Written by Christian Lynch and Chance Sherer, CVA
Ambulatory surgery centers (ASCs) continue to be the target of health systems, physicians, and financial investors due to their straightforward business model and ability to align with physicians. As more high-acuity, high-reimbursing procedures transition to the outpatient setting, ASCs will become increasingly attractive for investment and will further cement their status as a preferred, low-cost surgical setting. Given the considerable attention from potential investors, it is crucial to understand how value is measured, how that value is derived, and the common terms used to describe value.
To convey value, market participants often speak in terms of “multiples.” A multiple is simply a company’s enterprise value divided by an industry-specific metric. Multiples are used due to their simplicity and ability to compare subjects to industry peers without the need for complex analyses. Although multiples within healthcare can be based on many different metrics, such as number of beds, revenue, covered lives, panel size, etc., ASCs are most discussed in terms of EBITDA multiples.
EBITDA, defined as earnings before interest, taxes, depreciation, and amortization, generally approximates a center’s cash flow, and by extension, its profitability. By calculating earnings before non-cash charges, such as depreciation and amortization, EBITDA represents earnings available to shareholders better than net income. Additionally, excluding interest expense removes the effect of capital decisions, whereby shareholders decide to finance purchases with debt or purchase equipment outright. Due to the discretionary nature of utilizing debt instead of cash, removing the impact of such decisions makes EBITDA an easily comparable metric between industry participants.
Understanding EBITDA and its benefits provides a clearer picture of multiples and their meaning. For example, a multiple of 8x EBITDA means the target ASC can be wholly acquired for a sum equal to eight times its EBITDA. Despite the prevalence and simplicity of EBITDA multiples, there are a few significant pitfalls to be aware of.
First, it is important to recognize that EBITDA multiples are often discussed in terms of “implied” multiples rather than “applied” multiples. Put another way, the final transaction value is typically determined through a detailed analysis of the subject ASC’s historical and projected financial performance. This value is then divided by EBITDA to arrive at an implied multiple.
Investors and valuation professionals are concerned about the ultimate distributions received from an investment in an ASC and the associated risk/return. The distributions are assessed through a discounted cash flow analysis where future earnings are projected and discounted back to present-day dollars using a discount factor. The sum of these discounted cash flows is then used to estimate the value. This analysis allows for the consideration of many idiosyncratic factors relevant to the subject ASC, such as size, geography, capacity, specialty/case mix, payor mix, staffing and supply expense growth, capital requirements, and many other factors.
Conversely, simply applying a market multiple to EBITDA will give an indication of value but may not accurately reflect the specific factors of the subject ASC. Given the intricate analysis used to determine value, it is clear why ASC transactions at the control level do not all occur at the same multiple; one center may be valued at a 7.3x implied EBITDA multiple, and another may be valued at an 8.2x multiple.
Buyers and sellers must understand the range of EBITDA multiples in the market to ensure the analysis produces an appropriate result. If the implied multiple lies outside the market range the discounted cash flow analysis will provide an explanation as to why.
To fully understand an implied EBITDA multiple is it critical to know the EBITDA by which the multiple is calculated. As shown in the table below, the implied EBITDA multiple of ASC value can be expressed using several different types of EBITDA; however, the most common are historical, normalized, and projected. Historical EBITDA represents the actual earnings of the center in the prior 12 months. On the other hand, normalized or adjusted EBITDA represents earnings after adjusting revenues and expenses to depict what a normal past 12 months of operations would have looked like.
Typical adjustments include the removal of one-time expenses and revenues, transaction adjustments for related-party arrangements (i.e., management agreements, billing fees, rent expenses), and adjustments for the timing of certain revenues and expenses that are over-represented or under-represented in the examined historical period. Lastly, projected EBITDA represents the expected next 12 months of earnings after normalization. It may account for many specific factors, but commonly it varies from normalized EBITDA due to expected changes in case volume.
Using different types of EBITDA can have a material effect on multiples. For example, after removing certain nonrecurring expenses, a center’s normalized EBITDA might be $100,000 higher than the historical level. As a result, a control-level value indication of $10,000,000 would produce a multiple of 8.3x based on historical EBITDA, whereas using normalized EBITDA would imply a multiple of 7.7x.
Though implied multiples are often discussed in terms of normalized or projected EBITDA, sellers should be cautious when hearing rumored valuation multiples among their peers. A possible disconnect between the various indications could distort the view of how ASCs are valued.
While it is beneficial to understand the general market ranges for ASC transaction multiples, an extensive assessment of the specific facts and circumstances of any singular center is required to determine its precise value. This valuation requires detailed knowledge of the operations and financial performance of the ASC from both a historical and future perspective. To determine an accurate valuation range for a center, buyers and sellers commonly engage the services of qualified advisors, such as VMG Health, who have extensive experience in ASC valuation.
