Healthcare Private Equity Investment — 5 Areas to Examine in 2014: Hospitals and Health Systems, Pain Management and Anesthesia, Ambulatory Surgery Centers, Urgent Care and Dental Practice Management

This article briefly outlines some of our observations on five key sectors for 2014. Each of these sectors plays a specific and interesting role in healthcare, and each one is attracting a lot of interest from the healthcare investment community.

Summary observations

The investment outlook for these sectors is not clear and direct, but more nuanced.

The core, traditional business of hospitals, i.e. profiting from inpatient admissions, is under serious strain. The hospital operators that will thrive will have outstanding management teams that can use their existing platforms to move the hospitals into other business lines that are not as dependent upon inpatient admissions. These hospital operators will have to do a remarkable job of both reducing costs, increasing other revenue lines and often leveraging market strength. They will also need to increasingly focus on risk-based contracting.

The core surgery center business is also under strain. There is pressure on both the number or volume of procedures and on reimbursement. Here, successful companies will continue to look at ancillary revenue streams, build on specialist strength in certain communities and, where sensible, strengthen system partnerships (i.e., align with health systems).  

Urgent care has been a growth spot for several years, and great demand for urgent care services remains. Successful operators, as the total number of urgent care centers grows, will find ways to stand out in the market and maintain patient volume, improve the quality of their services and add higher acuity services. Here, there will be pressure on reimbursement as urgent care businesses that are partially out-of-network are squeezed. The sheer volume of urgent care center growth can also lead to fewer visits per center.

Dental practice management remains a fairly fragmented market, but one in which large dollar amounts continue to flow. The core investment thesis may depend on the ability of states to keep funding dental practice via Medicaid. Another consideration is the need, at a practice level, to build some economies of scale in models while maintaining great quality and appropriate productivity measures.   

Pain management remains a field of growth. Like urgent care and dentistry, it's an area that is clearly needed and wanted by consumers. The main challenges in pain management may be increased pressures on the few areas, whether reimbursement-wise or specific ancillary revenues, that have generated outsized profits. These may generate greater payer scrutiny.   

The prognosis on these sectors is mixed. On a macro level, the number of hospitals and ASCs has stayed flat during the past few years. Each sector has seen substantial private equity investment already and will see some added activity, but the total dollars spent in these sectors has flattened.

The total number of investments into and dollars spent on urgent care, dental practice management and pain management has grown substantially.  

Each of the sectors will face increased pressure. Certain sectors may see core volumes stagnate (e.g., hospital and ASCs). Others, such as urgent care and dental practices, will see volumes increase. In contrast, pain management could see substantial growth in volume, but regulation and payer pressures — such as limits and denials — may hamper this growth.

1. Hospitals and health systems. Hospitals can be an attractive investment as the industry moves from fee-for-service medicine to a mix of payment systems. Hospitals are the providers most likely to develop fully integrated systems that take advantage of the move toward risk sharing. Although very large physician groups may also be able to take on risk for payer dollars in the push for care coordination, hospitals are best positioned to achieve these goals.

In 2013, such attraction led to Nashville, Tenn.-based Hospital Corporation of America's share prices soaring (up 53 percent over the year). Rising prices allowed HCA's main investors, including private equity heavyweight firms Bain Capital and KKR, to sell additional stakes in the public company for billions of dollars. HCA also remained active, acquiring three hospitals from private equity-backed IASIS Healthcare, based in Franklin, Tenn., among other deals. Smaller private equity-backed health systems, including Capella Healthcare, were widely rumored as takeover targets for other investors such as Apollo and Thomas H. Lee Partners.

In a fee-for-service world, hospitals also benefit from larger Medicare reimbursement rates than those paid to independent physicians and other providers, such as freestanding surgery centers and imaging facilities for the same services. These healthcare system pressures (i.e., integration and reimbursement disparity) have helped drive hospitals' acquisitions of physician practices and hospital consolidations.

