INSIDERINSIDERD E C E M B E R 2 0 2 0

SHIFTING SITES OF SERVICE

IN HEALTHCARE

HEALTHCARE & LIFE SCIENCES

We hear consistently the desire to invest and operate on the “right side of the cost curve.” For any paradigm shift to occur in healthcare, the key constituencies must buy-in to any change. BGL’s lens when looking at sustainable change is through that of the patients, providers, and payors (government included).

The trends and strategies we are witnessing all pos-itively impact the three major constituencies. For example, in the physician office setting, we have seen a positive correlation between the ability to stand up telemedicine quickly and strong performance since March 2020. Various subsector specialists may have slightly differing views on the site(s) of service that best accomplish value goals.

INTRODUCTION

he shift in site of service for care delivery to the ambulatory environment is accelerating. This is driven by expanding patient choice and eco-nomic responsibility, growing payor adoption,

and continued technological advancements. BGL’s Healthcare & Life Sciences Team expects this trend will continue. We are advising companies on tailored investment theses and growth strategies that take advantage of this trend.

Physician entrepreneurs are a key driver of the move-ment to the outpatient environment. We segment physician practices into the following broad sub-sectors: Retail Medicine, Single Disease State Focus, Primary Care, and Outsourced Clinical Services. This report provides some insight into key trends in each of these subsectors.

BGL had targeted discussions with key thought lead-ers that are either invested in or operating within their sectors experiencing continued transition.

“ I think we’ve kicked the can far enough on the medical system reform that we’ve reached a point where we have to address providing the right treatment for the right patient in the right setting.

” Doug Wisor, MDCEO, National Spine and Pain

“Now you are seeing more money flow into the outpatient, multi-site specialties (particularly those utilizing ASCs), as well as home care and telemedicine. It is a continuation of a broader trend where care is provided at a Iower cost, with at least equal out-comes, good access, and more convenience in a patient friendly setting.

J.R. DavisManaging Partner, Blue Sea Capital

Chairman of the Board of SignatureMD ”

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“ I think the ASC is one of those unique environments in healthcare where you actually can simultaneously accom-plish quality, access, and cost.

”Rex AdamsCEO, EyeSouth Partners

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Access is a key element that is often overlooked in the equation of value that divides quality by cost.

COVID-19 has placed significant strain on the deliv-ery system further forcing site of service selection into the spotlight. Patient preference continues to shift away from hospitals designed to handle acute medical issues.

This trend has a very real impact in the Outsourced Clinical Services sector. With hospital margins declin-ing, vendor consolidation and hospital ownership consolidation are creating headwinds for outsourced clinical providers. Nevertheless, we are seeing win-ning models in outsourced coverage focused on outpatient settings, particularly in anesthesia. Also gaining traction are outsourced surgicalist mod-els because they solve issues of quality, efficiency, and access, while providing economic benefits to health systems.

INTRODUCTION

The reality is that patients don’t want to go to a hospital if they don’t have to go to a hospital, and they shouldn’t go to a hospital unless they have to.

Madan Kandula, MDFounder & CEO, ADVENT

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INTRODUCTION

4

NEWLY ALLOWED ASC CPT CODES PER YEAR

70

60

50

40

30

20

10

02015 2016 2019

90

80

20202018

Newly Allowed ASC CPT Codes Per Year Average

100

Source: Life Science Intelligence, L.E.K. Interviews and analysis

TOTAL U.S. SURGICAL CASES(2005-20F)Millions of cases

70

60

50

40

30

20

10

02005

50

10

54

15

60

20F

65

2017

U.S. SURGERY CASES BY OP SETTING: ASC VS. HOPD (2005-20F)Percent of total OP cases

100

80

60

40

20

02005

HOPD ASC

59

41

10

52

48

15

43

57

20F

40

60

U.S. SURGERY CASES BY SETTING: IP VS. OP (2005-20F)Percent of total cases

100

80

60

40

20

02005

IP OP

42

58

10

40

60

15

37

63

20F

36

64

1MedPac 2 National Conference of State Legislatures

Source: Life Science Intelligence, L.E.K. Interviews and analysis

Source: MedPAC, Life Science Intelligence, VMG Interviews and analysis

Source: CMS

• In 2020, ASC’s received an average 2.1% increase in Medicare reimbursement per procedure, and hospital outpatient departments received a 1.4% average rate increase.