Written by Josh Miner, Savanna Ganyard, CFA, and Taryn Nasr, ASA
The Ambulatory Surgery Center (ASC) market is a fast-growing sector of healthcare that is attracting considerable interest from private equity (PE) funds across the country. The following outlines the current state of the market as well as key factors driving ASC market growth and attracting PE investment.
2021 saw the most PE-related healthcare transactions in history, with an estimated 1,018 transactions occurring throughout the year. During the first quarter of 2023, transaction activity slowed from the pace set in 2021, primarily due to macroeconomic factors including inflationary pressures, rising interest rates, and higher labor costs. Additionally, rising interest rates and tight credit have increased the cost of debt leading to a reduction in leverage of one to one-and-a-half turns. Uncertainty surrounding the bank debt market has led PE investors to turn to private credit and other deal strategies. These strategies include searching for smaller deals where securing financing may be easier or targeting add-ons that are small enough to purchase without debt.
Despite the recent slowdown in activity, it is likely that the deal volume will rebound as macroeconomic uncertainty eases, but, in the short term, PE firms will likely continue to target smaller platform deals and add-ons. These transactions will likely involve independent targets, as other institutional investors may not attempt an exit in the current economic conditions.
The ASC market was recently sized at $84 billion in 2020 and is projected to grow at a compounded annual growth rate (CAGR) of 3.9% to $131 billion by 2031. The industry is highly fragmented with 70% of ASCs independently owned and the remaining owned by larger conglomerates. Over the past several years, PE ownership in the ASC space has steadily increased. Two of the largest players in the industry, AmSurg and Surgery Partners, have PE ownership. Other major ASCs with PE ownership include Covenant Physician Partners, EyeCare Partners, Gastro Health, GI Alliance, HOPCo, PE GI Solutions, and Value Health. Notably, Bain Capital’s $3 billion leveraged buy-out (LBO) of Surgery Partners in 2017 remains the largest deal completed in this space.
The expected growth in the ASC industry is driven by numerous factors including a shift towards lower cost procedures. On average, patients save $684 per procedure at an ASC as compared to a hospital based on a 2021 report from UnitedHealth Group. Specifically, orthopedics is a growth area driven by cost savings. On average, ASCs reduced the cost of orthopedic procedures by 17% to 43%. These cost savings at an ASC lessen the burden on the patient and help boost margins in an ASC setting. As a result, orthopedics continues to be a popular specialty for investors pursuing an ASC strategy.
Orthopedics remains the most popular specialty, but gastroenterology, pain management, and ophthalmology make up large portions of the market. Notably, cardiology has become the fastest-growing specialty as ASCs invest in technology and higher acuity procedures continue to move to the ASC setting. The demand for cardiology is driven by an aging population and the level of cardiovascular disease in U.S. adults (e.g., half of all U.S. adults have cardiovascular disease). While cardiology is currently primarily a hospital-based specialty, with 70% of cardiologists employed by hospitals, as this specialty moves into ASCs there is a unique opportunity for PE firms to secure a foothold in a fast-growing segment.
On January 31, 2023, Lee Equity Partners (LEP) completed a buyout of the Cardiovascular Institute of the South (CIS) for an undisclosed amount (of note, LEP deals typically range from $50 to $150 million in equity). CIS has 21 locations across two states and employs over 60 physicians. This deal represents one of the larger buyouts of an ASC in recent memory and illustrates the growth of cardiology as a specialty in ASCs.
As more cases and specialties shift to an ASC setting, there is an increasing patient demand for multi-specialty ASCs. Patients are seeking convenience in the ability to receive treatment for a multitude of treatments in one place. The number of multispecialty ASCs is forecasted to expand at a 4.3% CAGR, outpacing general ASC market growth.
These industry characteristics coupled with the PE industry outlook should continue to drive transactions within this space, specifically among the 70% of independently owned ASCs. Due to recent macroeconomic factors, we expect PE firms to continue to pursue smaller add-on deals aimed at consolidating several ASCs in an area. These types of transactions allow PE firms to capitalize on industry trends, optimize cost-cutting opportunities, and generate attractive returns. On the other hand, these transactions are also attractive to independent and physician-owned ASCs due to the benefits of a larger growth infrastructure which can leave more time for physician owners to focus on patient care.
ASCs can offer cost savings and convenience to consumers without sacrificing quality of care. Due to increasing demand, the number of specialties, and the ability to perform high-acuity procedures, the ASC market is projected to grow steadily over the next decade. Market growth, combined with the availability of investment opportunities due to the fragmentation of the market, will continue to attract PE investment. As macroeconomic conditions become less uncertain, it is likely that PE investment will continue to rebound to historical levels in the healthcare industry. Furthermore, the many attractive qualities of the ASC industry should draw investment in the space.
