Webinar: Outlook for Gastroenterology and Ancillary Services

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Good afternoon, everyone Thank you for joining Farragut's webinar on the outlook for gastroenterology

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and ancillary services My name is Jackie Williams and I'm the director of research

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at Farragut Today, we're very pleased to welcome Matt Devine, CEO of Ally Digestive

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Robbie Allen, CEO of 1GI Koran Garg, managing director at Hoham Bokeh And Scott Frazier,

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founder and managing director at Frazier Healthcare We're also joined by Farragut's very own Holly

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Stokes, senior analyst in Farragut's DC office who leads all of our PPM government diligence engagements and serves as our in-house expert on reimbursement and coverage of GI Before

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we get started with the program, I just wanted to inform the audience that you can write in questions in the Q&A section and I will read them into the program If I don't get

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to them right away, it's likely because I'm planning to address those questions later

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in the program, but I will try to fit that in We have a lot to cover today with our

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speakers, and so we'll get right to it So everyone is aware of the macro tailwinds for

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outpatient healthcare services And with that in mind, let's start with the operating environment

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for gastroenterology, including demographic trends and rise in GI related chronic diseases

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So Matt, we'll start with you and then move to Robbie to share your experience as an operator and what you're seeing Thank you I think one of the, there's several factors I think

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one of the big ones is consumerism out there that's going on today So I think the consumers

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are much more involved in picking their location where they're going to be seen So there's

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much more of a movement now outside of the hospital more into an outpatient center

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And that's being driven by consumers, I think, and it's also being driven by payers So we're

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in an environment now where payers are much more tuned to the high costs and they're moving procedures out of the hospital setting and more into an outpatient setting So we're

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certainly seeing a lot of that today And I think part of that's like higher deductibles

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and things like that that are driving, you know, the consumer to say, Hey, I want to be in an outpatient setting as they get more and more educated going forward I think the

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other one big trend for us here in gastroenterology as well is kind of a macro trend is the movement now towards colonoscopy of Asia 45 versus 50 That started in 2021 And that's again,

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led to a lot of demand, increased demand for services And I think lastly, I just mentioned

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the aging population So, you know, the aging population is driving more and more demand

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for our services as well So with that have come, you know, more and more focus on chronic

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disease and we're seeing that much more now in gastroenterology In our practice, there's

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much more focus on chronic disease management And that leads into our kind of partnerships

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with payers on how we're going to deal with that Thank you

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Thanks, Matt And Robbie?

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I think I think Matt hit on on obviously all the big big ones that we pay attention to I

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think there are a couple others in terms of overall morbidity associated with just the American population and obesity and the level of chronicity that kind of adds to existing disease processes certainly is one of the drivers of kind of increased use that we see across the spectrum of things And recently you got to add COVID I mean, everybody seems

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to be drinking and sitting and eating badly And that is certainly driven up some numbers

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and the pin up demand for GI services Yeah

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Thanks Robbie Those are very good points to make in terms of the other macro issues

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contributing to accessing gastro care And so, Karan, do you have anything to add on

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the macro side? Yeah, I think the only thing I would add is there is a shortage of GI physicians in the US So the number of retiring physicians is far outpacing the number of people who are

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joining the workforce from a GI perspective So what that really means is practices have

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to be more efficient in terms of how they're operating And from my perspective, looking

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at M&A world, that means it is going to lead to more integration so that people are able to work more efficiently in larger sort of practices where there is some kind of scale

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There is some ability to rely on ancillary services, which I know we will talk about a little bit later But also from the payer perspective, a lot of payers are pushing towards

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alternative payment models where fee for services is not the only way to go And the biggest

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concern around not being able to develop an efficient AVP model is really around lack of integration, lack of data So which all points to where the fact that as more and

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more consolidation happens, more and more integration will be required, not just to make the physicians productive, but also to develop these alternative payment models

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As well, and as you alluded to, we'll get to some of those topics later in the conversation

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So in addition to these profiles, the shift inside of care for GI care continues to move in a positive direction for the specialty, with over 20% of all single specialty Medicare certified ASCs being GI driven Scott, let's have you lead off on this topic to talk about

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why GI groups are busier than ever, particularly in the ASC space

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Well, I think Matt and Robbie hit on really the macro trends and very succinctly I think

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what you're seeing now, and KG touched on this as well, is payers are really initiating site of service initiatives and incentivizing it both to the providers as well as to the patients themselves as it relates to co-pays Secondly, another factor that groups benefited

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from private groups benefited from and realized, and we spend a lot of time focusing on behavioral health and the spike in all behavioral health issues Well, you have chronic disease in

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IBD and IBS, which are triggered by stress from behavioral health issues So a lot of

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groups saw spikes with some of their IBD patient population that drove additional volume But

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it's a combination of factors right now One other factor that wasn't mentioned is the fact

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that there's more awareness It's been tremendous awareness for the last 20 years driven by Katie

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Couric first and then other celebrities that have obviously passed Colaguard now, you

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can't watch TV without seeing ads for Colaguard and bring awareness to colorectal cancer It

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is an incredibly preventable cancer And you have this effect of increasing awareness,

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lowered screening age coupled with a massive patient population that is aging up and going in for their first screening So it's a great time to be an ASC owner, particularly an ASC

