Westcove

Cardiology Industry Insights

Market Trends and M&A Activity
Updated May 2022

Executive Summary

Introduction

As of this publishing, private equity investment into the cardiology specialty has been limited. Historically, merger & acquisition activity in the cardiology industry has been largely driven by hospitals and health systems looking to expand their operations and revenue base through the employment of cardiologists through an integrated model. As hospitals and health systems have continued to acquire cardiology practices, physicians have continued to be driven to enter hospital employment arrangements, and as a result, have lost a great deal of operational autonomy. Westcove believes that the cardiology industry will begin to experience a shift away from health system-led consolidation to private equity driven merger & acquisition activity that will dramatically increase transaction volume in the near-term as leading practices consolidate to gain scale and preserve independent practice.  
Investment from private equity will create new avenues for cardiology practices to grow in terms of both size and scale, outside of the traditional partnership route of partnering with a health system. By leveraging the capital and expertise of a private equity partner, cardiology practices can grow through a variety of ways including acquisitions or partnerships with other like-minded practices and the development of de-novo locations, while having the capital necessary to invest in the analytics capabilities and infrastructure necessary to profitably transition towards value-based payment models. By gaining size and scale, independent practices will have an opportunity to gain negotiating leverage with payors and local health systems that previously did not exist. For leading practices, a private equity partner can offer an opportunity to expand their scope of clinical operations, share best practices, and take better care of a greater number of patients. 
In the following piece, Westcove will discuss these trends and detail why 2021 will likely be a dynamic year for the cardiology industry as private equity capital begins to enter the specialty.
Historical Consolidation within the Cardiology Industry
Prior to discussing the trends driving future investment activity, it is important to note the nature of the transactions that have occurred to date within the specialty. Historically, the only meaningful partnership avenue that existed for cardiologists was a health system acquisition. During a health system acquisition, the physicians often sell 100% of their ownership and enter an employment arrangement with the health system. In many cases, due to the bureaucratic nature of health systems, these types of transactions can result in a significant loss of autonomy for the practice and ultimately create dissatisfaction amongst the physicians. Recent examples of health system acquisitions include Mountain Heart’s acquisition by Northern Arizona Healthcare (April 2020), and Los Angeles Cardiology Associates acquisition by Keck Medicine of USC (February 2020).1 As has been the case across several other physician specialties such as gastroenterology, orthopedics, women’s health, urology, and pain management, the cardiology industry is going to likely undergo a shift of acquisition by hospitals and health systems to partnerships with private equity firms, setting the stage to reshape the industry landscape. 
Cardiology Macroeconomic Trends
Favorable Demographic and Macroeconomic Trends
Westcove believes that as a result of favorable macroeconomic trends, the cardiology specialty is likely to attract significant private equity investment. Demand for cardiovascular and cardiology services will increase in the future as a result of numerous factors, namely an aging population, increasing levels of adult obesity,  the continued shift from the inpatient to the outpatient setting, and a transition from a fee-for-service model to value-based payment models. Combined, these factors will all contribute to increasing demand for cardiology services.

Aging Population

Adults over the age of 60 contribute to approximately 89 percent of revenue in cardiology services. The average age of the US population continues to increase at a steady rate. Today, there are 46 million adults in the US that are 65 years or older. By 2050, the number of adults over the age of 65 is projected to double to approximately 90 million. Between 2020 and 2030, the number of elderly people is projected to grow by 18 million. This is due to the baby boomer generation; between 2020 to 2030 the remainder of the baby boomer generation will reach the age of 65. Put more simply, by 2030 1 in 5 Americans is projected to be 65 years or older.  This will lead to a direct increase in the usage of cardiology services.
Moving from the Inpatient to the Outpatient Setting
Changes in the Centers for Medicare & Medicaid Services (CMS) 2020 rulings have added multiple cardiovascular Current Procedural Terminology (CPT) codes to a growing list of covered Ambulatory Surgery Center (ASC) cardiovascular procedures in an outpatient setting. Cumulatively in 2019 and 2020, CMS added 23 Cardiac Catheterization and Coronary Intervention Codes to the Medicare ASC Approved list. These changes will continue to increase the number of procedures that cardiologists can perform within independent ASCs and catheterization labs, instead of within the hospital setting. This change may also incentivize cardiologists that previously depended on hospital employment to return to independent practice. Cardiologists will be more effective at performing these procedures in an outpatient setting.
Value-Based Care
Healthcare treatment has largely been fee-for-service, and physician practices have been incentivized by the frequency of visits and number of times a patient is treated. Payment models are shifting to a value-based model that emphasizes outcomes, and therefore, demanding new required data analytics capabilities and increased care delivery standards. As small cardiology practices struggle to meet the demands of a continued shift towards value-based payment models, partnerships amongst cardiology practices will provide an alternative to joining a health system that is already equipped to handle this industry transition. We are already seeing cardiologists opt out of solo and smaller practices for larger practices that are physician-owned. 
Adult Obesity Rate

The adult obesity rate measures individuals that can be classified as obese based on Body Mass Index (BMI), where a BMI over 20% meets the criteria for medically obese. Clinical studies have illustrated the connection between heart disease and obesity, increasing risks of circulation issues, hypertension and diabetes, and coronary conditions. The adult obesity rate is expected to increase in the future, with almost half of the U.S. population projected to have obesity by 2030.