For example, note the 2013 blockbuster, multibillion dollar deals of (i) for-profit, Franklin-based Community Health Systems' acquisition of Naples, Fla.-based Health Management Associates and (ii) for-profit, Dallas-based Tenet Healthcare Corp.'s acquisition of Blackstone-financed Vanguard Health Systems, based in Nashville. Smaller private equity-backed health systems are also considering consolidation or affiliation to gain size and scope. For example, Warburg Pincus-backed RegionalCare Hospital Partners in Brentwood, Tenn., affiliated its Paris, Texas-based hospital with the largest hospital system in the state, Dallas-based Baylor Scott & White Health.

Fiscal pressures, including reduced admissions, are leading some hospitals to implement layoffs, including Cleveland Clinic and Nashville, Tenn.-based Vanderbilt University Medical Center.i These pressures will likely intensify as the Patient Protection and Affordable Care Act's expansion of Medicaid and low-cost insurance plans add new (or migrate patients to) health plans with lower reimbursement. Many hospitals face large, unfunded or critically underfunded pensions, and they carry large ongoing costs. Some hospitals and health systems are ill-positioned for the reduction/change in reimbursement rates, or the transition from fee-for-service to shared-risk or whole-risk contracting.

Figure 1: Top 5 For-Profit Health System Chains by Number of Hospitals

Hospital Corporation of America

Community Health Systems (pending merger)

Health Management Associates (pending merger)

Tenet Healthcare Corp.

LifePoint Hospitals

2. Pain management and anesthesia. We are seeing a substantial increase in interest in pain management clinics. Nearly 100 million Americans suffer from acute and chronic pain, and a large amount of dollars is spent each year on treatment.ii After modest private equity activity in this space since 2010 —  including Chicago Growth Partners' acquisition of Advanced Pain Management in Greenfield, Wis., and Sentinel Capital's investment in National Spine & Pain Centers in Alexandria, Va. — significant investments were made in 2013.

Mountain View, Calif.-based Prospira PainCare, for example, formed in 2012 with the backing of three significant private equity firms. It acquired a number of pain centers across the country including Hamilton, N.J.-based The Pain Management Center and Bloomfield Hills, Mich.-based Neuro Pain Consultants. We anticipate these mid-market acquisitions to continue, and other private equity firms to get into this nascent trend.

Anesthesia is another hot area of growth. Private equity groups, such as Madison Dearborn, Blackstone Group, Moelis Partners, Beekman Group, DFW Capital Partners, Triton Pacific Capital Partners, Provident Healthcare Partners and Goldman Sachs Private Capital Investing Group, have invested significantly in anesthesia practices.iii This list should continue to grow as more investment goes into the anesthesia market.

For example, the large, multispecialty provider MedNax, based in Sunrise, Fla., acquired Kingsport, Tenn.-based Holston Anesthesia Associates and Mt. Kisco, N.Y.-based Northern Westchester Anesthesia Services last year. Knoxville, Tenn.-based TeamHealth purchased Omaha, Neb.-based Professional Anesthesia Services and Orlando, Fla.-based Wolverine Anesthesia Consultants. Melville, N.Y.-based North American Partners in Anesthesia, after a series of 2012 deals, continued expansion through its acquisitions of a Hudson Valley, N.Y.-based practice and Paterson-based New Jersey Anesthesia Group. Meanwhile, Sunrise-based Sheridan Healthcare added its first California-based anesthesia practice and three more anesthesia groups in New Jersey, meaning it now offers services in 25 states. This space should see more investment in the year to come.

3. Ambulatory surgery centers. ASCs remain a very good business despite challenges to surgeon numbers and reimbursement rates. These macro factors are slowing ASC growth and harming ASC same-store growth. On the plus side, surgery centers are a true cost-saver to Medicare and can be for other payers, too. Movement of surgical procedures from hospital outpatient departments to ASCs reduces aggregate program spending because Medicare pays HOPDs substantially more than ASCs for the same services — 78 percent more in 2013. This differential is increasing — HOPDs' 2014 Medicare update is a half-percent higher than the ASC update (this at the same time CMS added new regulatory burdens on ASCs). One needs to look no further for evidence of interest in the prospect of ASCs, with their potential cost savings, than the successful initial public offering of Deerfield, Ill.-based Surgical Care Affiliates this past fall. Its share price rose nearly 30 percent post-IPO.  