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owner that does endoscopy procedures And so Robbie and Matt, anything to add from your

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operating perspectives here? This is tracking the broader trend in healthcare is if you take it a little bit farther out is side of care, the hospital of the future kind of is marching towards the home and exerably And so as we continue that march, the ASC seems to be a

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fairly durable way station on the path And it fits with patients desire for ease of use,

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ease of entry, flexibility and availability And those are those are consumer driven trends

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So absolutely

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You know, I just add that gastroenterology is no different than a lot of other physician services organizations like us, it's gastroenterology But you know, radiology, outpatient radiology

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services are all moving outside of the hospital So there's a much more demand and can the

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payers are driving a lot of this And I think from an investor standpoint, you know, originally

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private equity is very focused on, you know, they originally started out with more hospital based services, anesthesia, pediatrics, things like that, more hospital based And now, you

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know, it seems like investment has moved outside the hospital a lot more So you're and you're

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seeing more growth in outpatient services, like cardiology, things like that So again,

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I think originally investors kind of shot away from it, because you know, some some agree there's investment aspects to outpatient and some of the services So I think, you know,

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there's more growth in the outpatient services today than in a hospital based service environment

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So for us, you know, there's a tremendous growth opportunity we feel And, you know,

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the I think the hospitals have been slow to move in the outpatient setting And I think

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a lot of hospitals are getting more progressive now looking outside the hospital and trying to have an outpatient strategy So there's there's quite a quite a demand to kind of

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partner up with outpatient providers, I think now on the hospital side So

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And I know we'll get to some of that later in the program as well in terms of working with hospital health system partners But Quran addressed this a bit in his first response,

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in terms of provider shortages And so, Robbie and Matt, what are you seeing in terms of

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how provider concentrations are impacting the gastro sector? And what are you observing in your markets regarding supply and demand of dynamics? I think this is it's not just gastroenterology You know, it's not surprising that gastroenterologists

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want to live where often a lot of people want to live There are a couple of trends that

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work in favor of being outside of the larger cities today And one of that is just an astronomical

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amount of physician mobility right now You're seeing unimaginable previously amounts of

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physicians being willing to relocate, particularly out of cities, as these more are less dense markets sort of catch up on the benefits of payer rates and ASCs and the economics of practice in those locations look better And so some of our rural markets are more rural

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markets actually are much easier to recruit into than some of our city based markets, which is a little bit counterintuitive relative to some of the last 20 years in the space

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So it's a reshuffle It's the same reshuffle I think we're good We're seeing kind of writ

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large across the country and all jobs You know, it's healthcare is not impervious to

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this Maybe slightly higher rates of burnout, but that is one of the benefits in the rural

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markets that we have seen some help with is there's a you can sell the less burnout aspect of a quieter area over some of the city markets So that's kind of our our internal experience

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And Matt, you're you're in exactly the opposite

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I'm scared you're a virgin of this

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Mine's slightly different because we're located in Northeast So we're primarily New Jersey

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and New York area So there's a lot of training programs, residency fellowship programs in

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the Northeast here So we're in a quite a good area for recruiting physicians And for us,

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we obviously understand the shortages and when the aging demographics of the gastroenterology business, if you will So our challenge really is to build relationships with fellowship

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programs throughout this area So we're really focused on, you know, kind of fellowship programs

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in the Northeast and trying to provide kind of the different what we try to talk about as the differentiation of our model versus a hospital based model And the opportunity

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that is outside of the hospital for physicians and trying to explain our model So we've been

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very progressive, I think, and going and meeting with fellowship programs, presenting the fellowship programs We understand that, you know, that it's imperative that we continue to develop

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relationships with fellowship programs all throughout this area So that's really where

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we're focused today I think we've been fairly successful in recruiting physicians, gastroenterologists

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in particular But concentration, for me, you know, we believe that, you know, we're

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trying to be very focused on our geography so that we can add more value to our physicians

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So if I don't go out and kind of progressively try to concentrate, it really isn't good for my physicians along the line So to me, it's imperative that we go out and really create

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density in our markets so that we can add more and more value to our hospital partners, to our patients So I mean, I think that has been great for hospital partnerships and that

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we're providing a lot of services that a small group couldn't provide to them today So,

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you know, we really developed a lot of close relationships with our hospitals in providing services that they formerly didn't get from a small group So I think it's good for patients

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and I think it's been good for our hospital partners as well

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All right Thank you for those regionally specific responses So, Karan, what are you

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observing as you engage with GI platforms? Yeah, I guess, you know, this market, at least the GI

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you know, as of right now, I would say, I guess in baseball language, probably in the second innings or so, given their less than 10 private equity-backed platforms of size and scale, which means there's still a lot of consolidation that can happen But based on

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my experience in sort of interacting with these platforms over the last several years, the amount of variation in pair rates from state to state bases is just massive, right? So the same procedure costs something totally different in New York versus in Arizona And if you sort of really

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talk to do, you know, looking at some servers, et cetera, on the pair side, what really matters to the pair is the sort of access to care and the rates are depending on, you know, county by county, is it put by zip code basis? It really depends on sort of the provider size, how much market penetration the provider has in a specific geography, then also what all specialties is the provider specifically offering And more and more, what we are seeing is