Written by Anthony Domanico, CVA and Ben Minnis, CVA
The following article was published by the American Association of Provider Compensation Professionals.
In the rapidly evolving landscape of healthcare, traditional fee-for-service (FFS) reimbursement models are being replaced by alternative payment models that focus on value-based care in addition to, or even sometimes fully in replacement of, fee-for-service reimbursement. This shift from volume to value necessitates a strategic rethinking of compensation plans for healthcare providers to align incentives, optimize patient outcomes, and maximize revenue. The implementation of value-based compensation plans requires a deep understanding of the intricacies of different alternative payment models and the development of innovative strategies to ensure financial success while prioritizing quality care.
A key tenet of value-based care is the focus on delivering high-quality healthcare outcomes to patients while managing costs effectively. Alternative payment models, such as bundled payments, accountable care organizations (ACOs), and capitation, incentivize providers to prioritize preventive care, care coordination, and patient engagement while reducing unnecessary or inappropriate services.
These models differ from traditional fee-for-service, which rewards the quantity of services delivered rather than their outcomes. Under a fee-for-service reimbursement model, the more you do, the more you get. This is the case even if certain types of care or services are not warranted, are considered excessive based on the problem set presented by a particular patient, or do not lead to good patient outcomes.
However, under value-based contracts providers are rewarded not for the volume of services rendered, but for providing high-quality care to a large population of patients while also reducing unnecessary and/or inappropriate services.
While all value-based care models pay for value in some respect, the way various payment programs are structured will determine what compensation mechanism(s) will lead to better outcomes for both the physician and the organization.
Consider the following scenarios that are all focused on a hypothetical organization with $100 million of revenue and 200 FTE doctors ($500,000 in revenue per FTE).
Under a non-capitated value-based model where the organization continues to earn reimbursement under an FFS construct, with additional revenue opportunities through quality incentives, that organization might see $90 million of FFS revenue for the same book of business. In addition, that organization can earn up to an additional $20 million in value-based payments for a total possible range of $90-110 million of revenue.
Under this reimbursement structure, the organization will still be incentivized to have its physicians rewarded for productivity. After all, a sizable portion of the organization’s revenue, and most of the organization’s ability to increase the revenue pool (the $90 million), is through FFS reimbursement. As such, a compensation model under this construct might be a productivity model (with or without a base salary component). Also, it would include an additional incentive opportunity for value-based arrangements based on the metrics included in the organization’s value-based contracts.
Another emerging component of value-based contracts is shared savings opportunities. If an insurer typically incurs costs of $10 million for managing a population of patients, and the subject organization can take high-quality care of the same population of patients for $9 million, insurers are increasingly sharing a portion of the cost savings back to the providers/health systems that are helping to achieve these savings.
Designing compensation arrangements to maximize shared savings opportunities is much trickier than under FFS and value models. After all, it is much more challenging to define metrics around achieving cost savings on a targeted population of patients than it is to measure things like hemoglobin A1c scores. As a result, we often see organizations either use shared savings dollars earned from insurers to fund larger quality incentives or pass through a portion of those earned dollars received from insurers to network physicians.
The latter option is complex in that it requires organizations to understand how those cost savings are achieved and to be able to allocate those savings earned down to the individual physician level or develop a proxy formula to estimate these factors for payment. As an example, we may see an organization decide to withhold 50% of funds earned to cover the additional costs incurred by the employer (such as hiring care coordinators to ensure patients with diabetes are getting back to the clinic for follow-up tests, etc.), and distribute the remainder by using a formula based on quality, wRVUs, or some other distribution formula.
Ensuring compensation remains consistent with fair market value under these types of arrangements is challenging. With that in mind, you will want to ensure you are working with counsel and a compensation design/valuation expert to ensure any compensation models remain consistent with fair market value.
At the other end of the volume-to-value spectrum are capitation models which include an organization that receives a fixed payment on a per member per month basis for all members under its care. Under these models, if those 200 FTE physicians manage a panel of 50,000 patients, and the organization is reimbursed $166.67 per patient per month, that organization receives a total annual payment of $100 million.
Under these models, the organization receives a fixed payment regardless of its costs, assuming it has the same number of patients. An organization can only increase top-line revenue through growth in the patient population served, so compensation models tend to be a combination of fixed and variable. Specialists might be paid on a salary-type model (with or without incentives), while primary care providers might be paid on an acuity-adjusted panel size model whereby physicians are incentivized to take on more patients and grow the total capitated revenue of the organization.
These models may also include incentive payments tied to care coordination, quality outcomes, cost controls/reductions of unnecessary or inappropriate services, and the like.
