GRAND ROUNDS

The Golden Age of Older Rectums: Private Equity Trends in Gastroenterology

Private equity has been making waves in healthcare, with market penetration rates for gastroenterology nearly doubling between 2019 and 2021. It’s been a while since I wrote about this spicy topic, so let’s revisit the love affair between private equity and healthcare.

In this article, I’ll spotlight the latest trends in private equity within the healthcare sector, explore the business model driving these investments, and offer my insights as a physician on this dynamic and contentious topic.

The Deets: Private Equity Trends in Healthcare

PE ownership growth in physician practices has led to substantial market share acquisitions:

• PE firms hold over 30% physician practice market share in 120 metropolitan statistical areas (MSAs). These are cities with high population densities.

• Of these 120 MSAs, PE firms hold over 50% market share in 60.

The types of specialties PE firms most commonly acquire are dermatology, ophthalmology, and gastroenterology. For the sake of this article, I’m going to focus on gastroenterology.

A recent Health Affairs study found that gastroenterology's private equity market penetration rates surged from approximately 7.5% to 13% between 2019 and 2021, reflecting pre-pandemic versus post-pandemic dynamics. The graphic below illustrates the rapid increase in private equity involvement in gastroenterology over the past decade. By 2021, private equity firms controlled 42% of the market share in gastroenterology within 120 of 384 MSAs.

The rise in PE acquisition of gastroenterology practices makes sense if you follow the money and trends. I’ll spell them out below:

1. People are living longer, around 40% of Americans are 45 and older.

2. Guidelines recommend colorectal cancer screening (i.e., colonoscopies) start at age 45 for those at average risk. If you screen with colonoscopy, you continue screening every 10 years through age 75 (if no abnormal findings).

3. The average colonoscopy cash price is around $1,600.

So, you have about 130 million Americans 45 and older, a guideline that recommends routine colorectal screening starting at age 45 (and recurring every 10 years if everything is normal), plus a routine screening colonoscopy that can bring in $1,000 per scope. Additionally, the number of adults 65 and older is expected to double within 20 years to 80 million.

Suffice it to say: there will be a lot of people needing a lot of colonoscopies. Frequently, too. As I’ve said previously, this is the golden age of older rectums.

According to one report, 10% of all 14,000 gastroenterologists in the U.S. are currently partners or employed by a private equity-backed firm. The three largest PE-backed GI groups include:

1. GI Alliance: 650+ physicians, 400+ locations

2. PE GI Solutions: 600+ physicians, 60+ clinical partner locations

3. Gastro Health: 300+ physicians, 100+ locations

Below is a PE map from Physician Growth Partners on the PE landscape in gastroenterology.

How Private Equity Functions in Healthcare

PE firms typically follow a “platform and add-on” model. In this model, PE firms first acquire a large and established medical group, cut waste to improve efficiency, and infuse capital to purchase tech to streamline operations. With the profit earned, firms then acquire smaller practices to consolidate. This platform and add-on model allows PE firms to build market power, achieve economies of scale, control referrals, and increase negotiating power with third-party payers.

PE firms use a leveraged buyout (LBO) model for their acquisitions. In this model, PE firms raise a large amount of debt to acquire the medical group instead of using a large amount of equity (their own money). For example, a PE firm may use 70% debt, consisting of bank loans and “junk bonds,” and 30% equity to purchase an asset.

Here’s the kicker: the acquired entity (the medical group) is responsible for paying off the debt. The PE firm will have used the acquired entity’s assets as collateral. If the medical group can’t pay off its debt, lenders can seize it as collateral (just look at what happened recently to Steward Healthcare and Hannehman Hospital).

Hannehman Hospital’s story is known too well.

• PE-backed American Academic Health System acquired Hahnemann Hospital (owned by for-profit Tenet Healthcare Corporation) in 2018.

• To turn a quick profit, AAHS simultaneously sold Hahnemann’s real estate assets to Harrison Street Real Estate Capital—one of the largest real estate investment firms.

• AAHS then quickly filed Hahnemann for bankruptcy in 2019 but strategically excluded Hahnemann’s real estate from the bankruptcy filing.

This is a long way of saying that the acquired entity bears the financial risk of the acquisition—not the PE firm.

However, the benefits of an acquisition may outweigh the risks, which is why medical groups are attracted to PE. With a PE acquisition, the medical group gets immediate access to capital for new investments, efficiency gains, and tax benefits (because of debt). Note that the group's physicians and providers typically retain some equity, allowing them to benefit from future transactions.

Overall, these PE firms strive to achieve a 20% annual return on investment while eyeing a three- to seven-year horizon (the time until they sell their acquired assets to another firm or company).

Dashevsky’s Dissection

While private equity acquisitions of medical groups, like gastroenterology practices, can inject much-needed capital and drive efficiency, they also raise concerns about increased healthcare costs, potential quality compromises, and market monopolization.

As I discussed in a prior article on PE, studies indicate that while PE-owned practices may contribute to higher healthcare utilization and spending, the quality of care does not necessarily improve, with some areas experiencing higher prices post-acquisition. This is particularly troubling in hospital acquisitions, where a 25.4% increase in hospital-acquired conditions has been observed post-PE acquisition.

For gastroenterology, evidence shows that gastroenterologists significantly alter care processes, such as using anesthesia with deep sedation during colonoscopies, after integrating with a PE firm. This leads to a substantial increase in patients’ post-procedure complications. Additionally, it’s well established that PE-owned hospitals add more profitable service lines while discontinuing less profitable ones. These hospitals also tend to have fewer full-time employees, lower patient satisfaction scores, and poorer quality metrics compared to non-PE-owned hospitals.

In a recent op-ed, two physicians argue that the real issue with private equity in healthcare is the misaligned incentives prioritizing profit over patient outcomes—private equity is a symptom rather than the cause of systemic problems.

This seems evident to me.

In medicine, we’re taught to treat the underlying issue causing the symptom, which is what we should do. However, we often can’t address the underlying pathology driving a patient’s symptoms. The next best thing is to treat the symptoms. Similarly, the financial incentives that attract private equity to healthcare are too strong and entrenched to be easily changed. Therefore, the next best thing is to address the symptoms: private equity.

How we tackle this is a discussion for another time. If you’re eager for more, this Health Affairs article does a decent job of outlining the challenges and opportunities for reining in private equity in healthcare to protect patients.

In summary, private equity has significantly increased its presence in healthcare, particularly in specialties like gastroenterology. While these acquisitions can bring capital and efficiency improvements, they also raise concerns about higher healthcare costs, potential quality compromises, and market monopolization. Evidence suggests that PE-owned practices may lead to increased healthcare utilization and spending without necessarily improving care quality. The complex financial models used by PE firms place significant financial risk on the acquired medical groups, and systemic issues in healthcare often drive these investments. Addressing these challenges requires a nuanced understanding of both the benefits and risks associated with private equity in healthcare.

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