• Between 2013 and 2018, annual Medicare spend in the ASC grew from $3.7 billion to $4.9 billion, a CAGR of 5.8%.1

• Between 2015 and 2018, the number of single-specialty ASCs billing Medicare grew from 2,878 to 3,277 while the number of multi-specialty ASCs declined from 1,802 to 1,784.

• CON laws currently exist in 35 states across the United States2. Since the onset of COVID-19 in the U.S., 20 states have suspended some portion of their CON laws. Florida repealed a significant portion of its CON laws in July 2019 (general hospitals, medical rehab beds, and providers of tertiary services) with another repeal anticipated in July 2021 (specialty hospitals). We believe many states that have temporarily suspended their CON laws due to COVID-19 will follow Florida’s actions to promote increased competition and lower costs.

• In December 2020, CMS finalized plans to phase out the inpatient only list, clearing the way for further transition to lower cost settings that can maintain or improve quality.

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RETAIL MEDICINE OPHTHALMOLOGY & ENT

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he subspecialities we include within our Retail Medicine subsector address many of the cata-lysts for the shift in the site of service. Dental, Dermatology, Physical Therapy, and Veterinary,

while performing well under decades of private equity ownership, are seeing the site of service remain rel-atively stable. Ophthalmology and Otolaryngology (ENT) are attracting heightened levels of investor attention and investment. Given the procedure-driven nature of Ophthalmology and ENT, these specialties are more intertwined with hospitals and health sys-tems. In addition, historically they both have been smaller contributors to multi-specialty ASCs, given that MSK specialists typically anchor freestanding ASCs and physician-owned hospitals. The emergence of the single-specialty ASC has been, and will continue to be, a key driver of future growth in these specialties. In Retail Medicine, the captive ASC serves more as an extension of the office, playing into two trends—consumer choice and efficiency of care— that are influencing the site of service shift.

“Pick your service, find the least costly place to host that service, and maintain quality, and if you can do those two things, then there should be savings, by defi-nition, that can go to all players. That is the future of healthcare.

”Rex Adams

CEO, EyeSouth Partners

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Madan Kandula, MDFounder & CEO, ADVENT

Both ENT and Ophthalmology have demonstrated the requisite provider adoption necessary to enable a shift in site of care. Traditionally, ENT physicians train in the OR setting for more acute procedures such as balloon sinuplasty. In ophthalmology, general oph-thalmologists are now coming out of residency with training on MIGS when traditionally that was reserved for fellowship trained glaucoma specialists.

Payors are pushing procedures to lower-cost set-tings. It is not sustainable long term for the same surgical procedures performed in an HOPD setting to be reimbursed up to 40% more and up to 30% more in a freestanding ASC setting compared to a physician office.

”

“The beauty of a single-specialty ASC versus a doctor just walking into an average OR in a hospital is, typically our doctors will design their ASCs themselves. All the equipment is exactly how and where they want it, and all the supplies are exactly how and where the staff want them for ease of access. In addition, with a sin-gle specialty ASC the staff is trained, dedicated, efficient, and effective in working with doctors addressing that specific specialty of the patient. Outside of the operating room, the waiting room and the checkout room are designed for efficient, effective patient flow - to make it efficient and also as healthy as possible, and as clinically appropriate as possible. You are having a specialized design for that sole purpose, as opposed to a catchall OR that may supply a diver-sity of services.

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he triad of anchor tenants of physician owned hospitals and surgery centers - orthopedics, spine, and pain management - stand to be impacted most by site of service shifts given

their overall spend in the procedure-based category of the healthcare ecosystem.

A major shift in orthopedic care occurred in 2018 when CMS removed total knee replacements from the inpatient only list. Full migration can take up to five years but is transitioning quickly.

The actual eligible population is a factor and an area that may be overlooked when analyzing the potential movement of cases. Other factors includ-ing co-morbidities, general health, and age must also be considered. While equipping an outpatient

SINGLE DISEASE STATE FOCUS ORTHOPEDICS, PAIN MANAGEMENT, CARDIOLOGY

“We continue to see chunks of the inpatient volume move to outpatient, which is a secu-lar trend. We also have pro-cedures that are moving from ASC settings to office settings. I think it is a continuing trend that is probably not going to stop. Everybody wins, except for the hospital.

” Mike AndersonChief Development Officer, Orthopedic Care Partners

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setting to perform higher acuity procedures is not a gating item, physician and patient comfort are. Surgical enhancements such as minimally-invasive improvements and hybrid operating room advance-ments have enabled physicians to be more effi-cient and reduce staffing needs while improving patient outcomes.

