ConsoLiDation of the oPhthaLMoLogY seCtor
Health Care law Section Chairs : T . J . Ferrante – Foley & Lardner LLP & Kevin Rudolph – Shriners Hospital for Children
in ophthalmology , the number of cataracts are expected to double by 2030 , since cataracts are positively correlated with age . the same is generally true with glaucoma and other eye-related conditions .
Change often creates complexity , and in complexity , one can find opportunity . Healthcare reform , spurred by the passing of the Patient Protection and Affordable Care Act , has created an environment of experimentation with reimbursement models , healthcare delivery systems , vertical integration , horizontal integration , affiliations , quantification of patient care , information technology systems , health system consolidation , regional consolidation , and national consolidation , to name a few . As such , participants in the healthcare industry are knee-deep in the complexity brought about by change . However , for those who develop a winning formula to address any of this complexity , many rewards can follow .
For several years now , private equity firms , with vast amounts of capital that must be employed to appease their investors , have attempted to create value in response to change and complexity through large-scale consolidation of various sectors in the healthcare industry . The latest being the consolidation seen in the ophthalmology sector . The belief is that through consolidation , the new , much larger , entity providing healthcare services ( commonly referred to as a platform company ) can shift the complexities from an
individual practice to those at the corporate level . This entity can then specialize in handling these issues in a more efficient manner ; allow providers the ability to focus on the provision of clinical care ; and gain economic bargaining power with commercial payors and vendors in hopes of increasing revenue and decreasing expenses . The caveat , of course , is that the healthcare sector must exhibit certain characteristics that create the opportunity for a return on investment above those offered by other assets of comparable risk to attract investment at this scale .
Market Fragmentation The first variable in this investment formula is market fragmentation . In fragmented markets , participants have very little leverage with commercial payors or vendors . Therefore , value can be created by simply aggregating practices to generate economic bargaining power . Through this stronger position , the platform company can see increases in reimbursement from commercial payors and declining costs with nearly all vendors , especially when the volume of services , products , and expensive ophthalmology equipment obtained from vendors increases .
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Collectively , this results in increased cash flow , thus increasing the value of the entity . A tangential benefit is the ability to acquire new ophthalmology equipment at lower costs , which creates a competitive advantage for the practice relative to its competitors .
Favorable Demographic Trends
Although , not as directly impactful on cash flow as the increase in economic bargaining power through consolidation , healthcare sectors that are expected to benefit from the graying of America offer several benefits to the buyer . In ophthalmology , the number of cataracts are expected to double by 2030 , since cataracts are positively correlated with age . The same is generally true with glaucoma and other eye-related conditions . These trends lower the risk of an investment in the practice as any unknowns around healthcare reform or an uncertain political environment are partially mitigated by the ability to rely on growth in the volume of procedures . Lowering the risk of an investment , just like increasing cash flow , increases the value of the practice .
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