Gastroenterology: Medicine's New Cash Cow

Roxanne Nelson, RN, BSN

January 31, 2020

It's a good time to be in the business of gastroenterology. Not only do gastroenterologists enjoy one of the higher annual compensations among medical specialists, they are also driving substantial earnings for hospitals. According to the Merritt Hawkins 2019 Physician Inpatient/Outpatient Revenue Survey, gastroenterologists generated an average net revenue of $2,965,277 in 2019, more than double that reported in 2016.

With numbers like these, it's easy to see why gastroenterology finds itself where some other specialties have been in recent years, in the sights of investors hoping to ride emerging healthcare trends to further profitability.

"The healthcare environment is changing, and one of the most significant challenges is the increase in consolidation," said David A. Johnson, MD, professor of medicine and chief of gastroenterology at Eastern Virginia Medical School in Norfolk, who is a past president of the American College of Gastroenterology.

In gastroenterology, this trend is largely being driven by the entrance of private equity partners, whose presence has grown, Johnson says, especially in the past year.

Being such an in-demand specialty for investors comes with obvious opportunities, financial and otherwise. But gastroenterologists must have a clear understanding of the factors reshaping their practices or they risk entering into arrangements that do not benefit them in the ways they had anticipated.

What's Driving the Private Equity Boom?

Private equity firms have been investing in several medical specialties over the past decade, most notably dermatology and ophthalmology, according to Joseph Feuerstein, MD, associate clinical chief of gastroenterology at Beth Israel Deaconess Medical Center in Boston. Gastroenterology is a newer area of interest for such firms. The first such transaction was completed in 2016 by South Florida–based Gastro Health in its recapitalization with Audax Group. Since that time, gastroenterology has only become a "hotter target" for private equity investors, who are intrigued by a highly fragmented specialty with many small and mid-sized groups that could potentially be rolled up into larger organizations.

"Gastroenterology has a unique interest as an investment opportunity, given the lucrative aspect of endoscopic procedures," said Feuerstein. "As one increases market share, one is also able to start negotiating better insurance reimbursement rates, which allows for all those within the group to increase profitability."

He notes that gastrointestinal (GI) practices can, in general, be easily combined.

"The business administration is fairly similar regardless of the area served and the physicians and personnel involved," he said. "As practices are combined and grouped, one can also focus on a leaner system by cutting cost and standardizing practice, as well as using purchasing market power to negotiate better deals on everything from endoscopic tools to even just office supplies. The only thing that is likely to alter this practice would be a significant cut in procedure-based reimbursements."

According to Johnson, private equity firms are already changing physician compensation.

"When they go into a GI group, what is typically done is to give the physicians cash on a buyout of a certain percentage of their equity or give them a salary," he said. "The salary may go down because they give them a large chunk of cash up front."

Private equity transactions create a managed services organization (MSO), which will in turn buy out the current owners in the acquired practice. The financial benefits can be substantial. In exchange for receiving a payout, the physician group surrenders managerial control of nonclinical decisions through a managed services agreement with the MSO. The MSO, which is generally formed by the partnership between the practice and the private equity group, provides all nonclinical services to the practice.

"They don't take over the practice, but the private equity group may gain control of part of the business, such as consolidating it into a larger healthcare system," said Johnson. "You pay a fee to be in their system and you get equity out of that as well. This is done with the idea that it will improve your system, and your profits should improve as well — if you're bigger, you may get better rates with insurers, for example."

Weighing the Pros and Cons of Consolidation

Johnson notes that navigating through this new landscape may be a little challenging for physicians, who are suddenly faced with private equity partners managing medical practices they themselves once ran.

"It will be interesting to see what happens," he said. "Private equity firms want to get in and out with a profit, while physicians want to do good business as well as provide good care, and may not do third-party management well."

Being owned by a private equity investor provides financial stability, opportunity to modernize, increased efficiency, and decreased practice costs, Aasma Shaukat, MD, MPH, a professor of medicine at the University of Minnesota, Minneapolis, points out.

"Consolidation is the optimal way to compete with larger healthcare systems and hospital systems, negotiate with payors, and leverage resources," she said. "Consolidation provides economies of scale and brings modernization to the practices, such as with electronic health records, endoscopy equipment, software, and other ancillary services."

On the other hand, she adds, it can lead to loss of independence and financial control, higher healthcare costs, owing to the need to make profits, and uncertain financial futures down the line.

"I hear these dilemmas from colleagues around the country," Shaukat said. "Some have consolidated and are very happy with their decisions, while others are still on the fence. The devil is all in the details."

Sacrificing a little autonomy may be more of an enticement for younger surgeons, who bristle at the time needed to deal with the ever-growing onslaught of administrative and regulatory requirements and the increasing complexity of reimbursement.

