IT needs are driv­ing the up­surge in doc prac­tice merg­ers

Modern Healthcare - - NEWS - By Dave Barkholz

The merger-and-ac­qui­si­tion spree that in re­cent years has swept away hun­dreds of once in­de­pen­dent physi­cian prac­tices con­tin­ued un­abated in the sec­ond quar­ter.

Driven by the need to up­grade com­put­ers to meet es­ca­lat­ing fed­eral de­mands to mea­sure qual­ity, Tyler-based East Texas Anes­the­si­ol­ogy As­so­ci­ates in June joined forces with U.S. Anes­the­sia Part­ners, a Fort Laud­erdale, Fla.-based firm con­trolled by the pri­vate eq­uity firm Welsh, Car­son, An­der­son & Stowe.

It was at least the fourth ma­jor ac­qui­si­tion USAP made in Texas in re­cent years, bring­ing the com­pany’s to­tal clin­i­cians in that part of the coun­try to more than 800. “This part­ner­ship with USAP gives ETAA im­me­di­ate ac­cess to the in­fra­struc­ture and ex­per­tise that we would not be able to build our­selves,” said Dr. Shawn Thomas, pres­i­dent of the East Texas prac­tice.

It was only one of 22 physi­cian prac­tices of vary­ing sizes that were ac­quired in the quar­ter, rep­re­sent­ing about 12% of all health­care deals logged, ac­cord­ing to data com­piled in Mod­ern Health­care’s Merg­ers & Ac­qui­si­tions data­base.

Thomas said the anes­the­si­ol­o­gists in his prac­tice also were at­tracted to USAP’s sin­gu­lar fo­cus on their spe­cialty and its com­mit­ment to us­ing data to im­prove clin­i­cal qual­ity. The fact that the deal, whose terms were not dis­closed, al­lowed the prac­ti­tion­ers to be­come part­ners in the larger firm and con­trol gov­er­nance of the prac­tice made the loss of in­de­pen­dence eas­ier to swal­low. “We are gain­ing valu­able in­sight into the rapidly chang­ing re­im­burse­ment en­vi­ron­ment and IT in­fra­struc­ture that will po­si­tion us for con­tin­ued suc­cess,” Thomas said.

USAP ac­quired Greater Hous­ton Anes­the­si­ol­ogy in 2012 and Pin­na­cle Anes­the­sia Con­sul­tants in Dal­las in 2014. Like the East Texas prac­tice, Pin­na­cle’s 550 physi­cians and other ad­vanced clin­i­cians fore­saw the need for mil­lions of dol­lars of in­vest­ment in new elec­tronic health records and rev­enue-cy­cle sys­tems to pro­vide pay­ers with the qual­ity data they wanted to fully re­im­burse the prac­tice for care, said Dr. Thomas Swygert, a Pin­na­cle physi­cian leader who is on the board of USAP.

Greater Hous­ton Anes­the­si­ol­ogy had the same in­for­ma­tion tech­nol­ogy con­cerns plus the de­sire for man­age­ment best prac­tices that Welsh Car­son could rec­om­mend, said Dr. Ron Os­burn, a USAP board mem­ber who was in the lead­er­ship of the prac­tice dur­ing the ac­qui­si­tion. “The winds were chang­ing some,” Os­burn said of the health­care busi­ness en­vi­ron­ment.

They still are. Ac­qui­si­tions of physi­cian prac­tices and in­for­ma­tion tech­nol­ogy ven­dors dom­i­nated M&A ac­tiv­ity in the sec­ond quar­ter, with deals in the sec­tors show­ing no signs of abat­ing through­out 2016.

The $10 bil­lion health­care merger of physi­cian-staffing gi­ants AmSurg and En­vi­sion Health­care an­nounced in June was the big­gest in the quar­ter in­volv­ing two U.S.based com­pa­nies, Mod­ern Health­care data show.

