After experiencing high returns during the first wave of consolidation of physician practice management (PPM) models in dermatology, vision, and dental sub-specialties, investors are now contemplating what the second wave of PPM consolidation will look like. Investment opportunities in oncology, urology, vascular, and neurology specialties could lead to a continuation of the active deal flow in PPM transactions in the next few years. Following are some considerations for investors related to the second wave of PPM consolidation, according to experts who spoke on a panel at the 15th Annual Healthcare and Life Sciences Private Equity & Finance Conference on February 21, 2018.

Experts included Nandan Kenkeremath, Senior Health Policy Consultant at Marwood Group; Brent Kitts, Chief Operating Officer at AC3 Health; Steve Aguiar, Managing Director at Provident Healthcare Partners, LLC; and Eric Coburn, Managing Director at Duff & Phelps.

Here are five key points from the panel discussion:

1. Second Wave Sub-Specialties Investment Breakdown. Urology is a heavily fragmented sector. There are currently 12,000 urologists practicing in the United States, but the nation’s top 5 urology groups only encompass roughly 300 urologists. Thus, investors have the opportunity to consolidate small groups and build an attractive platform across regional markets to achieve necessary scale. Many investors, however, seem to shy away from urology due to its high percentage of Medicare and Medicaid reimbursement.

The oncology space circles around a patient population that is 55 years of age or older, a population that by 2040 will balloon. This population statistic has caused the government much concern regarding how it will handle this patient population. Thus, funds that can devise a successful model to efficiently and effectively treat this patient population will be winners.

Vascular transactions seem to have garnered a “lukewarm” reception in the investment community due to their heavy Medicare reimbursement and tough patient mix. But investors that can integrate and capitalize on vascular-related ancillary services, such as vein treatment, will likely prevail.

Neurology is not highly lucrative from a professional fee perspective. Thus, it is important to structure any neurology deal with a strong physician alignment model. Aligning with younger, entrepreneurial physicians and partnering with physicians who strive to achieve high returns could constitute a successful foundation for a neurology platform.

2. Follow the Money. Policy developments and regulations, specifically concerning reimbursement, inevitably drive various waves of consolidation. Evolving reimbursement frameworks and alternative payment models are currently driving PPM consolidation. Private equity funds can transform a practice to be more efficient and more valuable, achieving scale and size so as to position it to succeed in value-based bundled payment models and thrive in the current and future healthcare landscape.

3. Reimbursement Diversification. Diversifying a practice’s reimbursement mix increases stability. The sub-specialties in the first wave of consolidation (dermatology, vision, and dental) all have relatively low government reimbursement. Oncology, urology, vascular, and neurology, however, have high government reimbursement and do not have the layers of commercial and self-pay reimbursement that the first wave experienced. But payment diversification still plays a major role and investors looking to take part in this second wave of consolidation should look to ancillary services to diversify a practice’s payment portfolio, as discussed below in Item 4.

4. Capitalize on Ancillaries. As the second wave of PPM consolidation evolves, it will be important for investors to capitalize on associated ancillaries aligned with the specific specialties of oncology, urology, vascular, and neurology. Because practices in these sub-specialties produce less fee-for-service professional revenue compared to other specialties that have attracted investment dollars in the past, ancillary service revenue will be important for the overall value proposition.

5. Adjustments for Out-of-Network Business. Amidst volatility in the stock market, rising interest rates, and some political uncertainty, experts are still confident that EBITDA multiples will stay fairly constant throughout 2018. There is approximately $1 trillion in private equity dollars ready to be invested. Certain characteristics of targets can impact the multiple, such as the percentage of out-of-network verses in-network funds. Investors are adjusting a practice’s EBITDA to only encompass a practice’s in-network reimbursement and are excluding all out-of-network funds because of the risk attached as payor networks continue to narrow and close in.