ASC expansion has slowed in the face of reimbursement challenges from Medicare, third-party payers and even worker's compensation payments. The number of Medicare-certified ASCs grew only 1.8 percent from 2010 to 2011, or 5,344 total ASCs nationwide. That is much slower than the 2006 to 2009 average rate of growth, which was approximately 4.5 percent per year.iv Surgery center revenues also face non-reimbursement challenges, as they are wholly dependent on the number of cases performed in the center. Some erosion centers face is due to declining numbers of independent surgeons. Studies suggest significant training shortfalls coupled with burnout are affecting as many as 40 percent of all surgeons.

Many ASC deals are for existing centers rather than for startup centers. For instance, in 2013, private equity-backed Symbion Healthcare, based in Nashville, increased its ownership in two facilities it already controlled. With numerous ASCs remaining independent of a hospital or institutional partner, including 60 percent of ASCs in Texas, many possible targets remain.v These targets will continue to attract investors to the ASC space. For example, SCA's IPO raised $235 million for the company. Even considering the use of some of these funds to repay investors, SCA should have the financial strength to pursue various acquisition strategies.

We also anticipate private equity-backed ASC companies, such as Brentwood-based Meridian Surgical Partners, to consider new acquisitions. Further, other private equity-backed ASC companies, like Addison, Texas-based United Surgical Partners International, have suggested they anticipate increased M&A activity in the years to come as ASCs partner with other providers to form strong affiliations in the face of healthcare reform Many other privately held chains are also actively engaged in the marketplace, including Hanover, Mass.-based Ambulatory Surgical Centers of America, Westchester, Ill.-based Regent Surgical Health, Dallas-based ASD Management, Doylestown, Pa.-based Physicians Endoscopy, Cincinnati-based Blue Chip Surgical Partners and Somers, N.Y.-based Merritt Healthcare.

Figure 2: Top 20 ASC Chains by Number of Centers

United Surgical Partners International


Surgical Care Affiliates

Hospital Corporation of America


Surgery Partners

Symbion Healthcare

SurgCenter Development

Community Health Systems


ASD Management

National Surgical Hospitals

Physician Endoscopy

Surgery Center Partners

Regent Surgical Health

Foundation Surgery Affiliates


Constitutional Surgery Partners

Blue Chip Surgical Partners

Meridian Surgical Partners

(These numbers are based on third-party sources and may not be fully accurate as of 2014.)

4. Urgent care. The urgent care industry is a rapidly growing healthcare sector that provides cost-effective, convenient medical services to consumers who truly want and need the services. There was an almost 20 percent growth in existing clinics in the past four years, totaling more than 9,400 urgent care clinics. Furthermore, the existing clinics are looking to expand.

In 2013, almost 40 percent of these clinics told the Urgent Care Association of America they would be expanding their facilities or adding new locations, up from 18 percent in 2010.vii This expansion is not expected to slow; indeed, estimates predict the sector will see more than $18 billion in revenues in 2017 at more than 12,000 clinics, up from $13 billion in revenues in 2012. Millions of private equity dollars from at least a dozen firms have gone to urgent care clinics in the past few years, driving this expansion. For example, in 2013, NextCare Holdings, backed by Enhanced Capital Partners, acquired 11 PrimaCare Medical Centers in the Dallas/Fort Worth area. That brought its total to 86 clinics nationwide.

These investments should continue, in part as a response to fiscal pressures and the health insurance mandate's potential increased demand.viii This potential positive for urgent care is twofold. First, patients love the convenience of urgent care clinics. Second, these clinics have the advantage of saving significant payer dollars. For instance, a 2010 Rand Corp. study found almost one in five visits to hospital emergency rooms could be treated at an urgent care clinic, potentially saving $4.4 billion annually in healthcare costs.ix

The urgent care sector remains fragmented. Approximately 80 percent of urgent care companies have three or fewer clinics. We anticipate continued middle market activity, such as the 2013 CareSpot and HCA joint venture acquisition of Hermitage, Tenn.-based NeighborMD, CareWell Urgent Care in Massachusetts — backed by $11 million in venture capital — also opening eight clinics in the Boston area in the last two years with more planned in 2014. Private equity-funded MD Now, based in Palm Beach, Fla., rapidly expanded iin south Florida with 12 open clinics and 10 more under construction.

