Urology Private Equity Winter 2024: Investment Trends

State of Urology Private Equity – White Paper

Winter 2024

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Introduction

Private equity within physician practice management (PPM) is no longer a topic confined to the procedural based sectors of healthcare such as Dental, Dermatology, and Eye Care. Fueled by initial successes in these early specialties, private equity has started deploying capital into surgically focused specialties such as ENT, cardiology, urology, gastroenterology, orthopedics, pain management, women’s health, and others. Private equity’s interest in the broad spectrum of care is aptly timed as many independent physicians have never faced more difficult operating environments. Faced with ever expanding health systems, downward reimbursement pressures, rising operational costs, and a continued complex regulatory environment, practice owners across all specialities of medicine, including urology, are more open to discussions on strategic alternatives to joining a hospital. Thus enters private equity as a way for independent urologists to remain independent while securing the scale and support necessary to not only compete, but thrive in today’s healthcare environment.

 

Consolidation Drivers for Urology

Headwinds

Due to the relative lack of total healthcare spend within urology compared to their peers in more prominent specialties like orthopedics and cardiology, the specialty has faced many obstacles as the national healthcare industry has evolved. The small seat at the national table has forced many independent urologists to get creative with new income streams through ancillary service offerings, pursue local market mergers to increase scale, and look to external funding sources to fund this scale and consolidation. Falling reimbursement, rising costs, and increased regulation have all contributed to a unison viewpoint amongst independent providers; it has never been more difficult to survive as a private practice. Consolidation within urology is not new, dating back decades, with local practices having joined forces to create density in their geographies and increasing their ability to compete. Only recently did urologists turn to private equity to take this consolidation from local to national.

Ability to Grow Ancillary Services

The first partnership between independent urologists and private equity was in 2016. Since that time, urology has been one of the fastest consolidating specialties due to urologist interest in leveraging scale to increase access to more profitable ancillary service offerings. Large platforms give independent groups the ability to implement and grow business lines such as pharmacies, surgery centers, radiation centers, robust pathology labs, to name a few. Smaller practices either do not have the patient volume or capital necessary to invest into these ancillary services. With capital partners, providers can build out ancillary service lines to further enhance patient care and operations of their practice. These service lines can be shared regionally and nationally to increase scale and patient access. These factors have made urology and private equity a perfect match as they provide ample growth opportunities for private equity and ensure private practice urologists can continue to compete.

 

Urologist projection graphs: growth and stagnant models, 2020-2060.

 

Physician Shortage + Increasing Patient Demand

Demand for urology services continues to grow but what is troubling is the lack of providers to care for this demand as the population ages. The Health and Services Administration has released projections showing that by 2036, urology will have enough physicians to meet 83% of overall demand for care and there will only be enough urologists to meet 38% of rural demand for care. Private equity has been helping this over time as they have focused on provider recruitment bringing on advanced practice practitioners (Physician Assistants and Nurse Practitioners) to help supplement care. Additionally, building larger platforms with deeper service capabilities spread across regional sections of the country allows for clinics in smaller markets to have the same ancillary services access that have historically only been available to larger, metropolitan practices. This increased resource access allows smaller market practices to be more competitive when recruiting the next generation of urologists. 

Current Urology Landscape

 

Urology groups distribution across the United States map.

Why Now?

 

Maximize Practice Value

The urology space has seen strong activity over the past 36 months. The landscape above captures the current state of the market, with platforms active in all regions of the country. While PGP expects to see an ongoing industry focus on “2nd bites” and specialty changing transactions, platforms already active will continue to pursue small to medium sized, regional add-on acquisition opportunities aggressively. The types of groups interested in partnering with urology practices has broadened as well. Historically only urology focused groups have been interested, but as stated above, oncology & multi-specialty platforms have noticed the complementary offering and have displayed a strong interest in successfully acquiring and integrating urology groups into their strategy.

Compete Stronger

As the urology landscape continues to evolve, it is becoming significantly more challenging for smaller practices to compete with larger, consolidated platforms. As a result, independent physicians are heavily motivated to transact in an effort to control their own destiny and raise their compete-level in their local markets. In addition to maintaining a level of ownership in the new entity they sign on with, many groups will ensure clinical autonomy stays 100% controlled by the physicians.