Ini­tially, less than half the 113 part­ner doc­tors in Greater Hous­ton Anes­the­si­ol­ogy wanted to sell to USAP and be­come the first group of physi­cian part­ners in the com­pany, Os­burn said.

But they came around when they learned they could re­tain ma­jor­ity own­er­ship of the prac­tice, he said. And the

Ac­qui­si­tions of physi­cian prac­tices and in­for­ma­tion tech­nol­ogy ven­dors dom­i­nated merg­ers-and-ac­qui­si­tion ac­tiv­ity in the sec­ond quar­ter, with deals in the sec­tors show­ing no signs of abat­ing through­out 2016.

$5 mil­lion in cap­i­tal that the pri­vate eq­uity firm could in­vest for IT was go­ing to have to come out of doc­tor div­i­dends if they re­mained in­de­pen­dent. Each physi­cian in USAP re­mains a part­ner in the com­pany, he said.

“One of the driv­ers was physi­cians like to take all the in­come out of the prac­tice,” Os­burn said.

Physi­cian prac­tices are rush­ing into the arms of physi­cian con­sol­ida­tors such AmSurg, En­vi­sion, TeamHealth and Med­nax to gain ac­cess to the cap­i­tal and data needed to ne­go­ti­ate with pay­ers and prove their qual­ity un­der value-based re­im­burse­ment, said Jeff Swearin­gen, man­ag­ing di­rec­tor of M&A con­sul­tant Edge­mont Cap­i­tal Part­ners in New York City.

Health­care IT com­pa­nies are com­ing to­gether to give those providers as broad a range of prod­ucts as pos­si­ble to pro­mote com­mu­ni­ca­tion and in­creased use of an­a­lyt­ics so that care­givers can be more ef­fi­cient, he said.

One of the big­gest deals in June in the very ac­tive IT space was McKes­son Corp.’s de­ci­sion to merge its health­care IT unit with Change Health­care of Nashville to cre­ate a com­pany with $3.4 bil­lion in com­bined rev­enue. “If they’re on the front lines of change un­der the Af­ford­able Care Act, we’re see­ing lots of (M&A) ac­tiv­ity,” Swearin­gen said.

AmSurg CEO Chris Holden said this month at an an­a­lyst con­fer­ence in New York that AmSurg and En­vi­sion went with a no-cash, all-stock trans­ac­tion to keep the com­bined com­pany’s lever­age low for more physi­cian ac­qui­si­tions.

With a debt ra­tio of about four times EBITDA and ex­pected cash flow to bring that down fur­ther, the new En­vi­sion Health­care Corp. will not be ham­strung as it pur­sues a pipe­line of deals in a frag­mented in­dus­try sub­sec­tor still rich with in­de­pen­dent groups con­sid­er­ing con­sol­i­da­tion, Holden said.

The com­pany has given guid­ance that it will spend about $400 mil­lion on ac­qui­si­tions. The deal is ex­pected to close by year-end, cre­at­ing a com­pany with an­nual rev­enue of about $8.5 bil­lion, Holden told an­a­lysts this month at Can­tor Fitzger­ald’s 2nd An­nual Health­care Con­fer­ence.

“Both the payer com­mu­nity is at­tempt­ing to con­sol­i­date and the health sys­tem com­mu­nity is con­sol­i­dat­ing,” Holden said. “Who has not con­sol­i­dated at the same rate are physi­cians.”

Health­care ac­qui­si­tions as a whole are hap­pen­ing at a steady ca­dence, though not at the record-set­ting pace of a year ago, said Mo­hamad Makhzoumi, part­ner and head of health­care ser­vices at New En­ter­prise As­so­ci­ates, one of the world’s largest ven­ture cap­i­tal groups with about $18 bil­lion in­vested.

Last year was the busiest year ever for M&A, with $4.8 tril­lion worth of deals, in­clud­ing $500 bil­lion in the health­care sec­tor.