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they are really focused on pairs, they're really focused on dealing with providers that could provide broad-based density in a particular geography, as opposed to concentrated, you know, availability in a particular MSA or a particular city, for example So for them, almost adding more providers in

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a particular city is less important than saying, hey, can you provide more access by providing satellite operations in rural cities, like just like Robbie mentioned, I think that's high value at for them So that's, I think that's what I'm seeing from a variation perspective across,

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you know, how various GI platforms, depending some are national, some are regional, some are multi-regional, all of them have strategies around how to increase pair rates because that is a pretty big lever as it comes to consolidation And it kind of filters through

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everything else they're doing on the ancillary side, potential income repair, compensation to the physicians, and eventually sort of EBITDA and equity value generation

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Thanks, Karan Those are all excellent points that investors definitely need to keep in mind

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So we're at the topic of ancillary services GI is one of the most attractive specialties

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for ancillary services And Matt, on our prep call, you brought up the role of ancillaries when

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it comes to income repair Can you elaborate on that? So, you know, I think gastroenterology is a

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little bit unique in that we've been able to develop a lot of ancillaries So if you're a

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hospital-based service provider, it's difficult Like in anesthesia, for instance, it's hard to

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develop ancillaries And so income repair is more difficult in that environment Radiology is the

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same way Very difficult to develop ancillaries Why it's important to have ancillaries and develop

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ancillaries is so that you can provide income repair Essentially, income repair is, you know,

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in these transactions, everybody, typically the physicians have a scrape, if you will, of their kind of baseline income And so that scrape reduces their income going forward So it's,

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the success of the deal is somewhat dependent upon, have you been able to repair income for the physicians going forward? So in gastroenterology, you know, we've got a significant number of ancillaries You know, I'll let Scott or Robbie go into what those ancillaries are But the idea is

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we need to create income repair And we basically evaluate, you know, the success of the transaction,

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some degree, have we been able to income repair our physicians? So I think it's really unique

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in gastroenterology, the number of ancillaries that are out there And again, it's, when you're

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in an outpatient environment, you can repair income easier than when you're in a hospital-based service environment where to develop other ancillaries is quite difficult So I think we're

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very fortunate in gastroenterology that we have these opportunities to partner with the physicians going forward So I'll let others speak to the ancillaries, but there's a significant number of them

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Yeah, so with that, let's go to Robbie and talk to us about ones that are, you know, especially productive for 1GI And

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let me make sure I'm not on mute The ones that really popped to mind that are obvious pathology,

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the ownership of the economics of your ASC ownership, whether you're JVD and things like an AMSURGE or USPI type transaction But the ASCs, the anesthesia and the ancillaries that drive off

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of those ASCs, pathology, infusion, chronic care, management And then as you move kind of further

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out into infusion, research, which is another common element of most large-scale platforms

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And then you get into kind of a little bit more of the exotic microbiome work and some of the more concierge medicine aspects There's also secondary weight loss, diet provision,

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you know, you kind of descend down the order of profitability and difficulty in implementing sometimes So, but all of those exist Radiology and CLIA lab have been a little bit more resistive

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and are probably a little bit more likely to show up in the next round of consolidation as we kind of move into the next innings of this So, don't see a lot of that out there

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Thanks, Bobby And so Scott, what are you advising your investor clients related to future drivers

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of ancillary business and GI? Yeah, thanks for asking the question You know, I think one of the

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things that I'm most bullish about for GI ancillaries is what's happening in pharma development

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And as we all know that from operators that work in GI is pharma has done a wonderful job, really masterful in terms of creating awareness for a disease like reflux or GERD and then what it can relate to and doing that with the providers, doing that with the payers and doing it with the patients We now have about 30 different drugs in development that are going to address fatty

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liver disease or NASH And gastroenterologists are trained in hepatology and it's something that,

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you know, they have the ability now by working up a patient that is at risk with a simple scan in office to then put this patient assessing, you know, their degree of severity or risk of fatty liver disease and then putting them into a screening protocol and under a set surveillance And with

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these drugs now coming through phase three of development, we're going to start to really see this in about a 12 to 18 month period as the first drugs are expected to be cleared by the FDA

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So that's a very, and you're talking about 80 plus million patients in the US So it's a huge patient

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population, literally and figuratively, and it fits squarely into gastroenterology It ties to

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nutrition as well I know Robbie and Matt will touched on, you know, that's kind of more concierge,

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but, you know, diet management and weight loss is really the best way to treat, you know, fatty liver disease and its initial stages before it becomes, you know, necrosis liver and scarring liver Another newer ancillary, and I'm considering it an ancillary because of what it does to enhance

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GI groups And we're now seeing the first cleared artificial intelligence in, as it relates to

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colonoscopy, there's a technology that is available that has been widely adopted by a number of MSO groups And what it does, the technology what it does is enhances the colonoscopy

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Colonoscopy is the gold standard, but it is not a perfect diagnostic procedure There is what's

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called the misrate Using artificial intelligence and a set algorithm with image recognition and

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bit pit pattern, this technology is able to flag abnormalities to think of it almost as a rear view camera in your in your car, it alerts you, it puts a box around a suspected adenoma or pre cancerous lesion What this is doing is really substantial We've seen adoption now by

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three of the major MSOs Robbie and Matt have their their groups are not quite there yet

