Private equity in gastroenterology: Is it the future?

By | May 18, 2019

An excerpt from Private Equity in Gastroenterology: Navigating the Next Wave.

A long time ago, gastroenterologists ran solo or small group practices. Despite the myriad challenges of running a medical business, doctors enjoyed the independence that private practices offered.

But over the years, everything got too complicated. From insurance reimbursements to regulatory compliance to even patient demands and behavior. It just became tougher to stand alone. Younger physicians hardly consider going solo today. Most join groups or hospitals.

Smaller groups became bigger. Demand for endoscopic procedures fueled the growth of free-standing ambulatory surgery centers.

Hospitals sensed the opportunity. They began luring gastroenterologists to gain access to their patients and bring home new revenues. Some hospitals even created competitive pressure to persuade doctors to give up private practice altogether.

As hospitalists, doctors lost their independence. The burden of monolithic EHRs and administrative complexities didn’t help either.

Well, the market is shifting again with private equity (PE).

Involvement of PE is fueling a trend that’s already underway. By providing capital for recruiting other groups, buying new medical equipment, removing administrative burdens and inefficiencies, streamlining technology and starting ancillary services. They are courting doctors by offering them independence in a way that hospitals can’t.


Even before the advent of private equity, GI groups have been consolidating. Small groups (e.g., 4 to 8 doctors) merged to form mid-size groups (e.g., 8 to 20 doctors).

Mid-size groups came together to create large groups (e.g., 25 to 50+).

Some large groups expanded into supergroups (80 to 200+ gastroenterologists).

How would supergroups expand? I learned that the pipeline goes all the way to 1,000 GIs operating under a single entity. Such GI practices don’t exist today. At least, not in the U.S.

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Private equity companies refer to this as a “roll-up” strategy. These roll-ups will create a different kind of market dynamic. A tailwind of ancillary opportunities (imaging, pathology labs, nutrition counseling and so on) will emerge.

We’ve been involved in streamlining the back-end when some groups merged, and I experienced first-hand the efficiencies created by scale. Doctors saved money and started new revenue streams. It also made their position stronger in the region.

It’s not always necessary that mergers work out. A few industry insiders I spoke to pointed out that present trends remind them of physician practice management companies (PPMs) from the 1990s. Twenty years ago, PPM companies were hot, they raised billions of dollars, but most of them failed.

What’s next?

There are approximately 14,000 GIs in the U.S. today – many of them are part of 2,000+ fragmented groups. According to Medscape, 53 percent of gastroenterologists are employed at hospitals or other health care organizations. Present consolidation trends indicate that these deals would cover a large proportion of practicing gastroenterologists.

What happens next with 1,000 MD supergroups is anybody’s guess.

Would a tech giant be interested in buying a supergroup for the data it generates? Would a pharmacy be keen to lock in gastroenterology? Would an insurance company look at GI as a growth avenue? Or, would PE companies vertically stack a 1,000 MD GI group with similar sized ophthalmology, orthopedic, dermatology groups and create a multi-specialty private practice with 5,000 MDs?

This is not entirely new to health care. As a case in point, think of Kaiser Permanente, a non-profit founded in 1945. It has 22,000 doctors on staff serving 12.2 million members with revenues of $ 72.7 billion (2017).

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With PE in gastroenterology, the story has just begun.

Praveen Suthrum is president and co-founder, NextServices and blogs at redo | healthcare.

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