The table below summarizes the options discussed. Note that the compensation models in the right-hand column are the most predominant compensation model structures for a particular reimbursement model. However, other models may be more appropriate depending on the facts and circumstances impacting the subject organization.
In addition to designing compensation models that allow for maximum revenue potential, organizations must enact robust change management processes to ensure their providers are not lost in the transition to a new compensation model. Providers need to understand the rationale behind the new models and how their efforts contribute to both patient care and financial success for the organization and the providers. Regular feedback loops and performance evaluations can help providers track their progress and make necessary adjustments.
As healthcare continues to shift toward value-based care, designing an effective compensation plan is becoming increasingly crucial for provider organizations to thrive under these alternative payment models. The suitable model for your organization might vary significantly from the compensation structure observed at the neighboring health system. This is especially true considering both organizations could be positioned at distinct points along the risk continuum.
The key success driver is for organizations to design models that will help them be successful wherever they are on the continuum. By aligning incentives with patient outcomes, leveraging innovative strategies to provide more cost-effective care, and adapting to changing market dynamics, organizations can optimize revenue and physician-earning opportunities while delivering high-quality care to their patients.
Written by Nick Shannon, ASA, and Joel Gomez, ASA
Earlier this year, the United States Attorney’s Office Eastern District of Michigan issued a press release regarding a False Claims Act settlement involving a regional hospital system and physicians. Specifically, Covenant Healthcare System paid $69.0 million to settle allegations in 2021 under the False Claims Act related to improper financial relationships with eight physicians and a physician-owned investment group. In addition to the False Claims Act, there were specific allegations pertaining to the Anti-Kickback Statute (AKS) and The Physician Self-Referral Law (Stark Law).
One component of the allegations included a medical equipment lease arrangement between Covenant and the physician-owned investment group. It was alleged that Covenant permitted the group to structure the equipment lease under non-arms-length negotiations with the purpose of inducing patient referrals.
Many health systems and physicians/physician groups pursue lease arrangements to provide flexibility in assessing long-term relationships and to reduce capital expenditure at the outset of an employment agreement. These agreements may include traditional personal property fixed asset leases, such as furniture, fixtures, and equipment, or material capital asset leases such as major movable medical equipment. With the increased popularity and projected growth of medical equipment lease agreements, there is the possibility of increased scrutiny and consideration of whether these agreements comply with federal laws.
The structure of the equipment lease transaction has a significant impact on fair market value requirements, as well as other tax, accounting, and financial reporting requirements. When planning an equipment lease arrangement all parties involved should consider the following:
For federal income tax purposes, the Internal Revenue Service (IRS) has established guidelines for “true leases” or “fair market value lease.” This guidance specifies that a true lease, or operating lease, involves a lease transaction where the lessor is deemed the owner of the asset and receives all depreciation and tax benefits. Guidelines to consider for true lease classification include:
If the above guidelines are not satisfied, a lease transaction would be considered a non-tax lease, or capital lease, where depreciation and tax benefits fall with the lessee.
Another consideration, for both a potential lessor and lessee, is to evaluate the accounting treatment and impact for a particular classification of the lease. For example, a potential lessee interested in reporting a capital lease for financial reporting purposes would need to confirm at least one of the following criteria:
Alternatively, if the potential lessee cannot confirm any of the above criteria, they would classify the lease as an operating lease.
Once the appropriate equipment lease structure is determined the underlying details of the arrangement should be evaluated considering Stark and AKS, assuming the potential for financial and referral relationships between the parties.
Under Stark Law Section 42 CFR § 411.357(b) exceptions to the referral prohibition related to compensation arrangements subset (b) Rental of Equipment states that equipment lease arrangements do not constitute a financial relationship if the payments made by a lessee to a lessor meet the following requirements:
Similarly, AKS Section 42 CFR § 1001.952(c) outlines safe harbor related to equipment rental by meeting the following six standards:
In summary, the absence of arms-length negotiations could imply equipment lease payments constructed above or below fair market value, and therefore, not meeting Stark exception requirements under Rental of Equipment that states, “The rental charges over the term of the agreement are consistent with fair market value.”
Stark Law defines fair market value, with respect to the rental of equipment, as “the value in an arms-length transaction of rental property for general commercial purposes, consistent with general market value.”
In addition, AKS prohibits soliciting or receiving remuneration “in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a federal healthcare program.”
By Anthony Domanico, CVA, and Ben Minnis
VMG Health was published in the American Association of Provider Compensation Professionals (AAPCP) 2023 Journal of Provider Compensation. The section, “How to Measure Acuity-Adjusted Panel Size for Contemporary Provider Compensation Plans” was written by VMG Health experts Anthony Domanico and Ben Minnis.
In their section, Domanico and Minnis offer a detailed examination of diverse panel size approaches and important factors to consider when incorporating these metrics into a compensation plan. As organizations take on greater financial responsibilities in payer agreements, it is vital to ensure that incentives harmonize with compensation plans.