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With this technology, I know there's interest, but the widespread adoption, it has been, has really enhanced pathology revenue At the same time, it's provided better patient care

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So it's, you know, there's there's a subscription cost to this AI technology, but what it does is it provides a better diagnostic yield coupled with more pathology revenue and a shorter surveillance with colonoscopy So it's, it's, I'm considering it an ancillary, because it's, you know, there has

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to be an investment by a group to adopt it And you're somewhat challenging the gastroenterologists

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that they as good as they are aren't as good as, you know, AI plus that physician And you're seeing

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this in other sub specialties, radiology pathology But it really is the future of image recognition

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in medicine Yeah, and we'll get back to a couple of the other technologies that you AI and some

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others, but on the flip side of the ancillary revenue on our diligence as we've dug into Colaguard and helped investors understand the diagnostic tools coming into the market and the GI space So, Karan, what has Hohen advise clients on how to view Colaguard and other

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diagnostics innovations? Yeah, I mean, I think broadly speaking, Colaguard is not a negative for GI physicians or the GI groups or platforms that are consolidating the market I think overall

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it's a positive because it's creating market awareness and you know, on a direct to consumer basis with patients who are availing these services And that's part of the reason why,

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you know, today, I think, I think 30, 35% of the pairs have approved and pay for Colaguard treatment, which, you know, last I checked was like $600 per test or something like that effect And it really

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in their mind is that's on top of a colonoscopy that will then be performed if there was a positive test coming out of Colaguard It really is a function of the fact that they think earlier

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detection is going to lead to lower downstream cost from a peer perspective With that said,

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the technology is not, I mean, they've spent a ton of money in the direct to consumer marketing

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I think the last number I checked was, you know, pharma companies and device companies that spend close to like $4 or $5 billion last year on direct to consumer marketing And,

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you know, this science is still not positive I think I believe 15 to 20% falls positive

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positive rates for Colaguard, as opposed to a blood stool test, which is like closer to 5%

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But I kind of draw a similar comparison to what I saw in our sort of, you know, orthodontic industry with clear liners coming on board It just opened up a market, which was not a

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which was not available previously because the awareness was not there in the consumer base of the patient base And that's a good analogy in terms of complementary and then driving

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interest and awareness And so Scott, you talked at length about AI, but you've also kind of brought

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up liquid biopsy So without getting into either of those innovations, can you talk about,

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you know, where we are in the trajectory? Is this a near term, medium term, long term impact on practices? Yeah, I as it relates to Colaguard stool tests or liquid biopsy, which is a blood draw to detect colorectal cancer as well as other forms of cancer I think it's important to

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understand, you know, from an investment community that colonoscopy still needs to be performed on any positive tests coming out of those So it is very, very beneficial to providers and investors

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in the gastroenterology space with these diagnostic tests The other factor I think it's important

00:28:09

to mention, aside from the lower screening age is we're only screening about two thirds of the US population that should be screened is screened So there's a massive patient population that is

00:28:22

underserved or not being screened And your most at risk patient population is African Americans

00:28:27

and African American males There's a huge stigma that exists, a social stigma about having a

00:28:34

colonoscopy done So, you know, how do you address the most at risk patient population? You need,

00:28:40

you know, another diagnostic test So liquid biopsy, there's been a lot of developments and

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you're going to start to see this technology entering the market probably in about 18 months

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And, you know, it's an area that exact sciences has invested very heavily and really as the next generation of Colaguard And I think, you know, they've done a masterful job with Colaguard

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and building awareness for colorectal cancer screening And I think you'll start to see that

00:29:09

with liquid biopsy And, you know, it will be interesting to see how the payer community responds

00:29:13

to this because, you know, it is a simple blood draw And if they charge $600, $700 for the clinical

00:29:21

lab workup, that may limit your adoption with it But net net, all of these tests will hopefully

00:29:28

start to dig into the at risk patient population that one third of Americans that should be screened that aren't screened And, you know, if it is a positive result, it will result in a

00:29:42

gastroenterology colonoscopy referral So it's a good thing for GI It's not a threat

00:29:49

We're glad that the work characterizing it is, you know, complimentary and then something that practices will need to keep in mind as these innovations come to market

00:30:01

to go back to ASCs from a policy perspective, what are we observing regarding the ASC covered procedures list and the impact on GI? Yeah, so we've seen CMS embark on a years long effort to move procedures to lower acuity and more cost efficient settings

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That's both as technology and safety allows it

00:30:22

Annually they will review and update the inpatient only list and ASC covered procedure list to allow more procedures to triple out into the outpatient and ASC settings

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And GI has really been a clear front runner and leader in this

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As you mentioned, they account for about 22% of all single specialty Medicare certified ASCs

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There's around 1,030 single specialty GI ASCs in the market

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And we expect this trend for more procedures moving to the outpatient setting to continue

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And as it matures and the rate of procedures moving from inpatient to outpatient begins to slow, what we'll likely see is a greater shuffle of outpatient services between HOPDs, ASCs and offices

00:31:08

For instance, 2019 and 2020 Medicare data suggests that colonoscopies are still only performed in an ASC environment around 50% of the time with the remaining in the HOPD or inpatient despite the significant ASC cost efficiency

00:31:24

So we're gonna expect to see even as it starts to slow outpatient a further trickle into the ASC

