July 18, 2017
3 min read

How to look at private equity investment in physician groups: Eye care

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Steven Grassa
Anjana D. Patel

In this second of six articles from the lawyers from Epstein Becker & Green and the analysts from Provident Healthcare Partners, LLC, Steven Grassa and Anjana D. Patel, Esq., delve into the hot sector of eye care, explaining how private equity investment is growing in this field.

The super-hot market for eye care practices

The eye care sector saw a significant uptick in investment and consolidation activity in the first half of 2017. Private equity capital flowed into the sector to the tune of seven new platform investments in the first 180 days of 2017. The investment thesis in the sector is predicated on procedural volume tailwinds because of an aging population, cash-based premium eye care service offerings and a highly fragmented landscape ripe for consolidation.

In May 2014, Varsity Healthcare Partners, a health care-focused private equity firm with a demonstrated record of success in other outpatient specialties, recapitalized Katzen Eye Group to form Eyecare Service Partners (ESP) in a transaction that represented one of the first recapitalizations of an ophthalmology practice. With the capital and resources that Varsity provided, ESP expanded into four new states and grew its provider base from 30 to more than 115 in a 3-year span. ESP leveraged its first-mover advantage in implementing an aggressive add-on acquisition strategy to expand its geographic reach from Maryland to Delaware, Colorado, California and Illinois.

Private equity investment was quiet for a period after the Katzen transaction, until a number of other investor groups began to develop a similar thesis and enter the sector. Midway through 2015, FFL Partners recapitalized Clarkson Eyecare, a St. Louis-based optometry practice, to form EyeCare Partners (ECP). ECP, alongside ESP, has been an active consolidator in the eye care space, acquiring both optometry and ophthalmology practices nationwide.

There are now several private equity-backed ophthalmology practices, as investment activity has accelerated in 2017. The first 6 months of this year saw seven private equity groups make platform investments in practices headquartered in Arizona, California, Colorado, Georgia, Michigan, Minnesota and Tennessee. The most notable transaction so far in 2017 came at the beginning of June, as Varsity Healthcare Partners announced its exit from ESP in a transaction with Harvest Partners. This marked the first successful exit for a private equity firm in the industry, and this will undoubtedly attract more investors looking to replicate Varsity’s success in the space.


With investment activity very much in full swing, increasing competition for deals will drive valuations for leading eye care practices. The dozens of private equity groups looking to make their first platform investment in eye care now must compete with multiple private equity-backed platforms aiming to execute a roll-up strategy of their own. Provident is expecting consolidation and investment activity to continue its rapid pace as the sector moves toward the next phase of its investment cycle. Significant supply and demand imbalance in the sector is expected to continue, keeping valuation multiples for eye care practices at the higher end of the physician services sector.

Top health care regulatory issues in eye care practice transactions

Eye care groups should be aware that any major investor will conduct comprehensive due diligence of its debt, contracts, staffing models and general practice operations. In addition to standard areas of diligence, such as employment and malpractice exposures, payer audits, benefit plans and leases, there will be deep diligence on the practice’s regulatory compliance, including areas such as:

Coding and billing: whether codes are supported by medical records, whether certain procedures (eg, treatment of age-related macular degeneration or cataract surgeries) are “overused” compared with industry norms and medically necessary, and whether codes are improperly “unbundled;”

Fraud and abuse compliance, including arrangements with referral sources and Stark law compliance: especially if the practice constitutes a “group practice” and whether it meets the “in-office ancillary services” exception as per the Stark regulations for diagnostic eye imaging (eg, X-rays and ophthalmic biometry scans);

Financial relationships: co-management and other financial relationships with optometrists and other eye care providers; and

Compliance: robust compliance review and documentation of full implementation of the program (training, self-audits, reporting, investigations, etc).

To avoid issues that may cause delays in transactions, or possibly negatively impact a group’s valuation and purchase price, eye care practices, with the assistance of an investment bank and legal team, should make sure their “regulatory house is in order” in advance of proceeding in earnest with soliciting potential partnership/investment proposals from private equity companies or other investor groups.

Steven Grassa, an analyst with Provident Healthcare Partners, LLC, focusing on advising health care businesses with an emphasis on physician groups, prepared part 1 of this article. He can be reached at sgrassa@providenthp.com.

Anjana D. Patel, Esq., member of Epstein, Becker & Green, PC ’ s Health and Life Sciences Group, focusing on physician group and other health care industry transactions, prepared part 2 of this article. She can be reached at adpatel@ebglaw.com .

Disclosure: Provident was the exclusive financial advisor to Katzen Eye Group and Minnesota Eye Consultants in their respective transactions.