The second edition of this journal provides an in-depth analysis of issues such as financial pressures medical groups are facing, optimal timing for adopting a new Medicare Physician Fee Schedule, whether wRVU-based compensation plans remain the guiding principle for employment arrangements, and concerns about the emerging physician shortage. The five articles published in this edition all passed through a rigorous framework to ensure quality analysis.
For additional guidance related to provider compensation design or any other valuation, strategy, or compliance services, our expert Anthony Domanico would be happy to assist. Please email him at anthony.domanico@vmghealth.com to learn more.
By James Tekippe, CFA – VMG Health, and Courtney Stokes, JD, MHSA – Kathleen L. DeBruhl & Associates, LLC
The following article was published in the American Bar Association Health Law Section’s eSource.
Prior to the onset of the COVID-19 pandemic, the issue of career fatigue was already a growing concern for physicians and healthcare systems. In 2018, a survey conducted by The Physicians Foundation reported that 31% of physicians indicated they often have feelings of burnout. Fast forward a few years into the pandemic, and in the 2022 edition of this survey, this number has jumped to 62% of respondents indicating that they often have feelings of burnout. This growth in burnout is a major concern as physician burnout negatively impacts physicians’ well-being, decreases the quality of care physicians provide, and contributes to older physicians retiring earlier than anticipated and younger physicians leaving the field altogether. While many of the reasons for these results were present before COVID-19, the pandemic has brought this discussion into new context and importance.
This is the first in a three-part series on physician career fatigue and mental health issues. This article will examine four of the major causes of career fatigue for physicians: administrative burdens, including those created by the advent of electronic health records (EHRs), the increase in violence in the healthcare setting, the continued industry-wide staffing shortages, and the persisting stigma associated with seeking treatment for a mental health condition or substance use disorder. While there are no simple answers or quick fixes for these issues, this article will include a discussion of potential solutions that various stakeholders around the country are adopting in an attempt to positively address physician career fatigue and burnout.
Written by Haley Condon and Jen Johnson, CFA
The Centers for Medicare and Medicaid Services (CMS) will finalize the rule to establish a “Birthing-Friendly” hospital designation in fall 2023. While the motivation for the designation comes from the White House Blueprint for Addressing the Maternal Health Crisis, it gives hospitals the opportunity to experience a more favorable payor mix in their OB/GYN and laborist programs by improving the quality of care. As a result, we will see hospitals build strategies around incentivizing physicians to help them hit quality targets.
The new designation will be awarded to hospitals that answer “Yes” to both parts of the Maternal Morbidity Structural Measure question. The question focuses on two key points:
With a maternal morbidity rate that increased to 32.9 deaths per 100,000 live births in 2021, it is no surprise that women are conscious about safety and quality when considering where they will give birth [2].
According to a 2018 report, a large majority of mothers used quality care information to help compare facilities and providers when creating their care plans {3]. Additionally, several websites advise the top things to look for when selecting a birthing facility. These sites list many important factors to consider such as the hospital’s quality of care, C-section rates, clinical excellence in labor and delivery, pain relief choices, NICU and emergency capabilities, high-risk services, and the length of stay after birth [4,5,6,7]. These repeated recommendations to evaluate hospitals based on these topics and their overall quality of care demonstrates that mothers want the best care possible for themselves and their children when giving birth. This data shows that when given the choice women are most likely to select a facility recognized for its maternal and fetal safety.
Obtaining a “Birthing Friendly” designation will draw in both mothers and better-contracted rates. According to a Kaiser Family Foundation study, “private insurers pay nearly double Medicare rates for all hospital services, ranging from 141% to 259% of Medicare rates” [8]. Attracting more patients with private insurers is a step toward increasing collections, which is a welcome strategy as many hospitals experienced significant losses in 2022 [9].
In the eyes of patients with commercial payors, hospitals that obtain a designation for high-quality birthing services can cause them to become ideal birthing destinations. In addition, the “Birthing-Friendly” hospital designation provides hospitals the opportunity to increase the value of their services for their patients while taking a financially viable action. The “Birthing-Friendly” hospital designation allows for an intersection between the quality of care and financial motivations. While seeking the designation might allow hospitals to assist their bottom line, it will also provide access to medical care that prioritizes the safety of the mother and child. The designation will inevitably motivate hospitals to integrate value-based metrics into their physician compensation structures.
While value-based care arrangements do not make up most arrangements in the healthcare industry, they are continuing to rise in prevalence. According to a Deloitte survey, 41% of provider organizations’ overall revenue was tied to value-based models, up from 38% in 2020 [10].
