Cardiology and the Mounting Interest from Private Equity

Cardiology has been described as the “hot commodity” among private equity groups looking to increase investment in healthcare. Factors including significant patient demand for the services, more procedures shifting to outpatient settings, and the smaller number of existing independent practices compared to cardiologists working for health systems, have fostered competition in the sector and driven valuations higher than in any other specialty. A number of private equity firms have established platforms including Webster Equity Partners with Cardiovascular Associates of America, Ares Management and US Heart and Vascular, and Varsity Healthcare Partners and Partners First Cardiology.

Patient demand for cardiology services is expected to continue rising, and quickly.

People are living longer than at any other time in human history but that doesn’t mean adults are healthier compared to previous generations. The American Heart Association estimates nearly half of U.S. adults are living with some form of cardiovascular disease. The Centers for Disease Control and Prevention also estimates that 47% of adults have hypertension, a condition that increases the risk of problems like heart attacks and strokes.

Common risk factors for heart problems include diabetes or carrying excess weight, and both conditions are on the rise. The National Institutes of Health says 1 in 3 Americans has prediabetes, and the CDC estimates 73% of U.S. adults are either overweight or obese.

Add this to the fact that America’s population is getting a lot older, and cardiovascular disease is more common among people over age 65 (per the National Institute on Aging). The Census Bureau projects more than 70 million Americans will be 65 or older by 2030, including all Baby Boomers. And as reported in the Journal of the American College of Cardiology, medical advancements have made it possible for chronic cardiovascular disease patients to live a lot longer – those patients are going to need recurring care from cardiologists.

According to data published in Circulation, the majority of cardiology services (54%) are paid for by public insurance plans like Medicare. The people most likely to need heart care, which are adults over age 65, account for 86% of Medicare beneficiaries, per the Centers for Medicare and Medicaid Services, and Medicare is reliant on Congress for its funding. (Medicare payment rates were cut by 2% for 2023, with a 1.25% cut planned for 2024, per the AMA).

“Cardiology groups depend heavily on federal government-supported payers and insurance, and reimbursement rates are always in the crosshairs,” said Tim Attebery, CEO of Cardiovascular Associates of America. “But offsetting that is this expansion of services leaving the hospital.” 

Outpatient care is changing the game in cardiology.

Technological advancements in cardiology have created a new world of possibilities for providers and their patients, as well as for investors. Procedures that were once restricted to hospitals can now be performed in ambulatory surgery centers (ASC) and office-based labs (OBL).

A major turning point came in January 2020 when a CMS decision took effect. The federal agency ruled that percutaneous coronary interventions (PCIs) could be “safely performed in an ASC setting,” and added several CPT codes for CMS reimbursement. 

“When technology and physician capability line up, coupled with the desire of physicians and patients to move services to outpatient settings, I think the convergence empowered CMS to make these changes,” commented John Tiedmann, a Director and senior member of Brown Gibbons Lang & Company‘s healthcare and life sciences investment banking teamwho primarily works with physician groups. 

“There have long been services you could perform in the ASC, like implanting pacemakers and defibrillators, but there wasn’t necessarily enough work to be done in a single-specialty ASC to make it viable from a cost or volume standpoint,” Tiedmann continued. “But now that CMS has added cardiovascular CPT codes to the ASC, you’re starting to see a real need for more of those outpatient facilities, which is all driven by the overarching themes of cost savings, convenience, and efficiency.”

It’s less expensive to perform procedures in an ASC because the overhead costs are lower compared to a hospital, explained Attebery, whose experience includes serving as a hospital CEO for six years. “In a hospital, you need a certain amount of volume just to break even because of fixed costs like building maintenance and minimum staffing. If you can set up an ambulatory surgery center and cath lab as a substitute for the hospital, you can take 30-40% of hospital-based, invasive and interventional, procedures and move them out at a far lower cost.”

Cardiology-specific ASCs have become far more common in a very short amount of time. There were just 18 of them in 2017, but that number ballooned to nearly 90 just two years later, according to a report published in the National Law Review.

According to a 2021 analysis by UnitedHealth Group, moving common procedures from hospitals to ASCs would reduce costs by 59%, saving insurance payers and patients money. 

Physician groups stand to benefit from this trend, as well. Diagnostic and Interventional Cardiology (DAIC) reports more than 90% of ASCs are “physician equity owned.”  

“We’re going to see more and more procedures pushed into these outpatient settings,” said Roger Strode, a partner and health care M&A lawyer at Foley & Lardner. “That’s also going to benefit the investors and the physicians who own those facilities.”

“You’re really seeing an opportunity for private equity to come in and help cardiology groups grow,” Tiedmann added. “Cardiology is ripe for not only consolidation but investment in the diagnostics and the facilities necessary to enable a further shift to the outpatient environment.” 

Independent cardiology groups are a minority.

More than 70% of cardiologists work for hospitals and other health systems, according to the American College of Cardiology, with 20-25% involved with independent practices. 

As Attebery pointed out, this is part of what makes cardiology, in his words such a “hot asset commodity.” Entering the cardiology space is tricky because there simply aren’t that many practices available to acquire, and platforms like his, Cardiovascular Associates of America (CVAUSA), don’t target hospital systems. 

Attebery made the argument that a private equity-backed national platform can provide cardiology groups with the resources they need to grow without necessarily losing their independence. “Independent groups see the consolidation affecting the big health systems, big insurance companies and risk-bearing organizations, and consider how they’ll be able to compete.” 