On the other hand, while cost pressures may increase demand for urgent care clinics, these pressures will certainly impact this sector. Further, with such significant expansion, payers will be examining urgent care closely and placing significant pressure on reimbursement per visit. If such reductions gain steam, there may be a moderation in further private equity investments in this area.

5. Dental practice management. There remains tremendous investor interest in the DPM arena. Dentistry, traditionally comprised of only small group practices and solo practitioners, is shifting toward more DPM arrangements with the advantage of lower operating costs compared with a clinic's capital costs and revenue.x

In the last decade, more than 25 private equity firms have invested significantly in this changing healthcare sector, of which certain large DPM companies already have annual revenue exceeding $100 million.xi In 2013, this interest included Monroe Capital providing a $16.6 million credit facility to private equity-owned Smiles Services, a leading DPM in the Pacific Northwest. Such investments are paying off for private equity firms; a Sageworks analysis found DPM investments generated the highest return on equity of the industries they examined.xii

This investor interest may grow if certain opportunities materialize. First, many state Medicaid programs have supported dentistry fairly well, especially children's dental needs. This support allows dental practices to thrive with substantial Medicaid business, unlike other healthcare providers.xiii

Yet, during the past few years, stretched state budgets forced many legislatures to cut spending on dental care, especially for adults.xiv With state budgets improving post-recession, states may begin to refund this sector. Second, the PPACA strengthened support for dental services, especially again for children, by funding Medicaid program expansions and inclusion of pediatric dentistry as part of the essential health benefit packages for individual and small employer plans.

On the other hand, increased regulatory scrutiny on DPM structures could put new pressures on the sector. For example, a 2013 Senate committee investigation into DPM practices in the Medicaid program recommended some practices be excluded from Medicaid. Similarly, states like North Carolina have considered legislation at the bequest of their state dental associations to reduce DPM involvement in Medicaid. Unless such legislation becomes law, the opportunities discussed above abound.

i "Is Obamacare to Blame for Hospital Layoffs?" U.S. News & World Report, Sept. 20, 2013.
ii "Relieving Pain in America: A Blueprint for Transforming Prevention, Care, Education, and Research." Institute of Medicine of the National Academies, 2011.
iii "Nothing's Sleepy about M&A in the Anesthesia Sector," The Deal, Dec. 27, 2013.
iv "Report to Congress: Medicare Payment Policy, Chapter 5: Ambulatory Surgical Center Services." MedPAC, March 2013.
v "Northstar Healthcare Exclusive Interview." PRWeb, Dec. 5, 2013.
vi "ASC Sector M&A Activity: Outlook for 2014." Becker's ASC Review, Dec. 30, 2013.
vii "Private Equity Funds Rapid Growth of Walk-In Clinics." Reuters, Mar. 21, 2013.
viii "A Boom in Urgent Care Centers as Entitlement Cuts Loom." Forbes, Mar. 11, 2013.
ix "Urgent Care Centers are Booming, Which Worries Some Doctors." Washington Post, Sept. 17, 2012.
x "If Pigs Could Fly and Dental Professionals Could be Turned Bad by Private Equity Investment." Dental Economics, Sept. 20, 2012.
xi "Private Equity Firms Eye Big Profits in Dentistry." May 30, 2012, available at
xii "Which Businesses Have the Highest Returns?" Forbes, Dec. 15, 2013.
xiii "Don't Be So Quick to Dismiss Medicaid Business." Jan. 3, 2014, available at
xiv "13 States Cut Medicaid to Balance Budgets." Kaiser Health News, July 24, 2012.

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