Optionality & Succession Planning

Outside consolidators such as United Healthcare’s Optum Health, Walgreens, large health systems and other “payvider” insurance conglomerates are becoming more acquisitive of independent physician practices. Optum, for example, is the largest employer of physicians in the U.S., with 90,000 physicians employed or affiliated with the organization. Following that trend, it is imperative that independent urology group owners get educated on long term strategic options and exploring a private equity partnership has become an increasingly popular option. Even if a group doesn’t end up doing a deal, getting educated and exploring a competitive transaction process helps practice owners zoom out, helping them look at the bigger picture; allowing them to think about what the next 3, 5, and 10 years could look like if they maintain the status quo, were to partner with private equity, and/or sell to a health system or retail giant.

Key Considerations For Practice Owners

When evaluating a potential partner, it is extremely important to find the right fit to ensure a strong go-forward partnership. PGP advises that four critical factors are considered when evaluating whether a partner is right for your practice

  • Maximize Economics and Achieve Most Favorable Deal Terms
    • Negotiating favorable economic deal terms (equity share price, timing of payment, etc.) 
    • Strike appropriate balance between total EBITDA credit vs the EBITDA multiple
    • Receiving credit for various tangible growth initiatives in the business (new locations, new providers, new service lines, etc.)
  • Achieve Clinical Autonomy
    • Ensure there is a strong level of go-forward governance control at the local level
    • The practice maintains directional control at the company, including work schedules, vacation days, work location, and retention of staff
    • Maintained control of provider recruitment and retention
  • Ensuring potential partners have the resources to execute against the strategy
    • Access to capital and economies of scale 
    • Adequate level of administrative and operational resources provided (Accounting / Finance, IT, RCM, Marketing, HR & Recruiting, Business Development, Legal, etc.)
  • Track Record of Success
    • Partnering with experienced healthcare / PPM ‘Operating Partners’ with a history of adding significant value and operational guidance in the PPM space
    • Proven ability to align with young and newly recruited providers
    • Exceptional key performance metrics (recruitment, attrition, location growth, service line expansion)

What Happens After the Transaction?

One of the biggest questions practice owners have is “what happens after the transaction is consummated?” If you are doing a transaction with a reputable private equity platform, physicians will largely continue to operate “business as usual”. The private equity partner will look to implement certain growth initiatives, but these initiatives will all be items that were discussed at great length in advance of consummating the transaction. On the clinical front, physicians will practice medicine the way they always have. Clinical autonomy is maintained, and an advisory firm like PGP negotiates this on the physician group’s behalf. As for infrastructure capabilities, groups that lack back-office sophistication will typically integrate into the “platform” practice’s EMR, Accounting and PM systems. Outside of day-to-day operations and clinical delivery, the most notable change is the holding of rollover equity in the new partnership by selling physicians. Due to the fact a substantial liquidity event is experienced, shareholders are required to utilize a percentage of their proceeds in the form of equity in the new enterprise. This is desired by the private equity firms as they want to maintain alignment with the physicians that they have invested in, creating a shared goal of growing the platform and creating a “second bite of the apple” opportunity 3–7 years down the road.

What to Look For in a Partner and Why an Advisor is Important

Every private equity sponsor views the world through a different lens when it comes to their motivations, growth plan and relevant experience within the space. When seeking a partner, it is imperative for practices to be diligent in ensuring alignment for the future. While the partnership is not permanent, the years following a transaction will need close collaboration from each party for it to be successful. 

Physician Growth Partners (PGP) works on behalf of independent physicians to ensure their goals and succession planning needs are met through a transaction. Our process is tailored around maximizing value, while identifying and engaging investors that will be a strong cultural fit with experience in the healthcare space to ensure a successful go-forward partnership. It is essential that you partner with a healthcare private equity group that has a similar vision.

A seasoned healthcare transaction advisory team can ensure that the most attractive outcome is achieved. Through a formalized competitive marketing process, an advisor can ensure the practice maximizes the economic value of the practice. A transaction process also allows the practice to interview multiple private equity partners, in what we call reverse diligence, allowing you to choose the group that presents the best ‘fit’.

Conclusion      

Consolidation within Urology continues to accelerate and PGP expects the pace to continue into 2025. Whether a practice outwardly desires private equity partnership, questions the rationale and effectiveness of a PE partner, or downright disagrees with private equity, it is essential to get educated and ensure your practice is positioned for continued success in your market.

For those that choose to go down the path, it is imperative that culture and alignment, not simply economics, is the first goal. The role of an advisor like PGP can be the difference maker not only in knowing who can be trusted and who has a track record of success, but in ensuring an economic outcome that is satisfactory when transferring ownership of your business.

If interested in pursuing a transaction, learning about private equity, the private equity strategy, transaction dynamics, or activity in your market, please use the information below to contact the PGP team and schedule a discussion.

 

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