Additionally, a 2022 MGMA survey showed that 81.45% of the single specialty physician practices surveyed participated in commercial value-based programs and 85.80% participated in government value-based programs [11]. The increasing push for value-based payment structures is supported by CMS’ goal to have 100% of Original Medicare beneficiaries, and the majority of Medicaid beneficiaries, in accountable care programs by 2030. The Birthing Safe Hospital designation program provides an opportunity for hospitals to develop strong value-based arrangements in their laborist programs by using the designation’s requirements as a guideline.
When considering a value-based compensation arrangement with their physicians, it is important that hospitals ensure their arrangements are consistent with fair market value. This means they will need to select strong, outcome-driven quality metrics if they want to tie financial incentives to these metrics. Selecting metrics that are recognized in the industry and are measurable is the best way to ensure a compliant, successful physician incentive program.
In order to encourage buy-in, physicians should be a part of the selection process when choosing metrics. They will also need to be educated on what makes a strong metric from a valuation perspective. Once the quality metrics have been selected, an analysis should be conducted to ensure any compensation tied to the metrics is consistent with fair market value. The stronger the metrics, the more support can be provided for higher compensation levels.
Factors that make physician-based quality metrics strong include metrics that are outcomes-based, nationally measured, and physician driven. The major value considerations when assessing these arrangements from a fair market value perspective include market data for similar arrangements, historical performance for the service line, and industry-wide benchmarks. A good starting point when developing a program includes metrics that are the current focus of National Perinatal Quality Improvement Programs and other obstetrics quality improvement initiatives. These programs’ metrics include reducing C-section rates for low-risk pregnancies, reducing induced deliveries before 39 weeks, reducing the use of episiotomy, and increasing the percentage of deliveries that have a postpartum visit between seven and 84 days after delivery [13, 14].
CMS plans to award the “Birthing Friendly” designation to facilities that demonstrate a “commitment to the delivery of high-quality, safe, and equitable maternity care” [1]. This new designation will impact reimbursement and will inevitably create new strategies for hospitals attempting to align with their OB/GYNs. As with most physician alignment strategies, financial incentives will likely come into play. VMG Health expects to see quality incentives as part of compensation design initiatives, and a proliferation of service line co-management arrangements in the OB/GYN space. Key components in developing a hospital’s strategy around obtaining this designation will include collaborating with physicians, understanding industry-recognized benchmarks, and assessing market data around these types of incentives.
Written by Sydney Richards, CVA, Clinton Flume, CVA, and Patrick Speights
Orthopedics-focused ambulatory surgery centers (ASCs) are one of the fastest-growing segments of ASCs [1]. Orthopedics simplistically is the diagnosis, treatment, prevention, and rehabilitation of musculoskeletal system injuries and diseases. This specialty is evolving quickly to leverage demographic, payor, and technological marketplace shifts. Though the industry is still highly fragmented across the United States, VMG Health continues to see a demand for affiliations with strong orthopedic groups emerging from diverse contexts such as health systems, nationwide ASC operators, and private equity groups. Many orthopedics groups are considering whether now is the right time to pursue an affiliation or acquisition and how much their business could be worth to a potential buyer. Below, VMG Health experts highlight a few of the key trends impacting orthopedics providers in the U.S. We also identify what makes an orthopedics group attractive (Hint: It’s not just about the bottom line).
Compared to other specialties, orthopedics was hit disproportionately hard by the deferment of elective procedures during the COVID-19 pandemic and subsequent labor shortages. Through the second quarter of 2023, many markets have stabilized and recovered to pre-pandemic volumes. Over the next decade, orthopedics providers will continue to face unprecedented demand growth fueled by the aging population. Geriatric patients are naturally more susceptible to injury and disproportionally experience degenerative joint conditions compared to younger populations. As the population age shifts and there are continual technological innovations, people will live and work longer, which will create increased demand.
The population-driven demand for orthopedics services is further exacerbated by innovations and regulatory changes in the industry, such as the migration of inpatient-only procedures to ASC settings. It is estimated that moving total joint replacement cases from hospitals to ASCs lowers the cost of care by approximately 40% while maintaining the same outcomes [2]. As a result of this significant savings opportunity, around the beginning of 2019 [3] many commercial payors began requiring cases to be performed in ASCs rather than hospital surgery departments unless the latter were medically necessary due to complications or comorbidities. Medicare is also increasingly willing to pay for ASC procedures. For example, total knee replacements were approved for ASCs in 2020 and total hips were approved in 2021. Although the reimbursement is lower in an ASC than it would be in a hospital setting, according to VMG Health’s ASC benchmarking analysis, orthopedics cases are the highest-reimbursing cases performed in ASC settings nationally [4]. Many physicians also prefer operating in a specialized ASC setting where they can control the patient experience and operating room setup and earn returns for driving efficiency in expenses and operational metrics. As shown in the data below, in response to these opportunities orthopedics-focused ASCs are among the fastest-growing types of ASCs, along with cardiology and pain management. Nationwide, providers are investing heavily in the equipment and unique buildouts required to specialize in orthopedics, such as 23-hour-stay recovery suites.