Interventional Pain Management is an example of a specialty that utilizes outpatient services to deliver a holistic solution. Pain management effectively utilizes a plethora of services in outpatient-settings, tailored to patient convenience without reducing quality. As an advisor to multiple to Pain Manage-ment practices over the past five years, BGL has witnessed the progression of care options to ASC and office settings, ranging from the use of spinal cord stimulators to procedures such as kyphoplasty and vertebroplasty, which span subspecialities of Spine/Ortho/Pain.

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“At the end of the day, if our obli-gation is the patient, to provide the highest quality of care at the lowest cost setting that is safe and gives effective outcomes, I think the argument that you are going to force them to use the hospital setting has to come to an end.

Doug Wisor, MDCEO, National Spine and Pain ”

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Cardiology is emerging as a leader in the transition from hospital to outpatient care, despite being one of the early specialties to consolidate under hospi-tal ownership. Between 2015 to 2018, the number of cardiology-focused ASCs billing Medicare grew at a 77% CAGR from 10 to 55 centers. 3 As device technology becomes smaller and more advanced, and as surgical complications decline, physicians and patients become more comfortable having procedures outside the hospital. These measures reduce overall cost to the system and increase patient satisfaction.

Cost is perhaps the greatest factor driving the shift to the outpatient setting. Cost in outpatient set-tings can be upwards of 50% less than the same procedures performed in a hospital. That cost dif-ference still leaves significant margin potential for those who invest in the necessary facilities and ancillary equipment.

SINGLE DISEASE STATE FOCUS ORTHOPEDICS, PAIN MANAGEMENT, CARDIOLOGY

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CMS has taken notice of the potential for signifi-cant cost savings and increased quality associated with shifting cardiovascular services to the ASC. In 2019, CMS broadened the way surgery is defined in ASC regulations to account for select “surgery-like” procedures that fell outside the CPT surgical range. 4 This resulted in 17 new cardiac procedures on the ASC covered procedures list in 2019. In 2020, CMS continued this push, covering certain percutaneous coronary interventions (“PCI”) by adding another 6 CPTs to the list. This is considered by industry experts to be a milestone in the shift toward out-patient cardiovascular care.

As the trend toward outpatient cardiovascular care grows, we expect many hospital-employed cardiolo-gists to return to private practice, and those private practices will develop or join a growing number of outpatient cardiovascular facilities.

PRACTICING PHYSICIANS ANTICIPATE THAT AMBULATORY ACTIVITY WILL GROW 12% PER ANNUM OVER THE NEXT DECADE.

Ambulatory Inpatient

Cardiology, CPT codes Musculoskeletal (MSK) medicine, CPT codes

Surveyed CPT codesMore than 60% inpatient

volume today

Surveyed CPT codesMore than 60% inpatient

volume today

100% = 107 million 6 million 6 million

All cardiology activity

Today In 10 years All MSK activity

Today In 10 years

CPT, current procedural terminology.

8 million 8 million

69

31

16

84

56

44

5

95

26

74

40

60

100% = 71 million

3MedPac4 U.S. Centers for Medicare & Medicaid Services

Source: McKinsey & Company

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he emergence and evolution of concierge medicine underscores the growing trend toward healthcare consumerism. Consumers are now able to “shop” primary care coverage and pre-

mium options tailored to their individual and family needs. Care options tailored to patient choice and flexibility regarding site of service are paramount, and concierge medicine has thrived in 2020.

BGL expects to see large multi-specialty groups adopt hybrid site of service models with concierge medicine elements. A certain level of comfort in flexibility of site of care has been achieved with

PRIMARY CARE CONCIERGE MEDICINE AND RISK-BASED MODELS

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“In the rest of the economy you have a more direct, traditional customer-supplier relationship, where people can make pretty clear decisions for themselves with good information. To the con-trary, within healthcare the sys-tem you have historically had the payors between those two, and so it really can distort things and create misaligned pricing relative to value proposition. I think that has evolved over time with con-sumer-driven healthcare, higher deductible plans, better informa-tion, online ratings, to make things more transparent.

” J.R. DavisManaging Partner, Blue Sea Capital Chairman of the Board of SignatureMD

telemedicine. In addition, BGL predicts an increase in the number of ancillaries provided in the home setting.