“Who you partner with makes a difference,” Attebery continued. “The company that’s supporting us, Webster Equity Partners, has a pro-physician approach. When we make a deal with a physician group, they maintain operational and clinical autonomy.” 

However, one of the challenges to private equity is that many cardiology groups are merging with each other, instead. As of this writing, Levin Associates’ proprietary platform which tracks healthcare mergers and acquisitions in real-time, displays 39 deals made in the cardiology sector in the U.S. since 2012. The majority of the deals have been between physician groups, rather than with private equity-backed groups like CVAUSA

Consolidation has been an ongoing trend over the last decade. A 2020 report in the Journal of the American College of Cardiology found that between 2013 and 2017, the total number of practices with a cardiologist shrank from 8,642 to 7,709 and the number of cardiology practices with fewer than 10 physicians also dropped as groups merged. 

“Many of these cardiologists have already been down the hospital route and they’re not crazy about working for somebody else. It’s strength in numbers,” Strode said. “They think, ‘If I can stave off having to sell my business to a private investor and I can have a physician-run and physician-led organization, that’s what I’d rather do.’”

For some physician groups who are not interested in partnering with private equity, “the thought process is that they need to scale in order to retain independence and remain viable in the market,” Tiedmann said. He added that others view the onset of private equity in the space as “inevitable” and perhaps want to make their physician groups larger, and therefore making them more attractive when eventually considering a private equity deal.

“We’ve done a lot of work in physician group mergers. Oftentimes the end goal is to create something that is in effect more attractive to the market,” Tiedmann said. “Cardiology groups want to control their own destiny, and some may wish to be in a position where they can become the platform if they decide to partner with private equity, as opposed to becoming an add-on for an existing platform.”

Competition in cardiology has resulted in elevated valuations.

“If you look at where we are right now, there are maybe 350 independent cardiology groups of any significant size in the U.S., with perhaps half of them sitting on the sidelines not looking to make a deal yet,” Attebery said as he described the state of the cardiology sector.

“All the private equity firms that are trying to build cardiology platforms are all chasing the same game,” Attebery continued.  “Private equity folks would say that for most assets, getting an EBITDA multiple of 8, 9, or 10 is good. But many cardiology groups are doing a lot better than that.” 

“Valuations in cardiology have just been absurd because of the scarcity value,” agreed Abe M’Bodj, a Director at Westcove Partners. “It’s very deal-specific, but deals are safely in the double digits for even small practices. I’ve even heard of 20 times multiples of EBITDA in some situations, but I think in general, practices can expect to be in the 12-14 times range in most instances.” 

“We refer to practices as either platform practices or add-on practices,” Strode weighed in. “For platform practices, you see double-digit multiples of EBITDA.” He added that if a group owns ancillary services, that could bolster the final sales price as well. 

Tiedmann agreed that platform-level deals have been trading for 13 to 15 times EBITDA. “I think what you’re seeing right now is some jockeying in the market. Cardiology is consolidating faster than any other specialty we’ve seen, and we’re seeing investors pay more just to get in.” 

Tiedmann continued, “Some of the private equity firms are also going atypical from their normal investment strategies. If they can’t find a cardiology group that is big enough to be a standalone platform, they’ll instead focus on finding several practices with 1-5 cardiologists and use those to build the foundation for a platform.”

M’Bodj also brought up this investor strategy – noting that it’s possible that down the line, platforms created by private equity-backed groups could attract hospital-based cardiologists. He said that as more procedures shift to outpatient settings, it could inspire cardiologists to consider where they want to treat patients. 

“It’s scary, and expensive, to go back into independent medicine,” M’Bodj explained. “So I think a lot of private equity groups are thinking, ‘Will the more than 70% of cardiologists employed at health systems start to transition back to community-based settings, and if they do, can we build platforms for them to join?’” 

Another factor influencing consolidation decisions and valuations is the looming shortage of cardiologists in the United States. 

What does the future hold for cardiology?

Another factor influencing consolidation decisions in this sector is a looming shortage of cardiologists. Physicians Thrive’s 2022 Physician Compensation Report projects that cardiology will have the highest shortage of physicians, compared to every other specialty, over the next decade. The group predicts that by 2025, there will be 7,080 fewer cardiologists than the healthcare market needs.

“We’re going to have this net decrease, with more cardiologists retiring than graduating. I think it means the enterprise has to get smarter about how it approaches team-based care,” Attebery said. “We have to make cardiology units more expandable and flexible so they can take care of more patients.”

Both Attebery and Tiedmann theorized that one way to manage a shortage of cardiologists and meet patient demand is to leverage advanced practitioners, including physician assistants and nurse practitioners, within cardiology practices. They both pointed out that private equity investment could serve as the solution for smaller independent practices lacking the resources to build a support staff and scale up.

“For independent practices, you have to have the outpatient facility to perform the procedures.  “Developing or acquiring a facility requires capital. It requires business wherewithal,” Tiedmann said. “I think these platforms are a viable alternative for many cardiologists because they can focus on the patients without having to do all the administrative work.” 

Tiedmann added that he expects private equity will have a “huge role” in cardiology going forward. But he expects fewer large platforms will dominate the space, compared to other specialties like dermatology and ophthalmology. “I think we’ll settle at 10-20 platforms over the next few years.”

Attebery, as the CEO of one of those platforms looking to expand its reach, echoed that sentiment. “I think within the next five years, 20% of the cardiologists in the country will be part of a private equity-sponsored platform with physicians as co-investors in that platform, not as employees.”

Erin Laviola is a writer for Levin Associates.

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