"The private equity model is attractive for the 'work-life balance' concerns of millennials more than older physicians who were trained as being a 24/7 physician," said Larry Good, MD, FACG, founder and CEO of Good Pharmaceutical Development and CEO of the Compassionate Care Center of New York. "That is not the model and lifestyle that the more recent trainees want."

Regardless of their reasons for considering consolidation, physicians must always carefully vet the details of the private equity company that is courting them. Practitioners need to consider the company's financial backing, track record, current and future financial health, as well as the terms of the merger and it's potential to help the practice grow and thrive.

"One thing that is clear is that the trend will continue in the near future," Shaukat noted. "Per some estimates, the private equity investments in GI are already over $1 trillion. As more practices consolidate, more will feel the pressure to consolidate also in order to compete, and the compensations will be more lucrative."

The Ever-Increasing Practice Size

Additional pressure is surely being applied simply by the fact that small independent practices are disappearing across all medical specialties. Between 1983 and 2014, the percentage of physicians in solo practice plummeted from 41% to 17%, while practices with 25 or more doctors increased fourfold, according to a 2019 report.

In addition to private equity investors, hospitals have also been buying up practices. About 44% of US physicians were hospital-employed in 2018, an increase from 41.7% in 2016 and 26% in 2012.

"Bigger is generally better for competition and negotiations, and we are beginning to see mega-sized practices," said Johnson.

Good believes that conventional small independent practices of two or three practitioners or solo practitioners will continue to disappear because of economic pressures unless a new reimbursement model is developed that caters to smaller groups.

"These models may go completely fee for service, or they can modify the reimbursement schedule into something like a concierge service or VIP choice," he said. "In my practice, we have been successful by dropping all insurance except Medicare."

He further explained that although he continues to see current Medicare patients, new ones are discouraged.

"As long-time patients merge into Medicare, we continue to see them, but we encourage them to join our concierge internal medical practice," Good said. "We try to become their physician for all of their care and not just gastroenterology."

Short of modifying the practice plan, Medicare reimbursement will remain very flat, with an increase in reimbursement of only about 1% slated for GI procedures in 2020, according to Good.

"In addition, there is continuing downward pressure on private insurance and increasing deductibles, and also the Obamacare subsidized plans, which are essentially Medicaid with low reimbursement," he said. "Thus, it will be very difficult for practices not part of large hospital groups."

Good said that in his community, 20 groups are affiliated with the hospitals. By contrast, only four groups are not owned by a hospital or conglomerate. He noted that people who are maintaining autonomous practices are outliers in this environment.

He also emphasized that the political environment is uncertain right now, and depending on how the election goes, "we may have something like Medicare for all or Medicare expanded to age 50, and that certainly changes the variables."

Also Trending in the Field

Several other trends are likely to drive investor interest in gastroenterology in 2020 and beyond. Unless more medical school graduates step up to fill in the empty slots, it is projected that gastroenterologists will be in short supply by 2025, with a shortfall of about 1600 practitioners. The positive impact of a physician shortage is that the demand for these services could potentially increase fees and reimbursement.

For example, Shaukat explained, nearly 18 million colonoscopies are performed in the United States every year, making it the most commonly performed procedure.

"It pays extremely well, and bundled payment models are particularly well compensated for colonoscopy," she said. "A streamlined practice of highly efficient and high-quality colonoscopy is highly profitable."

The demand for endoscopic services, such as upper endoscopies and colonoscopies, will only increase as the population ages and with increases in related conditions.

"With the obesity epidemic, there has been a surge in fatty liver disease, one of the fastest-growing medical conditions in the US population, also requiring increasing gastroenterology services," Shaukat said.

Because gastroenterology care is largely delivered in the outpatient setting, ambulatory surgical centers (ASCs) are highly profitable.

"They offer a diversified range of services, such as endoscopic procedures, other specialized procedures, such as capsule endoscopy and impedance pH/manometry, specialty outpatient clinics, and infusion services," Shaukat said. "Many ASCs are able to offer diagnostic testing, such as laboratory, pathology, and imaging services, which further enhance revenue potential. Even in the event of an economic downturn, the need for gastroenterology services will only increase."

Together, these two factors — market pressures and profitability — make ASCs a very attractive candidate for private equity investors in gastroenterology, she pointed out.

One more trend to watch for is the removal or development of ancillary businesses by practices such as pathology or anesthesia.

"These can either be sold off or developed, and this is trendy right now because we provide them in gastroenterology," said Johnson. "Taking them in-house can provide a nice revenue stream."

Overall, there are a lot of moving parts for gastroenterology.

"Consolidation, roll ups, super groups — these are the emergent themes," said Johnson. "Gastroenterology is a good business and is stable for right now, yet it is way too soon to tell how practices are doing with private equity investment. It may be an interesting year."

Roxanne Nelson, RN, BSN, is a freelance writer based in Seattle, Washington, who writes primarily on health and medicine.

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