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Thank you for those details

00:31:33

And while the reimbursement under the ASC fee schedule is stable to positive, we're seeing disruptions under the physician fee schedule due to macro policy priorities

00:31:43

Can you touch on the ASC fee schedule and summarize the 2023 PFS proposed rule and the impact on the GI code set? That's right

00:31:53

ASC site of service fee continues to be favorable

00:31:56

For the past five years, it's increased by around two to 3% per year and CMS is telegraphing that for 2023 that trend will continue with a proposal of 27% increase

00:32:08

And that's because until 2024, CMS has tied a policy from 2019 to 2023 that the ASC update is tied to the hospital market basket update, which is really helping with this site neutrality trend

00:32:22

Outside of the favorable trends that you see in the ASC, we are seeing macro pressures on the horizon

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And that includes the return of the 2% sequester this quarter

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It includes a potential 4% pay go cut in 2023 due to budgetary costs from the American Rescue Plan and COVID relief

00:32:40

And you're gonna see even more acute pressure on the physician fee schedule

00:32:44

So the 2023 proposal includes a 44% cut

00:32:49

to the conversion factor

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And that is gonna impact every single specialty, including gastroenterology

00:32:56

Thankfully for gastroenterology, other macro pressures that most specialties are having to contend with such as clinical labor updates are really having a pretty flat impact on the space

00:33:07

And so they are spared from that

00:33:09

And we are starting to see some other positive trends that are more gastro specific

00:33:14

For instance, we talked about this a bit, but CMS is pushing for this age 45 for their screenings

00:33:20

They are also moving forward so that follow-up colonoscopies after non-invasive stool-based collateral cancer screenings are going to be at zero cost share for patients

00:33:32

So that should help increase patient utilization and limit some barriers to access

00:33:37

We are also keeping a very close eye on early signals that in 2024, our CMS could reweight RVUs via the Medicare Economic Index, which effectively would make reimbursement in the office space for gastroenterology more favorable, but could put a bit of pressure on professional reimbursement in the facility setting

00:33:59

All of that to say a lot of moving pieces, but for 2023, we're looking for ASC rates to be favorable and PFS rates to contend with the combined 4% cut to the conversion factor, 2% sequester

00:34:12

and potential 4% pay go cut

00:34:14

And, you know, we're, it's kind of a deja vu all over again with the PFS

00:34:20

So what are we advising clients regarding congressional intervention before implementation of the 2023 PFS in January, along with interest on mitigating some of these other macro policies that you outlined

00:34:38

So in our view, any relief to the 2% sequester

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would be an uphill battle

00:34:43

But we are more optimistic on potential relief to the cut to the conversion factor and the pay go cut

00:34:49

Specifically, we believe end of year legislation would likely see Congress again, potentially step in and provide a partial relief to the conversion factor, potentially spreading it in 2023 and 2024, and then potentially forgiving or kicking the pay go cut to another year

00:35:06

But we're gonna need to see stakeholders really ramp up efforts this fall and we don't expect Congress to provide any relief before CMS finalizes these cuts in the November rule

00:35:18

Yeah, so just to be clear with our audience, you are going to see likely adoption of the proposed rule in November when they release the final rule, you're going to see activity attraction related to congressional intervention again in December as Congress wraps up cats and dogs related to legislative agendas and priorities

00:35:38

And must do so

00:35:41

Finally, what's the outlook for reimbursement for ancillaries, including infusion? What's the current status of drug pricing before proposals? And what's the potential impact on GI? Yeah, so when you think about infusion, there are two important pieces to consider

00:35:57

The first is how CMS is currently reimbursing physician administer drugs, and that's at the average sales price plus 6%, but it's closer now to 4% now

00:36:07

It's closer now to 4% due to sequester

00:36:09

And so in the current environment, when you see changes in Medicare reimbursement for infusion, it has more to do with market pressure and the way manufacturers are pricing the drug than any concrete actions being taken by CMS

00:36:23

In the gastro space, the first thing that comes to mind is remicade, which has seen continued rate pressure since 2018 due to the entry of biosimilars

00:36:32

We are starting to see early signs that the degree of pressure on remicade could begin to weaken and slow down as it reaches similar pricing levels to its competitors

00:36:42

That's not to say it's going to all of a sudden shoot back up, but you might start to see a slowdown in that decline

00:36:49

Other key infusion drugs in the gastro space are generally more stable, but in a diligence, we always would look at pipelines, patent expirations

00:36:58

Generally, we're looking at a number of key gastro drugs to come off patent and pipelines projected around 2025, 2026

00:37:05

You might start to see some pressure, but typically biosimilar entry tends to have a less dramatic effect on the reference than in the generic market, around 15 to 30%

00:37:16

And that's because of slow utilization uptick and the way that the CMS prices those relative to their reference

00:37:24

The second key consideration for infusion is drug pricing reform that you mentioned

00:37:29

So we are continuing to track the Build Back Better Act

00:37:32

We've been tracking it for over a year and in its most recent iteration, it really is drastically different, but it's now strictly ACA subsidies and some very modest drug pricing reform proposals in an effort to get match and support and meet that 51 vote threshold

00:37:50

There's still a number of hurdles before it could guarantee any sort of Senate passage