To service the forecasted demand volumes and ensure that capital spent developing orthopedics-focused ASCs is optimized, there is a growing demand for orthopedic medical groups among private equity representatives, ASC operators, and health systems alike. Physicians are also increasingly interested in partnerships. Macroeconomic factors, such as inflation and rising costs of capital, compound the already burdensome administrative challenges facing healthcare providers. Factors such as declining reimbursement, shifts in payment models (fee for service, bundle pricing, value-based care), labor shortages, rising medical supply costs, and retiring providers have boosted physicians’ desires for partnerships. In choosing the most appropriate alignment model for partnership, physicians will be interested in monetizing their business’ equity and structuring their compensation package and strategic partner’s future vision.
Stakeholder alignment with orthopedic groups focuses on several key factors, a few of which are outlined below. While this is not an exhaustive list, the topics below highlight many salient considerations and value drivers for a medical group affiliation:
Below we have outlined private equity, hospital, health system, and corporate entity stakeholders and the value they may attribute to alignment with orthopedics groups.
Orthopedics is one of the most active segments of the healthcare services industry for private equity investment. Compared to other clinical subspecialties, orthopedics remains highly fragmented across the nation. Moreover, the strong demand discussed above and a growing shortfall [5] of physician supply create highly favorable investment opportunities for private equity platforms seeking to form strategic partnerships with independent orthopedic groups. Below we have included a summary of the trending count of orthopedics-centered private equity deals in recent years.
For many health systems, partnering with orthopedic physician groups provides an opportunity to partially recapture profitable inpatient cases, as they have transitioned to physician-owned ASCs. We have seen numerous care models evolve and expand recently, such as joint ventures with local orthopedics groups to construct de novo, highly specialized orthopedic surgery centers. The benefits of such an arrangement could include the following:
For ASC operators, orthopedic group partnerships represent an opportunity to gain market share and leverage their existing ASC expertise. The benefits of partnering with ASC operators could include the following:
The right partnership can provide orthopedics groups with access to resources and expertise to improve their competitive advantage and patient care through the relief of administrative burdens and improved financial stability. Physicians should consider their long-term goals when evaluating potential partnerships and offers. For future stakeholders, including corporate entities, health systems, and/or ASC operators, the potential value of an orthopedics group extends beyond the bottom line of the organization. By joining forces, orthopedics providers and their partners can bridge the gap between expertise and resources. Alignment with the right partner can improve patient outcomes and elevate the standard of care for orthopedic patients at a more efficient cost.
Written by Debra Rossi, CCS, CCS-P, CPC, CPMA
Prior to approving reimbursement for joint replacement surgery, CMS (and most commercial payers) typically require patients to undergo a period of conservative therapy or non-surgical treatments. The purpose of this requirement is to ensure that surgery is considered only when other treatment options have been exhausted or deemed ineffective.
The specific requirements for conservative therapy may include:
Please note that the requirements outlined in the CMS NCD are specific to Medicare coverage for joint replacement surgeries. Private insurance plans may have their own coverage policies and criteria. Additionally, these requirements may be subject to updates and revisions, so it’s essential to consult the most current CMS guidelines or to seek guidance from the relevant healthcare authorities for the most up-to-date information.
When a primary surgeon utilizes an assistant at surgery documentation plays a vital role in ensuring proper communication, accountability, and compliance with regulatory requirements.
Documentation elements that a primary surgeon should provide when utilizing an assistant at surgery include:
It’s important to note the specific documentation requirements may differ based on local regulations, facility policies, and the requirements of insurance providers or regulatory bodies. Surgeons should consult the relevant guidelines and protocols specific to their jurisdiction and healthcare facility to ensure compliance with documentation requirements when utilizing an assistant at surgery.
Written by Brad Witt, CPA
The dermatology market has long stood out as an attractive space for private equity (PE) firms due to its continuous year-over-year revenue growth rate, and an expected 2023 CAGR of 13.4%, showcasing the potential for substantial returns [3]. Driven by rising demand for specialized skincare services and advancements in treatments, the industry is experiencing a robust growth trajectory due to PE’s interest in the sector’s potential for generating substantial returns and its proven resilience in the face of economic fluctuations (e.g., COVID-19).
The dermatology market’s allure lies in its promising market dynamics, including opportunities for consolidating practices, leveraging economies of scale, and optimizing operational efficiencies. Additionally, the growing consumer awareness and emphasis on skin health have contributed to a robust and expanding market demand. With relatively favorable reimbursement structures, evolving regulations, and technological advancements supporting the sector, PE firms are keen to invest in dermatology practices and capitalize on their growth potential.