Private Equity Interest in Cardiology
Private Equity Investment Rationale in Cardiology
In addition to positive macroeconomic and demographic trends, cardiology possesses a number of traits that make it attractive to private equity investors and Westcove expects the merger & acquisition industry landscape to adapt accordingly.
Significant Industry Fragmentation
The Cardiology industry exhibits a low level of market share concentration, with the four largest operators estimated to capture less than 10.0% of industry revenue in 2020.1 Additionally, 80% of cardiology groups employ 1 to 5 physicians;2 showcasing that the majority of cardiology practices are small and serve a localized patient base. Such extreme fragmentation represents an opportunity for collaboration amongst cardiology practices to unlock efficiencies amongst their practices that would not otherwise exist without substantial size and scale. By leveraging a “roll-up” strategy with a private equity partner, a platform practice can align itself with other clinically leading groups to create a cohesive organization. As a larger organization the practice achieves the scale necessary to realize operational efficiencies and the ability to gain more leverage with payors and health systems.
High-Margin Procedures
Profit levels vary among cardiology specializations since different types of procedures incur higher medical expenses and costs. The highly specialized knowledge of cardiologists drives a significant amount of revenue generated per cardiologist. Relative to other like gastroenterology, orthopedics, and oncology, the profitability of cardiology makes the specialty a favorable investment for PE firms. Physician shareholders that are part of highly productive practices will often exceed the salary ranges in the table below. Procedures that were historically performed in the inpatient setting will become increasingly performed by private practices in the outpatient setting, which will allow community-based practices to drive increased margin and compensation for cardiologists in the years to come.
Changing Market Dynamics

Dynamic Market Enviorment

As previously mentioned, private equity investment within the cardiology sector will follow a similar pattern to other physician specialties such as: gastroenterology, orthopedics, women’s health, urology, and pain management. The first private equity transaction within cardiology was announced in November of 2020 when Partners First Cardiology, an Austin, Texas-based cardiology and cardiovascular physician practice management organization, announced its partnership with Varsity Healthcare Partners. Varsity Healthcare has also made investments into gastroenterology, orthopedics, eyecare, and dermatology. Through their partnership with Varsity Healthcare, Partners First is attempting to create a national platform of leading cardiology practices, while also offering an opportunity for health system integrated cardiologists to return to community-based practice.
Following the Partners First transaction, Westcove expects there to be a wave of private equity investment over the next 12 to 24 months as other leading cardiovascular organizations form platforms in partnership with private equity firms.
Previously, within the cardiology specialty, compliance with the fair market value provisions of Stark Law, has restricted the transaction values and multiples of M&A activity as sellers have been unable to benefit from competitive transaction dynamics that often push valuations well above fair market value. Investment from Private Equity sponsors will potentially raise transaction values as they do not have to adhere to the same fair market value restrictions that health systems do. In addition, private equity transactions offer an alternative to the traditional hospital employment model where physicians continue to own equity and drive the growth and decisions of the organization.  

A sample of recent transaction in the cardiology specialty is listed below between late 2019 and 2021. 

Founder Considerations
Considering a Transaction
Considering a transaction is an immensely personal decision. Shareholders must consider multiple economic and interpersonal factors when thinking through when and how best to pursue a transaction. A group might be interested in partnering with a financial sponsor to pursue growth, considering retirement in the relative near future, or want to mitigate the personal financial risk of having the vast majority of their wealth is concentrated in their practice. Again, each shareholder’s decision is incredibly personal and is usually a combination of several factors. 
The advent of private equity investment into cardiology represents an opportunity for shareholders to seek access to growth capital and pursue personal financial risk mitigation for the first time. Unlike bank lending, private capital can be tailored to meet the needs of the business, helps align incentives among partners, and provide financial diversification previously unavailable to the shareholders of cardiology practices. 
In a typical deal structure, private equity sponsors will typically make a control investment (greater than 50%) in a practice, and invite the shareholders to maintain a meaningful equity percentage (e.g. 20% – 30%, “rollover equity ”) in the newly created platform entity. Additionally, shareholders no longer personally guarantee the financing of the Company. Other factors such as productivity, day-to-day management, and facilitating growth of the newly formed entity become the chief concerns of the physician shareholders and management team, while the decisions are made by the clinical leaders of the organization. As this entity grows organically and through add-on acquisitions; profitability increases through the realization of operational and administrative efficiencies. Physician shareholders participate in the growth through continued ownership in the platform entity, while not having to personally guarantee capital for growth. Shareholders often participate in the substantial appreciation of equity value in the platform entity upon a secondary recapitalization, or “second bite of the apple,” after what is typically a five-to-seven-year period. In sum, shareholders can monetize the hard-earned value they have achieved over their careers, while reducing personal financial risk through asset (practice) diversification and pursuing broader growth strategies while meaningfully participating in the upside of such growth. 
Cardiology Market Update
This whitepaper was initially published in May of 2021. Since publishing, private equity activity within the cardiology market has dramatically increased. There are now a total of five publicly announced private equity platform practices in addition to several transactions in process. Below is an outline of the current cardiology market landscape as well as an outline of the transactions that have occurred since the publishing of this whitepaper. The aforementioned trends have continued to accelerate transaction activity in the specialty, and it does not appear to be slowing down anytime soon. Based on this activity, Westcove expects to see these platforms continue to expand via regional add-on acquisitions, as well as new platforms emerge with additional private equity funding.
2022 Cardiology Market Overview
Recent Cardiology Transactions

Sources:
CapIQ; MergerMarket; U.S. Census Bureau; Harvard T.H. Chan School of Public Health; IBISWorld, “Heart Growth: Demand From Seniors and Increased Healthcare Coverage Will Support Industry Growth”; 2 Specialty Networks Consulting, “Cardiology Market Research and Cardiology Groups in USA”

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