00:37:54

The first is going to be the Senate parliamentarian needs to review that it can even survive the bird rule and be subject to that 51 vote instead of 60 vote threshold

00:38:04

And the second is a number of COVID cases are really delaying any action in the Senate right now

00:38:10

But even if it passed as is, we don't expect it to be a major material headwind to the gastroenterology space

00:38:18

And that's because generally the infusion space isn't impacted by party provisions

00:38:24

Key gastro drugs tend not to be increasing at a rate higher than inflation

00:38:28

And then you get to the Medicare negotiation provision and that is usually the most controversial in there

00:38:35

But really in order to be impacted by that, you'd need to be one of the only drugs without a competitor and you'd need to be in the top sort of 20 drugs that are of highest Medicare spend

00:38:47

And so in a diligence, we would of course look at your specific assets, makeup and if there's any risk, but generally gastroenterology just isn't the primary target for this

00:38:58

Yeah, so lots of noise always with drug pricing and drugs, but really because infusion offerings in the GI space are really attached to biosymbolers on much more favorable dynamic versus generics

00:39:17

So, you know, Matt and Robbie, you talked about commercial payers kind of driving the move continued shift inside of care for GI

00:39:29

So let's talk about commercial payer reimbursement as Kron mentioned at the beginning of this, lots of differentiation variation in terms of what commercial payers are paying for certain procedures

00:39:43

So what can you share about commercial payer reimbursement in the markets that you operated? Let's start with Robbie

00:39:51

It certainly depends on the markets

00:39:54

If you're in the old South Alabama, Mississippi, places like that, it's a little more like dealing with the mafia with Blue Cross in those markets

00:40:04

So what we are seeing though is the advantages of consolidation and scale

00:40:10

It gives you a significant moment of inertia against some of the other commercial payers

00:40:18

And if you're willing to talk to partner to investigate and to kind of move away from the adversarial side of it, which really almost never works

00:40:29

What we're seeing at scale is we're able to move those rates in a positive direction generally

00:40:36

Unfortunately, probably not quite as fast as we'd like to see with the current inflationary environment, but it definitely is demonstrating the value of the commercial payer reimbursement

00:40:46

It definitely is demonstrating the value of scale

00:40:49

And then secondarily, the value of what we can deliver to their patient populations

00:40:55

There's increasing discussions around how do we share elements of these contracts? I prefer shared risk

00:41:03

Segments of shared risk over value-based care

00:41:05

I don't think anybody knows what value-based care means anymore

00:41:09

But the willingness to approach shared risk in most of the markets that we're in currently means that you have a different avenue to open discussions with payers and you have a lot more room to explore different arrangements

00:41:24

And we found considerable success there

00:41:28

Right And Matt, what are you seeing in the tri-state area?

00:41:32

Well, it's, I've kind of taken on what Robbie said

00:41:36

It's a different environment

00:41:38

You can't really come back 15 years ago when I was in practice management services

00:41:43

It was much more of an adversarial relationship with payer

00:41:47

You know, it was kind of who wins, who loses

00:41:50

And it was fairly adversarial

00:41:53

Those days are over

00:41:55

And really now it's incumbent upon us to really build relationships with the payers, understand what they're trying to achieve, and build programs around them

00:42:06

So, you know, it's from a payer situation over those 15 years, the payers have a lot more leverage, I'd say, today, because things like balance billing legislation, you know, going down, their ability to go down to, like, let's say, a market standard, those type of things have kind of taken some tools out of our toolkit as a practice management company

00:42:37

So what we really have tried to do is build more programs with the payers

00:42:42

And so it's much more, it's not just a discussion around rate anymore

00:42:47

It's more of discussion around partnership, keywords, how do we manage patients better? How do we share, and up sides, how do we share and keep patients out of the hospital? You know, how do we help them achieve their goals? And then how do we get rewarded for it? So the relationship has really changed

00:43:11

It's interesting, and it's probably in the long run, it's really good for all of us

00:43:17

But again, to me, it's our relationship with the payers much more expanded now than it ever was before

00:43:24

And I think our conversations are more productive in the sense that it's really more focused on patients now than just on rate

00:43:33

You know what I mean? And so it's like, how do we keep patients out of the hospital? How do we manage patients better? And then, you know, we kind of talk about rates, but it's all in the scheme of how do we deliver value to our payers? How do we deliver value really to all our constituents out there? So it's challenging

00:43:54

I'm not saying it's not, but, and certainly as Robbie alluded to, you know, I think that we're not getting from an adequacy standpoint

00:44:05

You know, no one's given us rates or keeping us constant with inflation right now

00:44:10

So, you know, the rate increases are below inflationary rates out there today

00:44:15

But again, the goal here is to participate more with payers, develop more programs that we can bring to a payer, like wellness programs and things like that, where we can kind of say, hey, we can provide your patients with the access to all these different programs

00:44:32

And if I have a lot of geographic reach, you know, it's great for the payer because he can go to their constituents and say, hey, we can cover you across all these different areas in the state of New Jersey rather than just one

00:44:47

So we'll have a pro they can have a program all across the state that manages wellness, diet, bariatric surgery, the whole bit

