with a PE investor (not unlike the health system employment they’re looking to escape). But PE investors who tailor models across markets will have greater appeal, with a range of options available from MSO services to total ownership with physician employment. Ultimately investors will be seeking to build a cardiology enterprise that can efficiently drive high volumes of CV encounters with some level of oversight in the operation of the practice and any affiliated ambulatory cath labs. Longer-term incentives for aligning with PE investors will depend on individual arrangements, but as a shorter-term strategy, partnership with a PE firm may offer a foundation for strong, sustained financial performance through an investment in updated equipment and technology, optimized payer contracts, and improved operational efficiencies.
Hospitals and Health Systems
Low-risk, elective outpatient cath lab cases are a significant source of revenue for hospitals, often representing up to half of the total lab-based procedures performed in a CV service line. With many of these procedures now approved for the ASC setting, CV leaders must thoughtfully assess the potential impact of losing them to PE investor-backed cardiology groups and related ventures that are highly focused on developing de novo CV ASCs or multispecialty ASCs with cath labs. Additional potential impacts may be felt in the decanting of cath lab staffing and even in the availability of cardiology resources to cover other higher-acuity clinical areas, such as emergency department coverage and inpatient services.
Although the difference in revenue for ASC-based procedures is substantial, embracing this shift in procedures to ASC—and the associated financial loss—may be better than a total loss of revenue. Strategies might include developing a hospital-affiliated or -owned ASC, partnering with local cardiology providers, or collaborating with a PE investor.
But while strategies will vary based on many market-level factors, it is important to evaluate longer-term tactics to ensure the financial well-being of the CV program. This should include an expanded focus on growth, increasing market share, and overall CV service line financial and operational longevity across the ambulatory, acute, and post-acute care settings.
Patients
From the patient perspective, who owns and operates a facility or practice rarely comes into focus, unless it is related to health insurance benefits coverage. Although we see continued growth in consumerism in healthcare, patients largely continue to rely on their established physician or provider to advise them on what treatments are appropriate for them, and where and when to seek those treatments.
Shifting procedural care to the ambulatory setting is a primary objective of PE investors, and doing so has the potential to impove the overall patient experience. Ease of access, patient experience, out-of-pocket costs, and total length of stay in an ASC is often much better in the ASC setting than in traditional hospital outpatient departments.
Payers
Payers will continue to pursue opportunities to direct lower-risk patients to lower-cost settings. This shift is consistent with the growing payer focus on managing health outcomes longitudinally, ensuring that care is delivered in the appropriate setting, in the most efficient and cost-effective manner. PE investors recognize the opportunity to drive high volumes of CV encounters to the ambulatory setting and can provide the platform and resources necessary to support efficient, guideline-driven care. In addition to seeking markets with the potential for high volumes of ambulatory CV care, investors are likely to focus on the geographies where broad or even limited networks of care can strengthen managed care contracting opportunities.
Each of the above situations requires a thorough understanding of the current and future state. Pro forma analyses, which might include managed care and critical expense assumptions, should be contemplated when assessing the need for external capital and strategic partners.
Key Takeaways for CV Leaders
Heightened interest in investing in CV care, specifically ambulatory clinics and CV ASCs, is emerging at a time when physicians and healthcare systems are reevaluating how alignment partnerships need to evolve, when most health systems and CV practices are struggling to manage timely access, and in an environment where margins are under intense pressure. Clinical guidelines support a shift of many CV procedures to the ambulatory setting, and many payers—including CMS—are signaling their intent to push low-risk procedures out of hospitals to lower-cost ASC settings. With the proper regulatory safeguards, the ASC setting can provide a much better experience for patients and providers, bypassing many of the burdensome requirements that are slowing down hospital outpatient cath lab services.
As more CV procedures become approved for the ASC setting and site payment neutrality continues to present a challenge for health systems, CV leaders should carefully evaluate all partnership opportunities, including those presented by PE firms. Further, as new models of ownership emerge in CV care, it will be important for CV leaders to act as patient advocates to ensure goals and motivation link to a patient-centric mission and remain founded in clinical practice guidelines, delivering the right care, at the right time, in the right location, by the best qualified care team to attain the best outcomes at a reasonable cost.
About ECG’s Cardiovascular Consulting Services
ECG’s cardiovascular consulting team is passionate about improving CV care delivery and since 2010 has conducted nearly 300 CV engagements across more than 100 parent companies. Our CV experts focus on providing executive advisory services to the nation’s leading CV programs. Our M&A experts focus on providing financial and partnership advisory services to physician groups, PE firms and health systems who are evaluating their existing platforms and potential opportunities.
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Edited by: Matt Maslin
