Subsector Snapshots — Brisk Investment Continues in Growing Urology Subsector

February 21, 2022

The urology subsector recently has garnered increased interest in the healthcare industry, partly due to the aging population and surging demand for urologic care. This growing patient population has driven investment interest and transactions over the past several years.

Specifically, numerous private equity-backed investors and administrative providers have emerged in the space, which is driving continued competition for add-on and platform transactions. As was the case with many physician practice subspecialties, transaction activity was more sluggish during the end of 2020 and early 2021, but as 2021 progressed, interest in urologic deals increased and many transactions have become highly competitive. Expect acquisition interest in this subsector to continue for many reasons, including potential growth of ancillaries (e.g., radiation therapy and surgery centers), increased capital cost of build-out for these ancillary service lines, and physician interest in administrative and operational partners.

Below are five key takeaways and considerations related to the urology subsector, an overview of recent transactions and a prediction on future investment interest.

Urology Subsector Considerations: Five Key Takeaways
Several factors currently make the urology subsector attractive to investors, but many of these attractive features also pose capital and other regulatory considerations. Investors interested in this space should consider the following dynamics.

  1. Consolidation of physician practice specialties is often driven by physicians’ desire to liquidate some of their interest in the practice and reduce the administrative burden of operating their practice. The urology subsector is no different. Consistently, outside investors and administrative services providers are attractive because they present an opportunity for senior urologists to receive a tax-advantageous payment during an initial sale of practice assets, or in some cases equity, and potentially benefit from a future sale of the practice’s associated administrative services provider. At the same time, the administrative partner can provide some relief to physicians in executing the operational aspects of their practice. In many cases, the administrative partner has management expertise and capital access that a physician practice, without sufficient scale, could not independently leverage at a reasonable cost.

  2. The lack of consolidation and increasing familiarity with administrative partners in the urology subsector has made it attractive for potential investors. There are approximately seven large urology platforms (discussed further below), which account for less than 10 percent of the total number of urologists in the United States. As a result of this fragmentation, there are many opportunities for add-on and platform transactions to gain greater economies of scale. Also, the visibility of some consolidation in the subsector has increased the comfort of physician groups with the structures of administrative service providers and outside investors. This familiarity has contributed to the prevalence of additional platform and add-on transactions over the past several years.

  3. As is the case with most physician practice specialties, the ability to expand ancillary service lines is one of the most widely cited drivers of growth and consolidation. The urology subsector provides a combination of unique ancillary opportunities in the form of radiation therapy, surgery centers, lithotripsy, laboratories and pharmacies. Many urology practices aspire to offer these service lines, to make care more convenient and safer for their patients. For example, many urology practices note a need to bring radiation therapy in-house, due to the frequency of treatment required for many patients and the convenience of avoiding travel to multiple locations for already at-risk patients. Also, many urologists are interested in developing surgery centers, due to payors’ strong emphasis on performing clinically appropriate procedures in the lowest-cost setting of care.

    Although ancillary service lines can provide convenience for patients, they also pose significant capital challenges. For urology practices to invest in these service lines, the practice must have a sufficient level of scale to justify the capital expenditure. Administrative and capital partners provide a unique opportunity to many urology practices that allows them to consolidate to the level of physicians needed to support these ancillary service lines, as well as provide the capital funding for ancillary service line growth.

  4. As mentioned above, the opportunities for ancillary service lines (e.g., surgery centers, radiation therapy and pathology) to support patient care has increased interest in the urology subsector. Many of these ancillary service lines, particularly in the urology subsector in which a high degree of government pay typically exists, are highly regulated by federal and state fraud and abuse laws. Before developing, and while operating, these additional service lines, investors and physicians must be mindful of implementing strong compliance policies and regulatory guardrails to ensure they are operated in a compliant manner. For example, radiation oncology services are typically governed by the federal Stark Law, and the revenue associated with in-office radiation therapy must be addressed to meet a Stark Law exception. Failure address these considerations could result in additional risk to the practice, physicians and/or investors.

  5. Strong relationships between hospitals and urology practices often create attractive opportunities for investors. Transfer agreements with affiliated surgery centers, call-coverage agreements, co-management relationships and medical director relationships are all examples of typical agreements between urology practices and hospitals. Co-management relationships, in which urologists manage the urology service line of a hospital, have garnered particular interest in the subsector over the past several years, as payors have increased their emphasis on quality outcomes in hospitals. These co-management relationships can provide unique opportunities for quality improvement for the hospital, as well as an additional revenue stream for the urology practice, but must be structured to comply with federal and state laws applicable to hospital/physician relationships.

Recent Transactions Within the Urology Space
The past several years have seen many urology and related oncology platforms arise as a result of private equity investment in urologic management companies. These platforms include:

  • United Urology Group, which partnered with Audax Group.
  • U.S. Urology Partners, which partnered with NMS Capital.
  • Solaris Health, which partnered with Lee Equity.
  • Urology Management Associates, which partnered with Prospect Hill Growth Partners.
  • Urology Partners of America, which partnered with Triton Pacific Capital Partners.
  • Urology America, which partnered with Gauge Capital.

Future Market Predictions
Despite the active investor interest in urology over the past three to five years, in certain geographies around the country, opportunities remain for further consolidation. Expect the platforms identified above to continue aggressive consolidation activities in the space for add-on and regional platform opportunities. Given the urology subsector’s opportunity for growth of ancillary services and telehealth, expect continued interest in this subsector through 2022 and beyond.