The cardiology industry has historically seen consolidation through hospital acquisitions, leading to loss of autonomy for physicians. However, the transactions have shifted towards private equity-driven merger and acquisition activity. Private equity investment offers cardiology practices new avenues for growth, such as acquisitions, partnerships, and the development of new locations. This will enable practices to invest in analytics capabilities and transition towards value-based payment models. The private equity model also provides negotiating leverage with payors and local health systems.

Macroeconomic Trends

Cardiology has attracted significant private equity investment due to favorable macroeconomic trends. The demand for cardiovascular and cardiology services is expected to increase in the future due to numerous factors such as 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. Adults over the age of 60 contribute to approximately 89% 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. By 2030, one in five Americans is projected to be 65 years or older. This will lead to a direct increase in the usage of cardiology services.

Migration from Inpatient to Outpatient

CMS rulings have expanded the coverage of cardiovascular procedures in Ambulatory Surgery Centers (ASCs), allowing cardiologists to perform more procedures in outpatient settings. This shift may encourage cardiologists to return to independent practice from hospital employment. The transition to value-based care models, focusing on outcomes rather than fee-for-service, requires enhanced data analytics capabilities and higher care delivery standards. Cardiology practice partnerships offer an alternative to joining health systems for smaller practices struggling with the transition. The adult obesity rate, strongly linked to heart disease, is expected to rise, increasing the risk of related conditions.

Value-Based Care

Healthcare treatment has traditionally operated on a fee-for-service model, where physician practices were motivated by the frequency of patient visits and the number of treatments provided. However, payment models are now shifting towards a value-based approach that prioritizes outcomes. This transition requires healthcare providers to possess new data analytics capabilities and uphold higher care delivery standards. Small cardiology practices are facing challenges in adapting to these evolving payment models that emphasize value. In response, partnerships among cardiology practices are emerging as an alternative to joining health systems that are already equipped to navigate this industry transition. Cardiologists are increasingly opting to move away from solo or smaller practices and choosing larger physician-owned practices that can better navigate the demands of value-based payment models.

Reasons Why PE is Interested in Cardiology

Fragmented Space

The cardiology industry is characterized by a low level of market share concentration, with the top four operators accounting for less than 10% of industry revenue in 2020. The majority of cardiology practices, around 80%, employ only 1 to 5 physicians, indicating that they are small and primarily serve local patients. This high degree of fragmentation presents an opportunity for collaboration among cardiology practices to unlock efficiencies that would be difficult to achieve without substantial size and scale. Through a “roll-up” strategy facilitated by a private equity partner, a platform practice can join forces with other leading groups to form a cohesive organization. This larger organization can benefit from operational efficiencies and gain increased leverage with payors and health systems.

Highly Profitable Procedures

The profitability of cardiology varies across different specializations due to variations in medical expenses and costs associated with different procedures. Cardiologists, with their highly specialized knowledge, generate significant revenue per practitioner. Physician shareholders in highly productive practices often surpass the salary ranges typically seen in the industry. As more procedures shift from inpatient to outpatient settings, community-based cardiology practices will have the opportunity to increase margins and compensation for cardiologists in the future.

FMV not Much of a Concern

In the past, compliance with the fair market value provisions of the Stark Law has limited the transaction values and multiples in mergers and acquisitions within the cardiology specialty because health systems must comply with the regulatory guidelines. Sellers have been unable to take advantage of competitive dynamics that often drive valuations above fair market value. However, investment from private equity sponsors has the potential to increase transaction values, as they are not bound by the same fair market value restrictions as health systems. Furthermore, private equity transactions provide an alternative to the conventional hospital employment model, allowing physicians to retain ownership and play a pivotal role in the growth and decision-making of the organization.

As of May 2022, there were a total of five publicly announced private equity platform practices in addition to several transactions in process. Los Angeles based investment bank 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.