The growing cardiology subsector is one of the most sought-after and competitive specialties for healthcare investors.
Stemming from an aging population and growing obesity demographic trends, demand for cardiovascular services is projected to increase significantly. The American Heart Association reports that between 2017 and 2020, 127.9 million U.S. adults had some form of cardiovascular disease. Approximately 38.5% of the U.S. population and 49.5% of all U.S. adults — accounting for 12% of total U.S. health expenditures, the most of any major diagnostic group — heart disease remained the leading cause of death in the United States through 2020.
Cardiovascular illnesses have created new treatment opportunities and a significant investment opportunity. Provident Healthcare Partners estimates a U.S. market size for cardiology services in excess of $50 billion, with growth expected. For example, in the global interventional cardiology product market, a 2020 study published by Emergen Research predicts a compound annual growth rate (CAGR) of 7.6%. By contrast, a 2022 Research and Markets report expects a lower CAGR of 3.1% for cardiovascular drugs through 2026, suggesting services will be a large portion of the market’s growth in the near term. In addition to these tailwinds, investors are attracted to the industry trends of outpatient procedure migration and high-value ancillaries. These trends can reinforce one another in potential investment opportunities as further discussed below through partnerships investing in the outpatient setting.
Read on for a summary of considerations related to investing in the cardiology sector, an overview of recent transactions, and predictions as to future investment interest in this subsector.
A. Cardiology Market-Dynamic Considerations: Seven Key Takeaways. Many characteristics help explain why the cardiology sector has become so attractive to investors; however, the cardiology space also poses unique challenges. Consequently, investors should consider the following dynamics:
1. Cardiology practices often have strong hospital relationships with long-standing arrangements. Due to the overlap of services and volume of cases, many cardiology practices have established long-lasting relationships with local healthcare systems and hospitals. These relationships often take shape through call coverage, personal services agreements, medical directorships and co-management agreements. Personal services arrangements, where all or some component of physician services are rendered through the health system payor contracts, are very common in this sector.
These types of arrangements can strengthen partnership ties between cardiology practices and a health system but also can implicate federal and state fraud and abuse laws if not properly structured. Also, for groups wanting to partner with investors, the agreements can have challenging unwind provisions, sometimes with post-termination tail periods where certain relationships — such as ownership in a competing business — may be prohibited. Further, due to the importance of this specialty to many health systems, hospital leadership will focus on changes to the system’s relationship with a cardiology practice if the practice embarks on a transaction with a third party, such as an investor. That said, there can be viable opportunities for cardiology groups to retain close ties with health systems and partner with investors in a manner that provides wins to the health system, the physicians and the investors.
2. More states are permitting cardiac procedures to be performed on an outpatient basis, but state law varies widely and can create high barriers to entry. Medicare has been approving additional cardiac surgeries to its list of covered ambulatory surgery center (ASC) procedures over the past five years, acknowledging the appropriateness of these procedures in lower-cost, outpatient venues. These approved facilities include Medicare reimbursing ASCs to perform certain diagnostic heart catheterization services and PCI stenting. With these changes, Bain & Co. reported in 2019 that by the mid-2020s, 30-35% of cardiology procedures will be performed in ASCs. As payors continue to emphasize moving appropriate cases to outpatient sites of service, which are historically lower cost for the payor and patient compared with an inpatient setting, the ability to invest in ASCs and cardiac catheterization office-based labs (OBLs) — the name often given to interventional suites in a physician office — is attractive to investors.
Despite this interest of both investors and payors, state law does not always allow a full migration of cardiac cases out of the inpatient setting. Often state statutes and regulations require services that qualify as cardiac catheterization, or specific procedures such as electrophysiology or percutaneous coronary interventions, to be performed only in a hospital. Some states also have “certificate of need” programs, which require regulatory review before large healthcare capital projects or development of a new healthcare facility. In these states, cardiac catheterization is a very common service requiring state approval, often complicating offering such services in outpatient settings. Further, because such cardiac procedures can be considered interventional, some state laws could limit the ability to open an OBL in a physician’s space without also obtaining ASC licensure. These challenges require investors to consider specific state laws and not simply adopt a one-size-fits-all-states investment thesis.
3. Cardiology practices often adopt high-value ancillary service lines, which create opportunity but increase regulatory complexity. Cardiology lends itself to an array of ancillary service lines, such as echocardiograms, nuclear heart studies, ultrasound exams, stress tests, remote monitoring, cardiac rehab services and, as discussed above, ASCs/OBLs. These ancillary services produce additional revenue — particularly in larger groups — and allow providers to serve as a “one-stop shop” for patients facing cardiovascular conditions, facilitating access to care and consumer convenience.
Although ancillary businesses can be lucrative, they also can pose risk under federal and state fraud and abuse laws. Thus, it is important to understand and analyze (i) how these ancillaries fit within the overall corporate structure, (ii) related financial arrangements, and (iii) other operational considerations to ensure compliance. For example, factors such as referral patterns (within and outside the practice), payment of revenues from the ancillary service lines (whether in the form of distributions or physician compensation), and corporate structure and governance become critically important in analyzing these arrangements.
Providers and investors are constantly looking for ways to experiment with new and innovative ancillary arrangements, including partnering with other industry participants. A word of caution, however, is warranted. With expansion into new and different models often comes regulatory uncertainty as the law attempts to keep pace with the speed of business innovation and evolving models of care.
4. Physician alignment is key to success. According to Medscape compensation reports, cardiologists on average earn more than all medical specialties, excluding plastic surgery and orthopedics. Investors will need to carefully structure post-transaction compensation arrangements to ensure satisfactory compensation to these medical professionals. Traditionally, and often more than other specialties, cardiology groups have utilized equal share (often described in the specialty as “lump and split”) or blended models between equal splits with production calculations. (See, e.g., 2012 figures published by MedAxiom that less than a quarter of reported cardiologists were paid on a pure production model.) Such equal splits likely reflect the additional burdens of cardiologists, including call, teaching and administration.
