The Rise of Private Equity in Gastroenterology Practices

Abstract

Private equity (PE) investment in gastroenterology practices has significantly increased over the past several years. Because PE firms are prevented legally from owning a medical practice in many states, they usually form a management services organization to oversee all nonclinical aspects of the practice, leaving all clinical functions to the physician owners. Gastroenterology practices have become attractive investments to PE firms because of the willingness of gastroenterologists to join a PE-backed practice and the potential to earn profits through consolidating the market. Research has started to examine the effects of PE-backed practices on patients and on the gastroenterology specialty specifically. Questions remain regarding the benefits for physicians. This article examines PE investment in gastroenterology practices and how this may impact the specialty in the future.

Keywords: Private equity; gastroenterology practice; health outcomes; management services organization.

Figure 1.

When private equity (PE) firms back gastroenterology practices, they may form a management services organization (MSO) that is responsible for the administrative aspects of a practice. PE investors own a majority share of this MSO and can offer the leadership of the practices an ownership stake as well. In exchange for having an MSO to take care of back-office tasks, the practices pay a fee to the MSO. The same MSO can service multiple gastroenterology practices as PE firms seek to enhance the performance of various practices through mergers and acquisitions. Part of the strategy to attract a lot of gastroenterology practices involves partnering with a large group first, called the platform practice, and then acquiring smaller add-on practices—leveraging the same MSO for all entities, which is illustrated by the real-world example highlighted in Figure 3.

Figure 2.

Annual count of private equity deals by specialty. Compiled from PitchBook data.⁶⁰

Figure 3.

In early 2020, Webster Equity Partners purchased Gastro One, the platform practice that gave rise to the management services organization (MSO) One GI. Over 2 years after its founding, more than 11 add-on practices have been subsequently incorporated. This brings the number of physicians that are a part of the platform to greater than 110. Although several larger platforms exist, this example highlights how rapidly the number of practices and physicians working with private equity is increasing.