00:44:56

So I think it's a challenging environment

00:44:59

Thank you

00:45:01

and I think we'll continue to be successful as we continue to expand

00:45:08

And Jackie, maybe if I can just add one comment to this

00:45:12

You have platforms as well as scale large groups that are regionally based that have been really successful with shared risk models, with payers as it relates to chronic disease with IBD

00:45:27

And secondly, with direct access programs for self-insured and large self-insured employers for screening, for screening colonoscopy

00:45:39

And then you also have platforms that have negotiated colonoscopy bundles

00:45:44

So, these are alternative payment models that are, there's been regional success with platforms in negotiating this

00:45:53

But I think, and both Robbie and Matt know this very well, it starts with dialogue and collaboration and data with your payer and it's a process

00:46:07

Totally agree

00:46:08

Yeah

00:46:09

And I think a lot of this has to do with providers also becoming more sophisticated about understanding what payers need

00:46:17

You need to get to the table with solutions and how are you going to provide that work out of CSE solutions, wellness solutions, other solutions that they are feeling in their particular markets

00:46:31

And so everyone's kind of rising to that level, higher level of sophistication

00:46:37

And so these conversations are becoming more productive as the two sides understand each other better

00:46:45

So I'm gonna skip around a little bit with timing in mind

00:46:49

As Robbie said, who knows what value-based care means anymore? But I feel like this conversation, I have to very, very briefly let's have Robbie and Matt talk about value-based care in quotes, what that means for GI and how can GI practices maximize what is the current environment for value-based care in healthcare

00:47:18

So let's start with Robbie and then go to Matt and then we'll quickly go to the other topics

00:47:22

Yeah, I mean, you could do another webinar on both elements of that question,

00:47:26

but the reality is the elements of value that the top GI groups are starting to bring to the table is expanding that quality dashboard from beyond ADRs or adnema detection rates and things like that to include more whole person metrics that take into account social determinants, socioeconomic demographic issues that are specific to your markets and treating a whole person

00:47:51

And so with that, you start to integrate whole person outcomes which are really the prime drivers of cost, these chronic out of control issues

00:48:00

And that requires a little bit of scale and density in a market in order to be meaningful as you approach from the provider side

00:48:09

But your insurers, your partners in the commercial world have that data as well

00:48:14

And so in a partnership, you're sharing collaborative data there and that's really the frontier, I think, of what I think of as value-based care as it shows up

00:48:24

So leave that there for Matt

00:48:31

Matt, anything to add on value-based? You're on mute

00:48:36

I would just say that the challenge out there is to really partner

00:48:42

So from our standpoint, we've partnered with Sonor MD and the idea being on IBD cases and things like that, it's like, we'll use extenders, we'll use nurse practitioners

00:48:56

We're kind of trying to manage that patient before they have to go to the hospital

00:49:02

So again, we get paid by kind of tracking, monitoring these patients on a more frequent basis

00:49:10

so that they don't end up in the hospital, we're paid, if you will, the shared savings program

00:49:15

We report on these patients and how we've been able to better manage them, keep them out of the hospital

00:49:22

And so that's like a shared savings program

00:49:25

We have episodes of care programs that we're in today

00:49:29

So again, I think we've come a long way

00:49:33

I think we have a long way to go

00:49:34

So, but I think at the end of the day, people kind of sometimes look at practice management and kind of with different viewpoints

00:49:43

And I think that what we're doing today, Robbie and other companies like Robbie's and ours are really, at the end of the day, we're bringing to the market solutions that couldn't be bought to the market if you were just a small GI practice

00:49:58

So I think there's a great evolution that's going on here

00:50:01

And I think it's often not talked about, but I think that the private equity has bought to bear a real focus on some of these programs that couldn't be developed if you didn't have size and scale

00:50:13

And so I think it's been good again for patient care and good for our hospital partners as well

00:50:20

So that's all

00:50:23

Thank you, you too, for sharing your perspectives as operators

00:50:27

It's important to understand the realities versus the aspirations

00:50:32

So, Kron, what do investors need to keep in mind for GI opportunities in PE back platforms as PE back platforms continue their buying sprees and continue to grow in their regional, national, multi-regional markets, and as the space, you know, faces for their consolidation? Yeah, I guess when I'm high level, the space is, it's a great space to be, as I mentioned earlier, it's in the beginning innings of consolidation

00:51:03

It's a massive market, right? 8,000 physicians out there working across 2,500 different practices

00:51:10

The tailwinds from a growth perspective are great

00:51:14

All the macros that you can be talked about today in terms of side of care, moving from hospitals to our patient, all the ancillaries that we have as revenue streams for the business model

00:51:25

So all that proves to be a big, a big positive for any investor looking to invest

00:51:33

I think at the end of the day, it's on a platform by platform basis in my mind across, and this is not just GI, but just generally across physician practice management, you know, key to success

00:51:45

Unlike retail healthcare or multi-site healthcare, whether you take dental or vet or some of the other areas, you know, you can put various shingles in various different states and it still works

00:51:56

Here, I think market density is important to create networks, to be able to sort of lean on the fact that you have hospital relationships, to be able to build those ancillaries, to be able to build those ASCs, to be able to recruit doctors into your network

00:52:10

So some broad-brace density in a given geography is important to create leverage, which really lends itself to creating income repair for the physicians

00:52:22

And there have been some true examples of platforms who have delivered and are delivering true income repair post-affiliation with MSO

