September 12, 2017
4 min read

How to look at private equity investment in physician groups: Gastroenterology

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Gary Herschman, Esq.
Gary Herschman

In this fourth of six articles by lawyers from Epstein Becker & Green and the analysts from Provident Healthcare Partners LLC, Gary Herschman, Esq., Abe M’Bodj and Anjana D. Patel delve into the hot sector of gastroenterology, explaining how private equity investment is growing in this field.

Poised for growth: Gastroenterology

Gastroenterology represents a newer area of interest from the private equity community as the sector shares many of the same market dynamics that are driving investment activity in other physician specialties, including: favorable demographic trends, increasing outpatient procedural volumes, and market fragmentation. The first private equity transaction within gastroenterology was completed in 2016 by South Florida-based Gastro Health in its recapitalization with Audax Group.

Gastroenterology has strong macroeconomic tailwinds that will drive future growth within the sector. The population of U.S. citizens over the age of 65 is expected to more than double from 35 million in 2000 to 71.5 million by the year 2030. Per the American Cancer Society, colorectal cancer is the third most common cancer diagnosed in both sexes, with an estimated 135,430 new cases expected in 2017; it is estimated that 90% of these cases will occur in those aged 50 or older.

Additionally, the cost containment efforts by payors and hospitals have significantly driven demand for outpatient surgical care. Procedures performed in the ambulatory setting are both more cost efficient and satisfying to the patient population. Between 1993 and 2014, the ratio of outpatient to inpatient procedural volume increased from 55% to 66%, with gastrointestinal cases representing approximately a quarter of all ASC procedures performed.

Abe M'Bodi
Abe M'Bodj
Ananja D. Patel
Ananja D. Patel

Industry headwinds: Risks facing GI

Several risks also face gastroenterology. The Medicare Access and CHIP Reauthorization Act (MACRA) will require capturing patient outcome metrics, demanding higher quality reporting from gastroenterology organizations. Organizations will need to significantly invest free cash flow into Information Technology and reporting systems in order to satisfy the MACRA reporting requirements. Likewise, bundled payments and capitation present a potential threat to the healthy margins groups realize from ancillary services. There has already been significant debate regarding the necessity of anesthesiology services during endoscopic procedures. These factors have motivated organizations to explore strategies aimed at mitigating the financial implications of these risks coming to fruition.

Becoming a platform: Private equity as a solution

Driven by the regulatory environment, reimbursement pressures and fragmentation, physician services organizations across a wide range of specialties have found that the best way to stay competitive in the modern health care environment is to gain size and scale. The motivating factors for consolidation are already present within the gastroenterology community. This is evidenced by the historical trend of smaller independent providers merging together to form large regional providers. These organizations have recognized the need to increase scale in a dynamic healthcare landscape.


More recently, private equity has been an attractive alternative allowing organizations to experience long-term equity appreciation without the dilution that occurs in a merger. As a result, private equity has been instrumental in driving consolidation within other clinically-based physician services areas such as dermatology, interventional pain management and ophthalmology. Through implementing a “buy and build” investment strategy in partnership with a “platform” organization, private equity partners can infuse a practice with the capital necessary to scale the business. The practice will then perform “add-on” acquisitions of smaller organizations. The biggest advantage in executing this strategy as a first-mover is the opportunity to make highly accretive acquisitions at depressed multiples due to a lack of competition. Gastro Health has utilized this strategy to their advantage within the South Florida marketplace. In 2017 alone, Gastro Health has leveraged the resources of Audax Group to complete seven add-on acquisitions. Through these acquisitions, Gastro Health has added more than 20 providers and 10 new facilities to its platform.

Health care regulatory issues in GI transactions

Prior to a potential transaction between a private equity group and a gastroenterology practice, major investors will likely conduct a comprehensive due diligence review. Such reviews are focused on the gastroenterology practice’s financial information, agreements and arrangements, staffing models and operational practices. In addition, due diligence reviews will likely focus on healthcare regulatory compliance issues, such as: 

  • Coding and billing matters, such as documentation and medical necessity of gastroenterology procedures.Recent areas of focus also include:
    • Improper billing for administration of medication and self-administered medication;
    • “Unbundling” or inappropriately billing multiple CPT codes for a group of services that are reimbursed under one comprehensive CPT code;
    • Whether a medical history and physical assessment and/or a pre-surgical assessment is performed prior to gastroenterology procedures (e.g., colonoscopy and endoscopy); and
    • Billing of moderate sedation and other anesthesia in connection with gastroenterology procedures.
  • Fraud and abuse compliance, including any potential Stark law issues (e.g., whether the gastroenterology practice relies on being a “group practice” and whether all of the “group practice” requirements are met);
  • Compliance with health care laws and reimbursement regulations with respect to ancillaries (e.g., pathology and anesthesiology arrangements);
  • Out-of-network billing practices;
  • Compensation, investment and other financial arrangements with employees, contractors, practice owners and referral sources;
  • Financial relationships with drug manufacturers, such as honoraria for speaker programs, that can be intended to induce referrals or increase prescriptions; and
  • Arrangements (including joint ventures) with hospitals and ambulatory surgery centers, such as anesthesiology services, payor contracting, medical director arrangements, rental of space and equipment, etc.

Red flags identified in regulatory due diligence can cause delays in a transaction, impact a gastroenterology practice’s valuation and purchase price, and may require a corrective action plan involving self-disclosure of compliance violations and refunds of overpayments. Gastroenterology practices can avoid such diligence issues by proactively reviewing these types of issues in advance of seeking a private equity partner or other investors.

For additional educational resources with regard to private equity investment within Gastroenterology, Provident has authored a white paper which expands upon the topic, and register for Provident’s and EBG’s Private Equity in Gastroenterology: Becoming a Platform webinar on September 20th from 1-2 pm EST.

Gary W. Herschman, Esq., is a member of Epstein Becker & Green, P.C.’s Health Care and Life Sciences practice, focusing on physician group and other health care industry transactions. He can be reached at

Abe M’Bodj is an analyst with Provident Healthcare Partners, LLC, focusing on advising health care businesses with an emphasis on physician groups. He can be reached at

Anjana D. Patel is a m ember of Epstein, Becker & Green, PC’s Health and Life Sciences Group, focusing on physician group and other health care industry transactions. She can be reached at