Ophthalmology Is Ripe for Roll-Up and Consolidation

September 7, 2017

Private equity firms have been looking for new healthcare markets with growing platforms to generate returns for their investors. Over the past several years, specialty physician practices such as dermatology and dental have been active markets. Recently, ophthalmology has become a focal point for private equity firms, for many of the same reasons the other aforementioned sub-specialties have been active areas. The combination of a fragmented market, a high-margin industry, an increasing demand, and the majority of cash and private pay procedures are all key factors that present an opportunity for premium returns on investment in this industry.

Ophthalmology Industry Overview

Private equity firms have been attracted to ophthalmology because it is a fragmented industry where independent ophthalmologists control a majority of the market share. Market research shows independent eye care providers perform approximately 68% of total eye care services (“Vision Industry Update” 2). This fragmented landscape creates an opportunity to generate economies of scale through industry consolidation. For the independent ophthalmologist, it can be difficult to compete by staying up-to-date with new technological advances which can carry an expensive price tag. Private equity firms through consolidation are able to leverage not only capital expenditures but also administrative and back office functions (marketing, billing, supply inventory, compliance, etc.) across multiple locations. In addition, consolidating the fragmented market should result in a larger market share which increases ones negotiating power with payors and ultimately improves reimbursement rates on commercial payor contracts.

Ophthalmology industry has seen a steady growth of approximately 4-5% annually, and accounts for approximately $12 billion of a $36 billion vision industry (“Vision Industry Update” 4-5). This growth is primarily driven by an aging population, growing coverage of vision care, as well as higher rates of glaucoma, cataracts, and macular degeneration. By 2020, there will be approximately 56 million Americans over the age of 65, up from approximately 43 million in 2012, a compounded annual growth rate of 3.4% (Ortman et al. 26). Given many ophthalmological issues arise from aging, the industry is poised for continued increases in demand. Furthermore, the affordable care act offers vision insurance to more people, thus reducing patient out-of-pocket expenses and spurring demand.

Elective, cash pay ancillary services in ophthalmology allow for direct business-to-consumer marketing, while annual vision check-ups for patients wearing contacts and/or glasses, offers a solid foundation for recurring cash flows. Elective vision correction surgeries, such as LASIK, are typically not covered by commercial or governmental payors. Therefore, the patient must pay for some, or all, of the elective surgery out-of-pocket. In addition, with the uncertainty surrounding reimbursement rates, administrative costs, and legal issues, more providers are opting out of the CMS reimbursement system and are accepting exclusively private payors. The high-margin elective procedures contribute to the allure of ophthalmology practices as investment platforms.

Investment Considerations

Given the aforementioned bullish industry trends, private equity firms are able to contribute their own benefits to the partnership as well. Private equity firms understand the growing administrative demand of independent physicians managing their own business. These investors can utilize investments in platform companies as a means to scale the administrative functions, allowing the provider to spend more time on patient care. Secondly, the Medicare reimbursement model change from fee-for-service to value-based care will require more compliance and physician investment in quality reporting initiatives. As discussed, the majority of ophthalmology practices are independent and can lack the infrastructure to comply with said reporting initiatives in an efficient manner, thus becoming at risk for a decrease in Medicare reimbursement. Through consolidation private equity firms are able to scale quality reporting requirements across many locations to optimize performance. Thirdly, investments from private equity firms can aid in the shift in physician lifestyle. For physicians approaching retirement, investment can help evaluate a buyout and provide a smooth succession. For younger physicians, investment can give one a more flexible work schedule and secure practice setting without the stresses of managing a practice. In addition, private equity firms have much greater access to capital than independent ophthalmologists, and therefore, can more quickly invest capital in order to adapt to market demands rather than requiring physicians to take on substantial risk by borrowing money equal to or greater than their net worth. Lastly, efficiency will be key since there is projected to be a shortage of approximately 5,000 ophthalmologists by 2020 (“The Physician Workforce” 29). Ophthalmology practices backed by private equity investment will be able to reduce or eliminate most administrative burdens, and provide clinical resources such as leveraging non-physician providers across multiple locations to efficiently meet demands.

Of course, the physician specific risks need to be considered when evaluating whether a private equity partnership makes prudent business sense. For example, there are generational issues where a buyout may make sense for physicians close to retirement whom are seeking to cash-out on their retirement; however these same issues may not be desirable for young physicians whom are just beginning their career and do not want to forego certain future earning opportunities. The physicians’ financial and career circumstances need to be aligned for investments to succeed. Moreover, there is a possibility that physician motives shift after a private equity investment due to internal or external pressure to meet for-profit performance. Furthermore, as a highly fragmented industry with sometimes intense local market competition, no two markets are the same so a business model that is successful in one geographic area may not be successful in others.

From a financial perspective, gaining an in-depth understanding of the ophthalmology market as well as identifying the main value drivers are important first steps in evaluating any potential transaction. Given the growing trend of ophthalmology consolidation, coupled with the healthcare regulatory scrutiny, it is critical that the purchase price of an ophthalmology practice, post-transaction physician compensation, and management agreement be consistent with fair market value. Undergoing a comprehensive due diligence process will not only assist with compliance but also assist with making a sound business decision.

Despite these potential challenges, private equity does offer a viable, new option for ophthalmologists to consolidate. The opportunity to consolidate a fragmented industry and create economies of scale to meet the increasing demand and grow revenue streams are all compelling factors for private equity investment in ophthalmology. The ophthalmology market provides opportunities for both physicians and private equity firms to boost performance and ensure the industry is well-positioned to take advantage of future market opportunities.


Ortman, Jennfer, Victoria Velkoff, and Howard Hogan. “An Aging Nation: The Older Population in the United States.” Published May 2014.

The Physician Workforce: Projections and Research into Current Issues Affecting Supply and Demand.” U.S. Department of Health and Human Services. Published December 2008. bhw.hrsa.gov/sites/default /files/bhw/nchwa/projections/physiciansupplyissues.pdf

Vision Industry Update.” Harris Williams & Co. Published March 2017. www.harriswilliams.com/ sites/default/files/content/hcls_vision _industry_overview.pdf.