Gastroenterology is a service line with unlimited potential for growth. The expanding patient need for services, combined with advancements that allow more procedures to be performed in outpatient settings, have made gastroenterology an attractive target for investors.
Patients utilize gastroenterology services throughout their lifetimes.
Gastroenterologists treat a wide variety of conditions impacting the digestive system, which includes the stomach, intestines, gallbladder, pancreas, and liver. Clinicians care for patients experiencing everything from abdominal pain and heartburn to nonalcoholic fatty liver disease and cancers. The stats show that chronic digestive issues keep providers busy:
- – Up to 100 million Americans have some form of liver disease, most of them undiagnosed (American Liver Foundation)
- – About 20% of Americans have gastroesophageal reflux disease (National Institute of Diabetes and Digestive and Kidney Disease)
- – Nearly 6% of U.S. adults have been diagnosed with ulcers (Centers for Disease Control and Prevention)
GI has always been interesting because when you have an aging population, it’s natural for people to continue to get, for example, colonoscopy screenings as they get older,” said Abe M’Bodj, a Director at Westcove Partners. “That’s part of the reason why there is a recurring revenue stream in GI.”
Recent changes to healthcare guidelines have also significantly increased patient demand. In 2021, the U.S. Preventive Services Task Force recommended adults begin colon screenings at age 45 instead of waiting until age 50 because, according to the American Cancer Society, colorectal cancer rates have been steadily rising in younger adults.
“I think the most obvious tailwind that’s driving a growth in demand for GI services is screening colonoscopies and lowering the age to 45,” said Robbie Allen, the CEO of One GI, which is one of the largest physician-centric management services organizations in the GI space. “No question that the increase in patient demand has been the growth driver for the field. Plus, the ability to provide even more services in outpatient settings is attractive to private equity groups.”
Minimally invasive techniques have created opportunities for GI in outpatient care.
The World Journal of Gastrointestinal Surgery reported in 2021 that “advances in minimally invasive techniques have opened a new era in gastrointestinal treatment.” Experts at Yale Medicine agree that less-invasive procedures typically result in shorter recovery times for patients and fewer complications. The UF Department of Surgery says innovative robotic tools are also helping to make GI surgeries safer. Advancements like these have created opportunities in the outpatient setting.
Allen said 90% of the procedures performed by One GI clinicians can be done in ambulatory surgery centers and endoscopy centers. “Only the most acute, invasive procedures have to be done in hospitals, and we partner with hospitalists when those needs arise.”
Common GI procedures done in outpatient settings include:
- – Colonoscopies
- – Endoscopy exams
- – Polypectomies
- – Hemorrhoid treatments
“There’s a growing emphasis on treating patients in the lower cost-of-care setting, and there’s certainly a migration in GI in that direction,” remarked Eric Major, a Managing Director at Provident Healthcare Partners, who explained that this shift is enticing for investors.
“The biggest value proposition these outpatient groups provide is if they’re providing just as high-quality of care as a health system, then doing those procedures in an endoscopy center versus the hospital outpatient department is going to save the payer significant dollars,” Major explained. “And the idea is that these outpatient groups should be able to take advantage of some portion of the dollars that they’re saving. The technology’s important because it allows these groups to provide cutting-edge clinical care and drive high-quality outcomes, in a setting that’s less costly.”
Private equity firms are also attracted to the host of ancillary services offered by gastroenterologists. “The opportunity for ancillary services in GI is very high,” M’Bodj said, because many independent GI practices “have surgery centers where they’re doing the colonoscopies, a lot of them provide the anesthesia that’s necessary during these procedures, and they may have a pathology lab or an infusion site. There are all kinds of different revenue-generating services these practices can offer.”
Allen agreed with that sentiment. “The ability to own all the ancillary has made gastroenterology a top-five earning specialty and now it’s the place to be.”
GI consolidation has been a trend for several years.
Consolidation in the gastroenterology sector has been a trend for the last decade. Digestive Diseases and Sciences reports that while the total number of GI physicians rose from 2012 to 2020, “the total number of practices has decreased by 14%.”
Provident Healthcare Partners has predicted the total number of MSOs operating within the GI sector will remain small compared to other service lines like dermatology, vision and dental. Provident has forecasted that major players in the industry will continue to expand across the country.
Levin Associates’ proprietary database, which tracks merger and acquisition activity in the healthcare space in real time, shows that platforms backed by private equity have a large presence in the GI sector. Of the 80+ deals closed since 2020, big players in the space including One GI, Gastro Health, GI Alliance, United Digestive and U.S. Digestive Health have accounted for 90% of the deals.
Major explained that independent providers have shown a willingness to partner with larger platforms in part because of the chance to retain their autonomy. “From a practitioner perspective, I think the private equity model has resonated because it sort of presented an opportunity for these groups to remain independent of the health systems, continue to have ownership, join other like-minded independent GI’s physicians and compete with those large health systems and hospitals.”
Geography has proven to be an important factor for GI platforms when deciding where to expand. Allen said One GI’s strategy includes “geographic continuity.” They’d rather have a larger presence in a few states versus a small presence in dozens of states.
Allen added that when choosing whether to bring an independent practice into One GI’s network, cultural alignment is crucial. “We make sure we’re partnering with someone who wants to use the extra resources of the platform to solve patient problems. Someone who is simply trying to sell the assets of their practice and retire is not a good match for us.”
Medicare reimbursement rates, however, do not play a deciding role in investment decisions in this space. “The long-term strategy is to leverage density and scale against rates in creative ways, whether that’s a value-based arrangement or risk-sharing,” Allen said.
“For private equity firms that are investing in a GI, they know there’s inherent risk when you’re investing into a specialty that’s predominantly Medicare,” Major added. “The general thought is that the larger the platform is, the better positioned it is to withstand cuts in a way that a smaller practice cannot.”
Valuations, competition and the future of GI
The experts interviewed for this article independently stated that GI practices have traded as high as 12-13 times EBITDA. The number of physicians at a private practice heavily influences the price.
“The deal could be for as low as 5-7 times EBITDA for a smaller organization, to more than 10 times EBITDA for groups with 20 or more providers,” Major said.
The number of years physicians plan to keep working is also an important factor, Major explained. “If physicians are closer to retirement, that’s going to have a different valuation compared to a group that has physicians who have ten or more years left in their careers.”
Allen added that the desire to maintain or grow One GI’s market position can also influence an acquisition price. “In a smaller market with only two six-person practices, for example, the last thing I need is for a competitor to acquire one of them. That kind of competition can easily drive the valuation for a smaller practice into the double digits.”
M’Bodj agreed that competition has the potential to keep valuations high, but because of an added layer of scarcity. “GI was one of the first markets that I covered closely, and there were probably 75 practices that I found to be strong candidates for private equity deals. Most of them have since done transactions,” M’Bodj said. “That’s why I think the market will slow down from an M&A standpoint. There’s intense competition for these practices and there are only so many of them available.”
Allen provided a different analysis for the future of the sector. “It’s still early innings. I think the next five years will be a continuation of what we’ve seen, which is a consistent pattern of consolidation,” Allen said. “Demographics work in GI’s favor, technology is disrupting the space in a positive way, and the ancillary services add value. GI is an active space and the tailwinds are just aligned in the space to make it very attractive to investors.”
Major also forecasted that future changes to payment models could fuel further private equity investment. “GI makes a ton of sense as an area that will shift to value-based care at some point, and practices will want to be well-positioned for that.”
Erin Laviola is a writer for Levin Associates.
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