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The Golden Age of Older Rectums: Private Equity Trends in Gastroenterology

Private equity has been making waves in healthcare, with market penetration rates for gastroenterology nearly doubling between 2019 and 2021. It’s been a while since I wrote about this spicy topic, so let’s revisit the love affair between private equity and healthcare.

In this article, I’ll spotlight the latest trends in private equity within the healthcare sector, explore the business model driving these investments, and offer my insights as a physician on this dynamic and contentious topic.

The Deets: Private Equity Trends in Healthcare

PE ownership growth in physician practices has led to significant market share acquisitions:

  • PE firms hold over 30% physician practice market share in 120 metropolitan statistical areas (MSAs).

  • In 60 of these MSAs, PE firms hold over 50% market share.

The types of specialties PE firms most commonly acquire are dermatology, ophthalmology, and gastroenterology. For the sake of this article, I’m going to focus on gastroenterology.

A recent Health Affairs study found PE market penetration rates for gastroenterology surged from 7.5% to 13% between 2019 and 2021. By 2021, PE firms controlled 42% of the market share in gastroenterology within 120 of 384 MSAs.

The rise in PE acquisition of gastroenterology practices makes sense given the trends:

  1. People are living longer, with around 40% of Americans aged 45 and older.

  2. Colorectal cancer screening guidelines recommend starting at age 45 and continuing every 10 years through age 75 (if you’re screening with colonoscopy and everything is normal).

  3. The average colonoscopy cash price is around $1,600.

With about 130 million Americans aged 45 and older needing routine screenings and the number of adults 65 and older expected to double to 80 million in 20 years, there’ll be a lot of colonoscopies needed. This is the golden age of older rectums.

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Currently, 10% of all 14,000 U.S. gastroenterologists are partners or employed by a PE-backed firm. The three largest PE-backed GI groups are:

  1. GI Alliance: 650+ physicians, 400+ locations

  2. PE GI Solutions: 600+ physicians, 60+ clinical partner locations

  3. Gastro Health: 300+ physicians, 100+ locations

Below is a PE map from Physician Growth Partners.

How Private Equity Functions in Healthcare

PE firms typically follow a “platform and add-on” model. They acquire a large medical group, cut waste, and invest in technology. Profits are then used to buy smaller practices, consolidating market power and increasing negotiating leverage with insurers.

PE firms use a leveraged buyout (LBO) model, raising debt instead of using their own money. The acquired medical group bears the financial risk, using its assets as collateral. If they can’t pay off the debt, lenders can seize the group’s assets, as happened with Steward Healthcare and Hahnemann Hospital.

Despite the risks, PE acquisitions attract medical groups by offering immediate capital, efficiency gains, and tax benefits. Physicians often retain some equity, benefiting from future transactions.

Overall, PE firms aim for a 20% annual return on investment, with plans to sell assets within three to seven years.

Dashevsky’s Dissection

While private equity acquisitions of medical groups can inject needed capital and drive efficiency, they also raise concerns about increased healthcare costs, potential quality compromises, and market monopolization.

Studies indicate that while PE-owned practices may lead to higher healthcare utilization and spending, the quality of care often does not improve (I’ve discussed it all here). Hospital acquisitions show a 25.4% increase in hospital-acquired conditions post-PE acquisition.

For gastroenterology, evidence shows significant changes in care processes, such as increased use of deep sedation during colonoscopies, leading to more complications. PE-owned hospitals tend to add more profitable service lines, discontinue less profitable ones, have fewer full-time employees, lower patient satisfaction scores, and poorer quality metrics compared to non-PE-owned hospitals.

In a recent op-ed, two physicians argue that the real issue is misaligned incentives prioritizing profit over patient outcomes—private equity is a symptom rather than the cause of systemic problems.

This seems evident to me.

In medicine, we’re taught to treat the underlying issue causing the symptom. However, when the underlying pathology can’t be addressed—which is often the case—we treat the symptoms. Similarly, the financial incentives that attract private equity to healthcare are too entrenched to change easily. Therefore, the next best thing is to address the symptoms: private equity.

How we tackle this is a discussion for another time. If you’re eager for more, this Health Affairs article does a decent job of outlining the challenges and opportunities for reining in private equity in healthcare to protect patients.

In summary, private equity has significantly increased its presence in healthcare, particularly in specialties like gastroenterology. While these acquisitions can bring capital and efficiency improvements, they also raise concerns about higher healthcare costs, potential quality compromises, and market monopolization. Evidence suggests that PE-owned practices may lead to increased healthcare utilization and spending without necessarily improving care quality. The complex financial models PE firms use place significant financial risk on the acquired medical groups, and systemic issues in healthcare often drive these investments. Addressing these challenges requires a nuanced understanding of both the benefits and risks associated with private equity in healthcare.

OUTSIDE THE HUDDLE

The top three articles I’ve read this week.

1) Supreme Court Upholds FDA Approval of Abortion Pill, Ends Legal Battle

SCOTUS unanimously ruled that the anti-abortion group challenging the FDA’s approval of the abortion pill mifepristone has no legal basis to sue. This decision maintains access to mifepristone, including recent FDA changes allowing prescriptions by mail and use up to 10 weeks of pregnancy. The ruling didn’t address the FDA’s regulation of the drug but emphasized that federal courts aren’t the right place for such concerns. Last year, I did a recap on policy surrounding abortion.

2) Google’s Verily Pivots to GLP-1s

Verily’s Lightpath is rolling out a new program in 2026 to help patients manage cardiometabolic conditions using AI and data with personalized care levels. This type of care ranges from intensive management to long-term support, including options like GLP-1 medications for obesity and clinically guided weight loss programs. Everyone is hopping on the GLP-1 train. If you ain’t first, you’re last.

3) Founders of Mental Health Startup Done Arrested

In perhaps the least surprising news, mental health startup Done's founders were arrested for fraud. Done is/was the one that prescribed ADHD meds, and received a lot of attention during the pandemic. The founders are accused of pushing easy access to Adderall through deceptive ads and shady prescribing practices, leading to over 40 million stimulant pills being prescribed. The Justice Department says they exploited the pandemic to run a $100 million scheme, targeting “drug seekers” and making false claims to pharmacies. It’s funny, for Christmas in 2022, I made a healthcare naughty and nice list—Cerebral and Done were at the top.

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