The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on some critical points private placement memorandum (PPM) investors should know before investing in ancillary services. It is authored by Chris DeGrande and Leah Eubanks.

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What Investors in PPM Businesses Should Understand About Ancillary Investments: ASC, Lab, Dialysis, Imaging and Others – 5 Key Points

By Chris DeGrande and Leah Eubanks

Ancillary services that provide additional value to patients such as ASCs, labs, physical therapy, and imaging, among others, continue to be a valuable way for PPM investors to obtain additional return on their investments, according to experts who spoke at the 16th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20, 2019.

Experts included: Stuart Bernsen, Chief Executive Officer of TVG – Medulla LLC; Jason Mangus, Vice President of United Surgical Partners International, Inc., and JC Miller, Senior Associate of Bow River Capital. The panel was moderated by Jason Greis, a Partner at McGuireWoods LLP.

Here are five key points from the panel discussion:

1. The experts noted several potential areas of ancillary investment for PPM businesses including: ambulatory surgery center (ASC) ownership, laboratory services, physical therapy services, imaging, and durable medical equipment (DME). These ancillaries all have unique considerations for investors. For example, the experts noted that ASCs are an area the government has focused its attention with respect to fraud and abuse; therefore, the ownership and associated financial terms of investment should be carefully structured. Also, while DME can be an appealing investment, there are significant regulatory compliance issues to understand with regards to DME relationships.

2. A key point of focus for PPM businesses when deciding whether to invest in ancillaries is how such ancillaries compliment patient care and convenience. Ancillaries that a patient needs in order to complete his or her episode of care, provide value to the patient and are generally strong ancillary investments. Conversely, adding an ancillary investment solely as a method of “upselling” a patient should be avoided.

3. Investors should understand the volume of a provider’s revenue generated by ancillary services. If there appears to be a disproportionately high amount of revenue generated from ancillaries, it is important to ask why this may be the case and take proper steps to ensure the ancillary business is in compliance with applicable laws and regulations before investing.

4. The experts anticipate that certain PPM sectors, where ancillary services are a significant part of the revenue mix, will experience healthy levels of investment, including, oncology, urology and podiatry. The experts also anticipate opportunities for investment in ancillary services that will vertically consolidate patient care, meaning those services that helped to capture and manage a patient’s care through the entirety of a patient episode.

5. Investors looking to invest in ancillary services should analyze the provider’s patient base and study the current and anticipated future patient makeup in order to determine which ancillary services may prove most beneficial for patients. In addition, investors must be mindful of certain legal and regulatory issues, including compliance with the “in-office ancillary services” exception to the federal Stark law, which prohibits physician self-referral. Investors should obtain proper advice and legal counsel regarding these types of issues.