Two women sitting on physical therapy exercise balls.

How Private Equity Helps Gastroenterology + Physical Therapy Practices


Investment dollars and management expertise are enabling practices to thrive.

Hospitals and insurance companies that physicians depend on for income have undergone substantial consolidation in recent years. At the same time, many physician practices remain small. They have clinical expertise, but often lack the investment in business capabilities needed to thrive in an increasingly sophisticated and fast changing environment.

To address this disconnect, two diverse practice areas—gastroenterology (GI) and physical therapy (PT)—have experienced a rapid acceleration in investment interest from private equity (PE) investors in recent years. These PE partners can assist healthcare practices compete and succeed in a variety of ways. An infusion of capital can finance much needed improvements, making a practice more competitive and better equipped to participate in a marketplace increasingly dominated by larger health systems and insurers.

Having the capital to finance investments in technology and business infrastructure, in particular, can relieve a burden for smaller practices and position them to better compete and interface with larger intermediaries in their markets. Additionally, PE partnership can help practices improve in other important areas including operations, recruiting, and marketing. Finally, physicians can realize substantial financial benefits as owners of practices that choose PE to support investment and growth.

The first major PE investment in a GI practice occurred in 2016, when Audax Group made an investment in Gastro Health (GH), then operating only in Florida. Today, Gastro Health has more than 360 physicians across Alabama, Florida, Maryland, Ohio, Virginia, Massachusetts, and Washington. GH was subsequently acquired by OMERS, a Canadian pension fund, in 2021, representing the first example of a secondary sale of a PE backed GI platform. PE acquisitions of physical therapy practices dates to at least the 1990s, when Summit Partners completed a majority recapitalization of Florida-based Rehab Management Systems.

For practices considering support from private equity, the decision is multi-faceted, but often hinges on the answer to an important question, said James Heidbreder, Managing Director, Fifth Third Securities. He added: "Do practices want to be directly involved in driving how their specialty develops and grows in their market during a time of substantial change?" Increasing numbers of practices are choosing to partner with PE firms and "be proactive in playing a direct role in shaping the direction of a specialties’ growth and development across their existing and surrounding markets," he says.

Capitalizing on Tailwinds for Gastroenterology

When federal legislation provided incentives for physician practices to invest in electronic medical records and other health information technologies, for example, many gastroenterology groups adapted, and invested capital in new systems in the hopes of achieving efficiencies that would make those investments pay off. More recently, practice restrictions necessitated by the COVID-19 pandemic, which limited office visits and led to the postponement of many elective procedures, have put additional financial pressure on many GI practices.

Enter private equity, which offers several potential advantages as a partner to GI practices. PE-backed GI "platforms," which tend to have significant market share and may serve as vehicles for further "add-on" or "tuck-in" acquisitions, can leverage their scale and business sophistication to drive value. Often through investments in technology and infrastructure as well as complementary business leadership, platforms can consolidate back-office functions and enhance efficiencies across the platform, leaving physician partners more time to focus on patient care.

Looking for Rapid Expansion

Private equity firms look for practices with a strong market presence and leading reputation that, aided by an infusion of capital and management expertise, can expand rapidly. In many cases, that expansion comes through investment in ancillary services, such as ambulatory surgical centers, in-office endoscopy suites, anesthesiology and pathology services. These PE consolidators often have experience from other markets and specialties in efficiently growing practices while preserving existing clinical excellence, thereby maximizing the growth potential of new practices.

Consider Puget Sound Gastroenterology (PSG) in Washington, which was advised by Coker Capital. Already a successful practice with over 20 physicians, PSG was in a part of the country that had yet to have a PE- backed gastroenterology consolidator enter the market. That dynamic made the market attractive to Gastro Health, which was accelerating its expansion from its Florida base. Following its acquisition in 2019, PSG worked with Gastro Health leadership to make targeted investments in areas like systems, operations, and marketing, thereby helping to accelerate the practice’s ability to efficiently grow by recruiting other practices and physicians onto the platform.

"Gastroenterology is a large specialty, but it’s a small world," says Heidbreder. Physicians in practices across the country, getting together for national conferences or communicating in other ways, may hear pros and cons of the experience from colleagues who have already partnered with private equity firms, Heidbreder says. "When physicians begin to understand some of the opportunities a PE investment can create, it tends to accelerate interest."

For practices that do become PE partners, there may be numerous benefits, though transactions are structured not to interfere in the clinical arena. "Private equity’s capability and expertise is on the business side of things," said Heidbreder. That may mean an investment in electronic medical record capabilities, for example, as well as implementing "best practices" advice around areas like staffing and operations. Moreover, that could include guidance about how many mid-level providers to use and in what context, and how to make anesthesia services available at all practice locations. "These things, largely involving administrative capabilities, provide support for physicians," he said. "But private equity does not get involved in directing clinical care."

Finding Support in a Fragmented Physical Therapy Marketplace

After nearly three decades of investment by private equity, the PT market today remains dispersed and fragmented, with some 38,000 outpatient clinics across the country staffed by more than 300,000 physical therapists and 125,000 physical therapist assistants, or PTAs. Although consolidation activity in the industry reached an all-time high in 2021, the owners of PT practices interested in working with a PE partner should find no shortage of interested parties. Indeed, PE competition for practices has been pushing valuations substantially higher in recent years.

Several trends are fueling growth for physical therapy, which is considered a crucial first-line, drug-free treatment for a range of musculoskeletal and pain-related conditions, according to Heidbreder. "Physical therapy is important because it can help keep people out of the hospital and can be an effective alternative to treating pain with opioids," he said. Recognizing these advantages, state governments have accelerated direct access to PT providers by removing requirements for referrals from primary care providers and orthopedic surgeons.

Helping PT Practices Expand

At the same time, however, these have been difficult times for many PT practices. For example, labor shortages amid the "Great Resignation" have pushed up the cost of finding and retaining employees. Moreover, last year, there was a cut in reimbursement levels for PTAs, impacting practices whose staffing models rely heavily on those providers. Finally, physical therapy was disproportionately affected by pandemic limitations relative to other healthcare clinic-based models, with many practices forced to switch to "tele-rehab" when in-person visits weren’t possible. While most practices have fully rebounded from the pandemic, some are still trying to recover from income shortfalls in 2020.

Against that backdrop, private equity investors may provide crucial support. Focusing on leading practices in attractive markets, PE firms can help drive expansion by acquiring other businesses or opening new clinics and expanding service lines while providing enhanced business capabilities. As practices gain scale, they are able to develop greater efficiencies.

The owners of healthcare practices in both physical therapy and gastroenterology should keep in mind that the private equity investment model is financially driven, noted Heidbreder. For PE partners, the goal is to invest strategically, help to improve and grow a practice, and then exit the investment within several years once major efficiencies have been realized and growth has been achieved. It is important for entrepreneurs and business owners to understand how these dynamics work in order to properly evaluate whether finding a PE partner is the right next step for a practice. While many practices thoughtfully evaluate private equity opportunities and decide not to pursue an investment, for other practices, a PE partner can provide important expertise and enhance a practice’s capabilities to help it prepare for future growth and success..

Interested in finding out more about M&A in this sector? Learn more about Fifth Third’s investment banking expertise.

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