As we reflect on the first half of the year, we took the opportunity to delve into the key highlights of the Physician Medical Group (PMG) industry. In an insightful conversation with Scott Davis, Managing Director at Provident Healthcare Partners, we explored the major themes that have shaped the year’s journey so far.
Q: What were the major headwinds and tailwinds impacting the PMG market in the first half of 2024? How has this changed from 2023?
A: Debt markets continue to be a headwind for the formation of new platforms, with many investors over equitizing investments to fill the gap and/or needing to take a club lending model to fill the financing needs of a given deal. Additionally, the approval or proposal of a variety of legislative measures to monitor or control the consolidation of physician practices at the state level has continued to mount, creating uncertainty and potentially hesitation for certain investors.
Tailwinds are similar to what they’ve been throughout the past decade plus of physician practice investment including an aging population, growing levels of chronic disease, the increased need for specialized care, patient preference for the outpatient setting, shortage of qualified medical providers, the fragmentation of private practices, the relative inefficient operations of private practices, the growing level of regulatory/reporting/payor-related requirements, and more.
Q: What do you anticipate M&A activity in the PMG industry to look like in the second half of 2024 and even going into 2025?
A: We would expect to see continued add-on activity with groups adding density in core markets or expanding into new ones via regional platform opportunities. What we’d expect to see change is an uptick in physician practice management (PPM) platform exits by private equity (PE) investors. For the past 24 months, this has been a less active segment of the market due largely to the macro-economic environment that made it difficult to sell businesses into the middle market, such as access to debt financing at reasonable terms. With signs of optimism for a softening of interest rates, we’d expect that issue to subside, combined with the fact that so many of the PPM platforms in place are reaching the end of their fund’s lifecycle and in need of a second event. There are already a number of platforms across a variety of PPM sub-specialties that are either exploring exit options or aiming to do so in the next 12 months.
Q: How have private equity buyers impacted the PMG market in 2024? From an advisor’s perspective, does private equity have more of an impact now than a year ago?
A: Private equity is easily still the largest driving force behind the consolidation of physician practices. Having said that, the macro issues previously described has made it slightly more difficult for those investors to complete deals, particularly platform investments or exiting an existing platform. That’s opened the door to other investor types that are less dependent on debt markets to complete deals. This includes groups like SCA, Surgery Partners and USPI who had all historically been purely ambulatory surgery centers (ASC) consolidators. Due to private equity’s ability to offer physician shareholders the opportunity to monetize a portion of both their practice and ASC ownership, these strategic investors have had to offer similar options to sellers and are now active on the practice side as well. Their publicly traded or affiliate status has provided for large balance sheets to invest off of and some insulation from the debt markets.
Taking all these factors into account, you’d have to say private equity is slightly less impactful at the moment, but this is not something we’d expect to continue. When the macro environment becomes more favorable, so will the PE model and we’d expect that investor category to remain the most active.
Q: In addition to private equity groups, what are the active buyers?
A: Although early in development, we’re also seeing select health systems take more of an aggressive approach on valuation, whereas historically if private equity or other types of strategic investors were involved, they would have been unlikely to compete on value.
It’s also worth mentioning the payor-related investor category where groups like Elevance and UnitedHealth’s physician acquisition group, Optum, have remained active, albeit facing mounting FTC pressure given their scale.
Q: What do valuations look like currently? How does it compare to a year ago?
A: Valuations for the premier assets in a given sub-specialty have remained relatively the same or a hair down from the previous highs. This is due to the scarcity value of such assets and are considered the platform-worthy groups, although may sell to a strategic investor. The tier 2-3 groups are where there’s been some modest amount of multiple compression from the highs of previous valuation ranges. Beyond multiples, the previously mentioned complications within the debt market have also led to investors (or their lenders) to tighten their acceptance on adjustments, particularly those of the pro forma variety, which in turn could reduce EBITDA and therefore enterprise values. These factors have been relatively consistent for the past 12+ months, although optimism remains on the debt market front.
Q: In addition to dental, eye care and dermatology what are the active specialties? How has this changed from 2023? Additionally, are there any specialties that were active in 2023 but have experienced a slow down?
A: I would add cardiology, orthopedics, GI, IVF, pain management, among others to the sub-sectors of active consolidation. While still active, the pace of deals in the orthopedics and cardiology spaces have slowed. Part of this could simply be due to the fact of less public deal announcements by investors but also taking into account they were extremely active sectors of consolidation so would naturally experience a slowdown from that rapid pace.
Explore several of the transactions that Provident Healthcare Partners advised on in the first half of 2024:
- EyeSouth Partners acquires Community Eye Care Specialists
- Provider Network Holdings purchases Cornerstone Specialty Network
- Sweetgrass Pediatrics acquires SouthernMED Pediatrics
Delve into noteworthy PMG transactions of the first half of 2024:
- Cardinal Health acquires Specialty Networks, LLC for $1.2 billion
- Sutter Health acquires 5 radiology centers
- Arches Medical Partners buys 11 Rhode Island internal medicine practices
- CUC Inc. acquires Beyond Podiatry for $87 million
- OneOncology Inc. buys Connecticut Oncology Group
- Thurston Group’s Gen4 Dental Partners acquires The Nova Institute
- Sweetgrass Pediatrics purchases SouthernMED Pediatrics
- National Cancer Care Alliance acquires Quality Cancer Care Alliance
- REV One Dental purchases 9 dental practices
- Spire Orthopedic Partners acquires Ortho Rhode Island
