Private Equity Partnerships in Radiology—funding growth and opportunity in today’s healthcare environment

GE Healthcare

Despite the pandemic-induced stress on the healthcare market as well as significant drops in global financial positions, private equity activity in healthcare has remained relatively active in 2020 and thus far in 2021.[1] According to an article published in the Journal of the American Medical Association (JAMA), the fourth quarter of 2020 saw more private equity deals in healthcare than any other fourth quarter in the last 20 years.[2]  

Private equity firms began seriously investing in healthcare around 2010 by using capital from institutional investors and individuals to purchase ownership stakes in hospitals and physician specialty practices, such as radiology. Some of the key characteristics that make radiology practices appealing to private equity investors include the market’s size, its sustainable revenue projections based on favorable demographics derived from serving aging populations, increasing costs of technology, importance of scale for success and the need for improved operational efficiencies. Typical private equity strategies include the consolidation of smaller organizations under one management company, creating economies of scale. When the venture becomes efficient and profitable after a number of years, the private equity firm sells the acquisition and returns profit to its investors.

Private equity investing is poised to play a substantial post-pandemic role in healthcare. Understanding the role of private equity in healthcare and the implications in patient care is important for radiologists because they will continue to see a lot of investment activity in their markets. In a recent webinar hosted by GE Healthcare, Todd Sisitsky, managing partner of TPG Capital (TPG), discussed the recent trends in private equity investing in the healthcare sector and what that could mean at the practice level in the near future.

Private equity trends in radiology

Hospitals and radiology groups have seen increased private equity activity in recent months and trends indicate these types of investments will continue. Private equity firms acquired 355 physician practices from 2013 to 2016, and the number of acquisitions rose exponentially during the period, according to research published in JAMA.[3]

More and more independent radiology groups and other practices such as primary care are considering external investment in their practice.[4],[5] As reimbursement continues to shift and decrease, market consolidation continues, and technology and infrastructure needs increase, many practices are looking to raise capital and to accelerate growth strategies.

In recent news, one of the nation's largest physician-owned outpatient radiology and imaging practice, SimonMed, officially announced a strategic partnership with New York-based private equity firm, American Securities. SimonMed operates 147 centers across 11 states and employs nearly 200 radiologists, with 2 million patient visits per year.[6] The company’s founder and chief executive officer, John Simon, said in a statement that American Securities brings strategic, functional, and financial resources to SimonMed that will support and accelerate their many growth initiatives.[7]

Private equity opportunities in a changing healthcare market

From changes in reimbursement models to advances in technologies and treatment, it can be said that the healthcare environment is constantly in a state of change. As just one example, due to the pandemic in 2020, healthcare experienced a major shift in alternative sites of care, almost overnight, that fueled IT growth. As a result, private equity groups are targeting some healthcare IT companies to fund their growth as they provide the foundation for many of the sweeping changes happening in healthcare. In addition to IT groups searching for outside investment, many radiology groups considering external investment opportunities may be looking to utilize the capital for an IT infrastructure investment to support the current need for virtual access and remote reading in radiology, or for efficiency improvements using some of the newer technologies and AI-based solutions that are available.

“I think what we’ve seen in the last twelve months is an acceleration of some changes that have already been happening. The healthcare IT infrastructure market has probably matured by two decades in the last five years alone. In the silver lining category, one benefit of COVID is that we have seen healthcare organizations embrace of technology more than ever before,” said Sisitsky.

Sisitsky co-leads the healthcare group at TPG Capital, where he oversees the team’s investments across healthcare disciplines including physician groups, pharmaceutical products and services, medical devices and technologies, and healthcare IT. TPG is one of the most active investors in healthcare, having deployed more than $21 billion of capital into the sector over the past 20 years. In discussing the ways that the pandemic impacted healthcare, Sisitsky referenced portfolio company LifeStance Health, the largest behavioral health services provider in the U.S.

“In many ways, I think the second pandemic is a mental health one. Up until March 2020, LifeStance conducted nearly all of its visits in-person. In just a two-week period, the company transitioned to more than 90 percent of its visits online. The same can probably be said for many other providers as well. Healthcare service providers have shown tremendous resilience during the pandemic, and I think some of the lessons learned from this period – such as the willingness to embrace technology to do things better and more efficiently – are enduring and sustainable over the long-term. The overall pace of change in healthcare has been tremendous, but the second derivative, the rate of change, has increased a lot in recent years, particularly in 2020.”  

Private equity investments in healthcare companies and physician practices don’t happen very quickly, according to Sisitsky, but he does expect to see a continued increase of investments into the sector. When asked about how he selects the companies or practices that TPG backs, Sisitsky explained that these investments are the result of extensive, sometimes years, of research into a specific organization and market.  This process always involves building relationships with the management teams of target organizations.  Oftentimes, in physician owned practices or imaging centers, a potential external investment can cause concern about losing that sense of ownership or control.  Many associate private equity with hostile takeovers and cost cutting measures, a perception that Sisitsky acknowledges is common, but importantly, inaccurate. For TPG, it’s all about alignment and growth.

“We believe there are a few key components to any successful partnership,” Sisitsky explained. “You need a sense of trust with management and how the company is going to be run, as well as a mutual understanding that the investor is not management – we’re a partner. We always have an open dialogue with the teams we invest behind, but they are the ones who are running the business. Reflecting on our successful investments, the correlation between excellent management teams and excellent cultures is probably the highest of any variable, much higher than the price paid. The second component for us as investors, and it’s especially true in healthcare, is that we have to believe that we can bend the curve of the company’s trajectory. We want to help enable long-term, sustainable growth, working with management to build a company that is stronger than it was before for the benefit of its patients, employees, and other stakeholders.”

Evaluating private equity and alternative funding models for radiology practices

Though private equity funded strategic partnerships such as the recent SimonMed announcement seem to be most relevant in healthcare news, there are alternative funding strategies available to independent physician practices and healthcare organizations that can allow them similar growth opportunities. Mergers and joint ventures are alternative options to consider. While a merger is a true blend of two, typically similar companies in size and structure, a joint venture is represented by two or more organizations joining together and creating a new entity. This is a model that works well when hospitals and independent practices come together. The businesses are too disparate in size, purpose, organizational structure, ownership, and funding to utilize a true merger. In a merger, the partners or shareholders in each company usually have an ownership position in the merged entity, an arrangement almost impossible for physicians joining forces with a hospital.[8]

As another funding option, imaging leaders such as GE Healthcare have stepped up in their financial willingness and organizational readiness using risk-based contracting, flexible long-term financing and managed equipment service (MES) contracts built around shared accountability, including shared gains and vendor penalties. Some of these agreements also extend to less capital-intensive areas of digital solutions for operations and informatics as well.

Regardless of the source of external funding being considered, radiology practice leaders should be well versed in the current and projected financial health of their practice. Understanding their market position, competitors, and market trends will help them make better decisions for the future of their radiology practices.

Learn more by viewing the webinar, The Future of Healthcare Private Equity.