Private Practice Consolidation Opportunity in the Fragmented Urology Specialty
The urology sector has yet to see significant investment and consolidation led by private equity, but the specialty is poised to be a newer area of interest from the investor community as evidenced by Audax Group’s 2016 recapitalization of Chesapeake Urology. Large group practices will be at an advantage over smaller groups as an aging U.S. population will continue to drive demand for urologic procedures, and a projected shortage of urologists will put further emphasis groups’ ability to recruit new providers and increase the productivity per physician.
With 12,186 practicing urologists in the U.S.¹, the specialty is similar in size to dermatology and gastroenterology, but smaller relative to other actively consolidating physician services areas highlighted in Table 1. However, a high level of market fragmentation and the presence of several market-leading platforms indicates there’s an opportunity for a regional or national roll-up strategy led by private equity. As seen in Figure 1, consolidation in the industry has been occurring for the last decade, primarily driven by hospital acquisitions and mergers with larger practices.
Market Factors Affecting The Urology Industry
Similarly to most physician specialties, the U.S. urology industry has significant fragmentation nationally. According to data from the American Urological Association 2016 Census, nearly 60% of the 12,186 practicing urologists, or 7,196 physicians, are in a private practice setting, and about 17% of those physicians, or 1,198 urologists, are solo practitioners (Figure 2). Furthermore, over 5,000 urologists reported in the 2016 survey to be part of a practice with 10 or less total urologists (Figure 3).
The single specialty urology market presents an attractive opportunity for a regional or national consolidation strategy. With over 5,300 doctors practicing as part of single specialty urology groups, fragmentation is very evident given only eight practices nationally have more than 50 total providers, which includes NPs, PAs, and physicians (Table 2). The five largest single specialty urology groups in the country employ 309 doctors, according to company websites, which is less than 6% of urologists practicing in single specialty groups nationally. Private equity groups that partner with one of the leading platforms in the sector have an opportunity to consolidate fragmented regional markets through add-on acquisitions.
Rising Demand for Urologic Procedures will Outpace the Supply of Urologists
Driven primarily by the aging U.S. population, demand for urologic procedures is projected to rise as the prevalence of prostate cancer, urinary incontinence, and Benign Prostatic Hyperplasia (“BPH”) significantly increases in the age 60 and over population (Figure 4). Patient demand for these services is expected to outpace the supply of urologists as over 50% of the practicing urologists in the U.S., or 6,175 urologists, are over the age of 55, with only approximately 300 urologists graduating from residency programs each year (Figure 5).
To meet the demands of the patient population, urology practices will need to be efficiently managed both operationally and clinically, leverage size and scale across multiple markets to better recruit physicians, and utilize physician extenders as their role grows within the specialty. The management capabilities and clinical protocols of a platform entity will provide an opportunity post-closing for organic growth of less efficiently managed add-on acquisitions that also lack a full suite of sub-specialty coverage.
Reimbursement Adjustments Under MACRA
As the patient-to-urologist ratio increases, practices nationwide are also preparing to report value-based metrics as a result of the shift to The Merit-based Incentive Payment System (“MIPS”) outlined under the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”). Large group practices that have invested in management, healthcare information technology, sub-specialty expertise, and the implementation of practice-wide clinical protocols are poised to benefit under MIPS through their ability to qualify for bonus payments starting in 2019 and beyond (Figure 6; Figure 7). A one-stop-shop model for providing urologic services is critical to controlling the full continuum of care for the patient.
MACRA is expected to be an impetus for consolidation in the urology industry as solo practitioners and physician-managed practices look to align with larger private providers or health systems that can alleviate the administrative burden and infrastructure costs necessary to qualify for bonus payments under the new quality payment system. Private equity-backed groups will see an opportunity to scale management services via alignment with these providers.
A Shift From Volume to Value
The passage of MACRA signifies a trend towards value-based payments in healthcare, and urology stands to be favorably impacted by MIPS; when the urology sector begins experiencing zero-sum payment adjustments in 2019 based on 2017 clinical performance data, many urology groups are poised to realize positive reimbursement outcomes. CMS estimates total bonus money to urologists of $17.9 million in 2019, with an estimated 72.4% of urologists being eligible for exceptional performance bonuses.
Private Equity: The Alternative to Hospital Employment
Health System Acquisitions
Consolidation within the urology sector has historically been led by hospitals and health systems acquiring group practices locally. As of 2016 data, about 40% of practicing urologists in the U.S. work in an institutional setting, an approximately 6% increase since 2014¹; financial and administrative challenges that private practices face around government regulations, reimbursement under value-based care, and the lack of leverage in negotiations with large payors have made hospital employment a more secure option with better quality of life for small practice urologists. However, hospital employment limits the autonomy and ownership that urologists sought after in their decision to practice in an outpatient setting. Additionally, the shift to inpatient care can increase healthcare costs for the specialty.
The Attractiveness of Private Equity-led Consolidation
Urologists in large group practices are able to enjoy the benefits of private practice. Financially, this option typically includes ambulatory surgery center ownership to access facility fees through distributions, bonuses tied to ancillary services including radiation treatments and pathology, hospital co-management fees, and compensation increases related to the overall profitability of the practice. Perhaps most importantly, private practice physicians are able to maintain clinical autonomy and work with a much more nimble organization as compared to a health system. These factors are what make private equity consolidation such an attractive alternative for urologists looking to alleviate the administrative burden of their private practices. Through partnering with a larger, privately-held entity, physicians will be able to enjoy the benefits of aligning with a management services organization while also sharing in the financial success of the enterprise through their compensation and equity appreciation.
Allowing physicians to be successful in private practice also drives down costs for payors. A 2012 Journal of Urology study found that 20 of 22 common urological procedures were less expensive in ASCs than in the hospital outpatient department (“HOPD”) setting; the study estimated that shifting 50% of urological procedures examined from hospitals to the ASC setting would save the Medicare program $66 million annually.
For investors, post-closing growth enhancement of add-on acquisitions can be realized through providing more efficient care, driving procedural volume into company-owned ambulatory surgery centers versus hospital operating rooms, adding full sub-specialty coverage, and scaling ancillary services to practices that haven’t fully invested into them.
The urology sector shares many of the qualities that are leading to enhanced investment and consolidation activity in outpatient physician areas such as dermatology, gastroenterology, interventional pain management, and ophthalmology. The specialty will benefit from the same volume tailwinds driving an increasing demand for care across all specialties treating the geriatric population. Additionally, fragmentation coupled with a more difficult private practice environment will likely result in market interest from providers looking to partner with a larger private practice organization in lieu of hospital employment. Through ancillary services and ASC ownership, private practice income margins in urology can remain attractive. Private equity groups have an opportunity to be a first-mover in the consolidation of the private practice urology sector before competition for add-on acquisitions increases.
Provident Urology Team