Since 2011, the dermatology sector has witnessed robust market activity and this trend shows no signs of slowing down. According to Pitchbook’s analysis of transaction activities and deal flows in the dermatology space, there were 134 private equity transactions recorded between 2020 and 2022, indicating a strong and consistent demand for investment when compared to the 171 transactions between 2017 to 2019. However, it is important to note these figures only include transactions that are strictly related to dermatology practices and do not include med spas or other aesthetic services. Additionally, even with the significant deal flow in the space, the market remains highly fragmented with no single participant owning 1.0%+ of the total market [3].
The growth and stability of the dermatology industry is fueled by several factors. First, the market itself is highly fragmented, as outlined above. Additionally, the industry benefits from an aging population with over 69% of dermatology patients being over the age of 40 [2]. Considering this age group accounts for 47.9% of the entire U.S. population in 2020 (U.S. Census Bureau), the demand for dermatological services is poised to rise. Moreover, the limited number of board-certified dermatologists further amplifies the favorable supply/demand dynamics [2]. Another driving force is the increased awareness of skin health due to more individuals recognizing the importance of early detection and treatment. For instance, skin cancer affects approximately 9,500 Americans daily with annual treatment costs estimated at $8.1 billion [6]. Consequently, the robust demand for dermatological services persists and ensures the industry’s continued growth.
It is interesting to note that while the demand and activity within the space are undoubtedly high, the Medicare reimbursement rates have decreased by roughly 10% between 2011 and 2021. In a peer-reviewed study published in 2022, doctors found management codes and both procedural and evaluation experienced an average decline in reimbursement over the span of 10 years. Out of the 20 codes tested, 15 had a higher average decrease in reimbursement [4]. However, it is important to mention the author also noted that this decrease is in line with similar trends observed in other medical specialties, albeit to a lesser extent.
A separate study on reimbursement rates between 2000 to 2020 further supports and confirms the overall decrease in reimbursement rates. This study identifies the decline was primarily attributable to changes in valuation by the relative-value scale update committee and healthcare policy changes aimed at reducing reimbursement. Additionally, the authors emphasized that reimbursement for other healthcare sectors experienced more significant decreases. For example, emergency medicine experienced a decrease of 29% over the same period [5].
Private equity firms can add significant value to dermatology practices by streamlining administrative functions, leveraging their business expertise, and capitalizing on marketing and cross-selling opportunities. By consolidating practices to include the currently untapped cosmetic sub-industry, PE firms can utilize fresh capital pools. This can create platform companies to capture more market share and scale administrative tasks which allow dermatologists to focus on patient care. However, aligning goals between physicians and PE partners and maintaining long-term practice stability are essential considerations.
GarMark Partners was founded in 1997 as a mezzanine investment firm and is headquartered in Stamford, Connecticut. GarMark provides junior debt and structured equity capital to middle-market companies with over $1.4 billion of capital invested across their entire portfolio, and over $685.0 million is within the healthcare space. GarMark’s goal is to employ flexible investment strategies that encompass a wide range of transaction types along with deep expertise in investing across the capital structure to achieve long-term business success. GarMark has completed three investments related to the healthcare industry, including dermatology, pediatrics, and nutrition.
The Dermatology Specialists (TDS), located in New York, New York, was founded in 2019 and is now the largest dermatology practice in New York City. The practice specializes in both medical and cosmetic treatments in the field of dermatology with over 30 locations across Manhattan, Brooklyn, Queens, the Bronx, and Long Island.
ACE & Company (ACE) was founded in 2005 and is headquartered in Geneva, Switzerland. With over $1.7 billion of assets under management across over 150 companies worldwide, ACE’s goal is to leverage its relationship with top investment firms, corporate partners, and entrepreneurs to provide private investors with exceptional investment opportunities and solutions. ACE has completed six investments related to the healthcare industry, including healthcare IT, dermatology, pediatrics, and laboratory services.
MedSpa Partners (MSP), located in Toronto, Canada, was founded in 2019 and is the operator of an acquisition platform intended for medical aesthetic clinics. The platform acquires medical spas and cosmetic dermatology clinics. MSP focuses on providing support in areas such as clinic management, marketing, business intelligence, legal, and others to enable its acquisition partners to achieve their goals and create valuable customer experiences.
The dermatology market is poised for continued growth with favorable industry trends offering significant opportunities for building and scaling platforms. However, the scarcity of board-certified dermatologists may pose challenges in initial hiring and retention. Adding cosmetic services to complement medical-surgical dermatology is expected to unlock untapped growth potential. As mergers and acquisitions reshape the landscape of dermatological care, these activities will drive advancements in patient care, fostering innovation, and unlocking new avenues for growth.