While consumerism drives change at the front-end of healthcare delivery, the way payors and provid-ers assess and assume risk on the back-end is also evolving. Much like the movement from acute to outpatient settings, the way payors reimburse is shifting. Sophisticated providers are entering into risk-sharing relationships up and down the care continuum with the realization that a focus on pre-ventive measures can produce both high quality out-comes and significant cost savings. In 2016, Hawaii’s BCBS plan launched a new capitated health plan that “increased quality measure scores by 2.3 percentage points and decreased primary care visits by 3.9 per-centage points… the [capitated] system pays to take care of individual patients, not to do visits with them in the office.”5 Whether an acute episode such as a bundled knee replacement, or a capitated primary care model to leverage preventive care and keep an entire population healthy, payors and providers are finding ways to share risk and mutual benefits.

Perhaps the most significant recent catalyst in the shift toward risk-based care is the COVID pandemic. Providers that historically resisted changes to the status quo have reexamined their fee-for-service models and now recognize the value had they secured capitated contracts pre-pandemic.

As risk continues to shift onto the provider, those providers will naturally look toward high quality, cost-efficient sites of care. Providers will favor the control and comfort of outpatient and office-based settings to limit the unknown risks and costs asso-ciated with hospital-based care.

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5 HealthLeaders Media 6 Kaiser Family Foundation

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PROVIDER SERVICES

The delivery of healthcare in the U.S. has been steadily moving to the ambulatory environment, driven by the physician entrepreneur and related advanced practice providers. BGL’s Provider Services Group is one of the most experienced and respected financial advisory teams in the U.S. for medical practices and related technical services, with a long track record of success advising physicians and alternate site providers through strategic transactions.

LEADING ADVISOR TO PHYSICIAN ENTERPRISES

RETAIL MEDICINE OUTSOURCEDCLINICAL SERVICESALTERNATE SITE SERVICES

• Behavioral Health

• Clinical Diagnostics

• Home Health & Hospice

• Specialty Hospitals & Short-Stay Surgery

SINGLE DISEASE STATE FOCUS

• Cardiology

• Gastroenterology

• Oncology

• Orthopedics

• Pain/Spine

• Podiatry

• Urology

• Anesthesia

• Emergency Medicine

• Hospitalists

• Radiology

• Surgicalists

• Pathology

PRIMARY CARE

• Concierge Medicine

• Internal Medicine

• Multi-Specialty Groups

• Risk-Sharing & Full-Risk Models

• Women’s Health

• Allergy

• Dental

• Dermatology

• ENT

• Fertility

• Ophthalmology

• Physical Therapy

• Urgent Care

• Vein

• Veterinary

FOCUS AREAS

• Independent investment banking and financial advisory services for the global middle market since 1989

• A firm culture built on the core principles of integrity, accountability, commitment, and relationship focus; as a partnership owned exclusively by our professionals, we are singularly focused on helping our clients succeed

• On every engagement, our clients receive senior-level attention from experienced bankers who bring a wealth of industry knowledge, transaction expertise, and deep relationships

• We are energized when presented with unique challenges and known throughout the industry for our ingenuity in developing and executing creative solutions to deliver outstanding results

• Deep industry experience in Business & Industrial Services, Consumer, Healthcare & Life Sciences, Industrials, and Real Estate

• Broad client base including family/entrepreneurially-owned, private equity-backed, and publicly owned companies

• Investment banking offices in Chicago, Cleveland, and Philadelphia; real estate brokerage offices in Chicago, Cleveland, and San Antonio; and access to experience and capital in more than 30 countries worldwide via Global M&A Partners, Ltd.

LEADING INDEPENDENT FIRMWHO WE ARE

COMPREHENSIVE CAPABILITIES

Sell-Side Advisory

Acquisitions & Divestitures

Public & Private Mergers

Special Committee Advice

Strategic Partnerships & Joint Ventures

Fairness Opinions & Fair Value Opinions

All Tranches of Debt & Equity Capital for:

Growth

Acquisitions

Recapitalizations

Dividends

General Financial & Strategic Advice

Balance Sheet Restructurings

Sales of Non-Core Assets or Businesses

§363 Auctions

M&A A D V I S O R Y C A P I T A L M A R K E T S

F I N A N C I A L A D V I S O R Y

Primary Research

Industry Benchmarking

Operating Advisor Network

White Papers

Industry Surveys

R E S E A R C H

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SELECT BGL PROVIDER SERVICES BANKERS

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CLINTON J. PARKERManaging Director210.352.5832cparker@bglco.com

J. KYLE BROWNDirectorProvider Services Lead312.658.4767kbrown@bglco.com

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MANFRED R. STEINERManaging Director312.658.4778msteiner@bglco.com

SEAN P. MAYNARDVice President312.658.4771 smaynard@bglco.com

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