Merger vol­umes in health­care were down about 17% in the first quar­ter of this year com­pared with the year-ago

pe­riod, said Toby King, man­ag­ing di­rec­tor of the global health­care group at Cit­i­group, speak­ing to the Nashville Health Care Coun­cil in May.

Makhzoumi said health­care M&A in the first half has been dom­i­nated by “strate­gic” buy­ers or com­pa­nies buy­ing ri­vals or into com­ple­men­tary prod­ucts rather than the big pri­vate eq­uity play­ers who look for strong cash flows and fi­nan­cials from their tar­gets. He said the AmSurg and En­vi­sion deal is a prime ex­am­ple. AmSurg is strong in am­bu­la­tory surgery cen­ters and spe­cialty physi­cian staffing, such as ra­di­ol­ogy and anes­the­si­ol­ogy, while En­vi­sion has an am­bu­lance unit and a prom­i­nent pres­ence in ER physi­cian staffing.

They also es­chewed cash in the deal so they could in­vest in ad­di­tional ac­qui­si­tions as a com­bined com­pany.

An­other ex­am­ple of a strate­gic ac­qui­si­tion was the merger of Plano, Texas-based U.S. Re­nal Care with DSI Re­nal in Jan­uary, Makhzoumi said. That deal com­bined U.S. Re­nal Care’s 198 dial­y­sis lo­ca­tions in 20 states with Nashville-based DSI’s 100 fa­cil­i­ties to cre­ate a dial­y­sis gi­ant serv­ing 23,000 pa­tients in 33 states and Guam.

That’s not to say that pri­vate eq­uity has stayed en­tirely on the side­lines, espe­cially in health­care IT. There’s the ex­am­ple of New York City-based Welsh Car­son ex­pand­ing USAP and mak­ing a deal in June at an­other of its physi­cian-prac­tice com­pa­nies, U.S. Acute Care So­lu­tions. In that deal, U.S. Acute Care ac­quired a big chunk of Er­gen­tus Emer­gency Ser­vice Physi­cians of Denver. Terms were not dis­closed.

On the IT front, San Fran­cisco-based Thoma Bravo this month agreed to pay $544 mil­lion to buy health­care IT se­cu­rity com­pany Im­pri­vata and take it pri­vate.

In June, Pam­plona Cap­i­tal Man­age­ment, which bought MedAs­sets this year and rolled it up with Pre­cyse to cre­ate rev­enue-cy­cle gi­ant nThrive, an­nounced last month that it was buy­ing the health­care an­a­lyt­ics con­sul­tancy Equa­tion of Salt Lake City.

Th­ese types of rollups of­fer the prom­ise of bet­ter in­te­gra­tion of IT prod­ucts and ser­vices to providers that of­ten strug­gle to get their elec­tronic health records to com­mu­ni­cate smoothly with one an­other, said Caitlin Blalock, a Fitch Rat­ings an­a­lyst.

IT ven­dors are go­ing to play an in­creas­ingly im­por­tant role in mak­ing sure hos­pi­tals and physi­cians can op­er­ate ef­fi­ciently and prove their qual­ity to get full re­im­burse­ment as pay­ers move from fee-for-ser­vice to value-based pay­ments that put providers at risk for the cost of care, she said.

But pri­vate eq­uity firms also tend not to be shy about tak­ing cash out of their ac­qui­si­tions, Blalock said.

For ex­am­ple, when McKes­son com­pletes di­vest­ing its IT busi­ness into a joint ven­ture with Nashville-based Change Health­care in 2017, Change’s ma­jor­ity owner, the Black­stone Group, will re­ceive a $1.75 bil­lion div­i­dend at the time of the trans­ac­tion, Blalock said.

As Blalock and Fitch Man­ag­ing Di­rec­tor Me­gan Neuburger noted gen­er­ally in a re­cent IT re­port, “pri­vate eq­uity in­volve­ment may also con­trib­ute to the de­te­ri­o­ra­tion of bal­ance sheets, as pri­vate eq­uity in­vestors have fa­vored this space for its durable cash flow prospects.”

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