00:52:32

And that in my mind is sort of validation of the value proposition that these platforms are bringing to bear

00:52:39

The other thing I would say is, you know, as with any consolidation opportunity, there's a tendency to get aggressive and then sort of lose discipline around what you're really buying and why you're buying it

00:52:51

So there's a secret sauce across every platform which works for them because that's how they've molded their culture, molded their infrastructure, all those things, but sticking to that discipline and not just, I guess, paying any multiple that you see out there because you're just trying to grab market share or do a land grab is going to be important to long-term for the sustainability of growth

00:53:15

And then last is just underwriting criteria that people kind of focus on here when they are doing M&A acquisitions and thinking about what the opportunity to grow this particular acquisition would be in the future and how to underwrite the right valuations for it

00:53:31

And then eventually, I think each MSO is dependent on sort of the infrastructure and the management team

00:53:36

Just the other execution heavy businesses, there's a lot to do from a cultural perspective, integration perspective, making sure that your physicians are aligned, making sure they have autonomy at the same time

00:53:48

There are certain decisions being made at the right board level which determine the sustainable future for the platform

00:53:55

So those are five or six things I would say that if you're keeping an eye on as you're looking through the platform, we'll determine

00:54:02

And at the end of the day, I think it's organic growth alongside what you're able to do with your acquisitions, post-affiliation, which drives value

00:54:11

Thanks, Karaman

00:54:11

That's all very important points

00:54:14

And so Scott, very briefly, as we are running up against time here, what do GI MSOs have on the horizon related to growth and contracting in the asplaries and just in general, the drivers? Well, related to growth, my firm jointly publishes a report called The Business of Gastroenterology with Spherics Global Insights

00:54:42

And this is sold to all the big pharma and big med tech companies, but we measure across a panel the intentions of gastroenterologists to join MSOs

00:54:56

And we've seen a real growth over quarter over quarter with now, we saw an 80% jump, looking at when we first started doing this in the beginning of COVID to now, with gastroenterologists and their intentions to join MSOs

00:55:13

So there's a lot of awareness in the marketplace about MSOs

00:55:18

You can see the spread of the MSOs

00:55:20

So there's still a lot of white space for growth

00:55:24

I also think it's a really interesting time

00:55:26

And I think the bankers are closest to this

00:55:31

You have big strategics now that are making investments in primary care

00:55:37

If you look at a lot of press, obviously, about the Amazon One Medical that has the primary care side of it, but you also look at what Optum has done with my old company with Physicians Endoscopy now becoming part of the SCA Optum network

00:55:56

And reading the tea leaves, as these national platforms grow, GI is the number one referral out of primary care

00:56:05

So logic would tell you that you're going to have more and more strategics enter this space

00:56:10

And there's real synergies

00:56:11

If you look at Summit Health with the Werbergs platform, with the Citi MD being urgent care, primary care, and they have about 45 or so GIs that are busier than they've ever been because they've a built-in referral network

00:56:25

So I'm expecting you'll see these national rollups become very attractive to more strategic entities in the future or a combination of them becoming more attractive in the future

00:56:38

Yeah, I mean, I kind of find it funny

00:56:40

Like four or five years ago, there were big five insurance companies trying to merge, and they were all shot down

00:56:49

And the reason they were merging was because they were trying to figure out weaknesses in their each of their sort of platforms and trying to make up for those

00:56:57

And this is another way of consolidating this exact same market, which you're doing on the provider side of the end, is just taking a little bit longer

00:57:05

And you have to do it in smaller bite size but the end result is the same

00:57:10

You've got more members consolidated amongst these bigger groups, which allows payers greater flexibility, access to care, all those kind of things

00:57:21

All right, we are coming up on an hour, but I do think that we have to touch on valuations, Karan

00:57:26

So what are we expecting with the second half of 2022 related to GI M&A and valuations here? Yeah, I think just like the last half of 21, I think this second half of 22 is also going to be a pretty busy year

00:57:42

Not albeit sort of all the changes that have been going on in the market, both the public equity markets also sort of what's happening on the lending market and the debt market side, which will probably have some impact on valuations

00:57:55

However, for premium companies and with the premium management team, then great sort of growth forecasts, I think this is a bump, especially given all the dry powder the private equity has and the long term view that they take, I think it's a good space to be in

00:58:11

Unfortunately, they haven't been that many data points on the gastro or the GI side simply because they haven't been that many second exits, if you will

00:58:18

A lot of them have been first time institutional capital going into private equity funds, going into GI platforms, including Matt and Robbie's platform here today

00:58:27

So I think the future is bright and we're seeing valuation most both sort of hold up relative to what we saw last year

00:58:36

All right, well with that, I'm going to conclude the webinar

00:58:41

Thank you very much, Matt, Robbie, Karan, Scott, and Holly

00:58:46

As you know, we do these on a regular basis, so please look out for our next webinar where we'll be featuring additional executives from platform backed assets as well as our banking partners and consulting partners

00:59:02

Thank you very much for joining today's webinar and we look forward to seeing you again soon

00:59:06

Thanks very much, all job

00:59:07

Thank you, Jackie

00:59:08

Thank you, Jackie

00:59:09

Thank you, Holly

00:59:10

Bye-bye

00:59:10

Appreciate it