Gary Herschman Discusses Consolidation in the Ophthalmic Market in Q&A with Dana Jacoby

What dynamics are fueling today’s ophthalmology market, especially private equity’s (PE’s) push to grow their portfolio companies through dozens of add-on acquisitions?

We are seeing some fundamental changes in the healthcare financial market. Most practices weathered the pandemic only to face other economic uncertainties brought on by inflation, global instability, and an increasingly volatile market. At the same time, investors have set aside more than $730 billion of dry powder. Many of those investors view the healthcare industry as a top sector for investment because of the aging American population, the relative wealth of the baby boomer sector, and advances in medical technologies. As a result, many believe healthcare is somewhat recession-proof and that new technologies and approaches to highquality and cost-effective care will result in increased value opportunities when properly scaled.

Specifically, the eye care market has been actively consolidating for more than10 years. Even though there are around 30 investor platforms in this space, the market remains highly fragmented because there continue to be many smaller practices across the country. Those providers are increasingly challenged by volatile reimbursement models, increased competition, and outside market forces. Keep in mind that the majority of doctors are now employed by either private equity platforms, national companies, or hospitals. Those doctors whose practices are still community-based are, on average, in their late 50s, and many of them are interested in “monetizing” their practices and taking some cash now rather than waiting for retirement (when they may not be able to sell their practices at high valuations). Consequently, the hot market and high practice valuations seem to present a perfect opportunity to transact.

PE has consolidated practices to create platforms of professionally managed eye care groups. They are looking for opportunities to build even larger platforms. Specifically, they have done the hard work of creating synergies across their acquired practices by reducing management expenses such as conducting patient billing, maintaining EMRs (electronic medical records) and combining other administrative tasks in central, more efficient operating models. In addition, PE investors may have generated increased revenues through broad-based marketing and other enhancements to increase demand. PE companies also provide capital to expand profitable opportunities such as new locations, better medical equipment, and expanded product offerings. For example, many eye care platforms are adding new specialties, such as retina (to keep referrals within the organization), as well as adding ambulatory surgery centers (ASCs) and other new diagnostic and treatment modalities. Taken together, these activities produce more profitability and arguably better outcomes for patients.