More recently, likely due to the increase in integrated cardiology practices with different subspecialties (including electrophysiology, interventionalists, invasive surgeons and advanced heart failure providers), production-based models have grown more common — over half of all cardiologists and over 70% of surgical cardiology programs, according to MedAxiom’s 2022 compensation report. In this shift, the American College of Cardiology has advocated that compensation be equitable, minimizing “unwarranted systemic differences based solely on subspecialty,” and “explicitly reward nonbillable work” where wRVU measures may not measure a cardiologist’s practice building or contribution to patient care.
Important in any cardiology compensation structure is the mechanism for expense allocation, which should ensure that individual decisions impact compensation while group overhead is fairly allocated. Without these considerations, individual physicians can get credit for revenue earned through a larger support staff without offsetting the additional costs they are adding to the platform, or avoid necessary contributions to the platform that are not directly tied to professional collections to earn more than their colleagues who continue such contributions.
5. The market is in its early stages of consolidation. Because of legal barriers to outpatient work and the high cost for cardiology equipment, there has been less transaction volume in this specialty. However, as discussed in section B below, with private equity and other investors establishing nearly a dozen platforms in 2021 and 2022, cardiology consolidation is in its early stages and likely will outpace other physician specialties — including other recent “hot” investment specialties such as urology, gastroenterology and orthopedics.
In the United States, more than 22,000 physicians are treating cardiovascular disease, with approximately 10,000 more in either cardiac electrophysiology, interventional cardiology or pediatric cardiology, according to the Association of American Medical Colleges, reflecting only a slight increase from a decade ago. Many of these specialists have remained independent from health systems, and some platforms are focusing on partnerships with health system-linked specialists. Therefore, private equity investments have only scratched the surface of the cardiology sector.
6. Cardiology practices provide payors value by shifting surgeries to the outpatient setting, such that value-based payment (VBP) care models may be less pressing. As discussed elsewhere in this subsector snapshot, cardiology provides significant value to commercial and government payors by shifting care from more-expensive hospital inpatient settings to cheaper outpatient settings, including hospital outpatient departments. Cardiology practices have focused less on preparing for VBP initiatives than other specialties.
Coinciding with the lack of emphasis on VBP models, some prevalent VBP models — such as longitudinal care — are rare in the cardiovascular care subsector, according to a recent journal article. That said, certain subsector participants — including the American Heart Association and the American College of Cardiology — have been working to prepare cardiology providers for such reimbursement models. This status on shifting to new payment models may give cardiology platforms longer to prepare for VBP reimbursement models while still working with payors collaboratively to reduce larger inpatient hospital costs by moving care to less-expensive but appropriate care settings.
7. Due to physician shortages, there is a big focus on delegating more services to nonphysician advanced practice providers (APPs). Experts expect cardiology to have the greatest deficit of physicians through 2025, compared to all physician specialties. With a projected deficit of 7,080 cardiologists according to a report by Physicians Thrive, cardiology practices are turning to nonphysician APPs to help treat patients in their busy practices.
Cardiology providers typically leverage these APPs using between a two-to-one and one-to-one ratio of APPs to physicians. This lower ratio — compared to that in other specialties — reflects the higher acuity of many cardiology patients and the need for more physician medical decision-making and continual involvement in a patient’s care. This also means cardiology-focused APPs may need more training than other APPs practicing in less-acute specialties, and many cardiologists may still need more convincing that APPs can supplement their practice in an appropriate manner, particularly physicians who worry they will be replaced with a lower-cost staff member. Further, while APPs can practice across the continuum of cardiovascular care, they often have primary responsibility for initial cardiology consults and outpatient follow-up.
As investors consider forming partnerships in the cardiology sector, they should keep in mind the growing role of APPs and looming shortage of cardiologists, while being sensitive to concerns with ensuring appropriate care.
Recent Transactions Within the Cardiology Space. The past several years have seen a flurry of transactions within the space.
- In 2021, Deerfield Management Company led a Series A financing for value-based cardiovascular care delivery platform Novocardia for the purpose of partnering with cardiology practices. In 2023, Novocardia announced its merger with Cardiovascular Associates of America.
- In late 2021, Assured Healthcare Partners formed Heart & Vascular Partners (HVP), a national cardiology platform. HVP has partnered with leading practices in Oklahoma, Texas, Colorado and Illinois and comprises more than 50 partner physicians.
- US Heart and Vascular, a portfolio company of Ares Management, announced a partnership in 2022 with Houston-based Willowbrook Cardiovascular Associates. In 2023, US Heart and Vascular announced a partnership with Orion Medical, strengthening its presence in Houston.
- In 2023, Lee Equity Partners, in partnership with Cardiology Institute of the South (CIS), a large independent cardiovascular practice, announced the launch of a new platform called Cardiovascular Logistics.
- Before the Novocardia merger discussed above, Cardiovascular Associates of America — a portfolio company of Webster Equity Partners — announced in Q4 of 2022 its partnerships with Chicago Cardiology Institute, The Heart House of New Jersey, Cardiovascular Institute of New England, and Southwest Cardiovascular Associates.
Future Market Predictions. Despite the ballooning of investor interest in this space in recent years, the cardiology subsector remains highly fragmented — with partnership opportunities and transactions in the space expected to boom in coming years. Given the cardiology sector’s position for inclusion of ancillary services, shift to outpatient settings, innovation, and fragmented market, strong interest in this sector is expected throughout 2023 and beyond.
