Bonaccord Capital Partners has made a passive minority investment in Revelstoke Capital Partners, according to a news release.

Revelstoke, based in Denver, focuses on investing in the healthcare and related business services sectors. Founded in 2013, the firm typically invests between $10 million and $250 million.

Bonaccord, based in New York, is a private equity firm focused on acquiring non-control equity interests in middle market private markets sponsors spanning private equity, private credit, and real estate and real assets. Founded in 2018, Bonaccord is a part of P10 (NYSE: PX), a multi-asset class private markets solutions provider in the alternative asset management industry. 

Terms of the investment were not disclosed.

In response to a growing number of cyberattacks in the healthcare and life sciences industries, on Sept. 27, 2023, the U.S. Food and Drug Administration (FDA) released updated guidance regarding cybersecurity safety requirements for medical devices. This guidance outlines the FDA’s recommendations on improving the cybersecurity safety and effectiveness of medical devices in the premarket phase, replacing its 2014 “Content of Premarket Submissions for Management of Cybersecurity in Medical Devices” guidance.

This guidance applies broadly to all devices with cybersecurity considerations, including devices that have a software function, contain software or programmable logic, and are network-enabled. Importantly, this guidance also applies to devices that do not require a premarket submission, such as 510(k)-exempt devices. Practically, this includes everything from a programmable thermometer to an artificial intelligence-enabled diagnostic device.

Device manufacturers already are required to establish Quality Systems Regulation (QSR) metrics. To strengthen the QSR metrics, the FDA recommends implementing a secure product development framework (SPDF) to address cybersecurity risks. The FDA recommends that, among other things, the SPDF be incorporated at each stage of device development, and it should establish a security risk management plan that includes traceability documentation to demonstrate threat modeling, cybersecurity risk assessments, and maintaining a software bill of materials. SPDF use may reduce risk that device manufacturers will need to “re-engineer the device when connectivity-based features are added after marketing and distribution, or when vulnerabilities resulting in uncontrolled risks are discovered.”

Recently, the FDA acknowledged that artificial intelligence and machine learning (AI/ML) will play a critical role in medical device development, in part through cross-system integration. However, AI/ML remains largely unregulated as scientific advancement continues to outpace government oversight. The FDA recognizes that this rapid, unregulated expansion may create new cybersecurity risks and recommends that device manufacturers consider evaluating and enhancing cybersecurity systems at all touchpoints in the device life cycle.

Moreover, the FDA advises that device labeling should include an accurate description of the medical device’s cyber risks, but in a way that is easy to understand to the “average user.” This can be particularly challenging where the average user may be unfamiliar with technology generally. Failure to include proper cyber warnings on the label may render the device misbranded under Section 502(f), potentially leading to FDA enforcement actions such as fines, injunctions, civil penalties and criminal charges.

Investors in medical device and device-adjacent products and services should ensure that potential targets incorporate security-by-design and lifecycle security risk management into their go-to-market plan. Diligence should include evaluation of cybersecurity compliance throughout the entire process of device development, manufacture, sale and decommission. If medical devices interface with other systems, investors also should ensure targets have cybersecurity measures in place to prevent potential attacks from occurring at each touchpoint and via interconnected devices. Device operation continuity plans and disaster response plans are also critical to ensure device safety in the event of an intrusion or attack. Lastly, investors should ensure device manufacturers are prepared to address device labeling changes, as there may be particular challenges in describing risks and protections in a user-friendly manner.

McGuireWoods attorneys track updates in medical devices, digital health and cybersecurity. For more information on how this guidance may apply to you, potential implications or possible areas of concern, please contact the authors of this article.

On this episode of The Capital Corner, McGuireWoods’ Geoff Cockrell sits down with Hector Torres and Rich Blann, managing directors on DC Advisory‘s global healthcare team. They discuss market trends and current areas of interest from both investors’ and sellers’ perspectives.

Hector and Rich share the challenges they’ve seen in the market this year, as well as where they see the upward trends heading. From the bid-ask spread to physician practice consolidations, they offer plenty of advice and hope for the remainder of the year.

The interview below is part of a McGuireWoods series featuring interviews with C-suite leadership of private equity-backed portfolio companies. To recommend a leader for a future interview, email Holly Buckley at hbuckley@mcguirewoods.com or Tim Fry at tfry@mcguirewoods.com.

Q: Can you tell us about Ambulatory Management Solutions (AMS)?

Scott Mayer (SM): AMS is an outpatient anesthesia platform exclusively focusing on non-hospital cases, surgeries and environments. That means we cover anesthesia for ambulatory surgery centers (ASCs), as well as offer a turnkey model for physician offices, dental offices and clinics. If anesthesia-related support is needed by any of these settings, we deliver it.

From a market perspective, our platform stands out because of that support. We pride ourselves on being more than just an anesthesia staffing company. We deliver an unmatched number of value-adds to our clients’ facilities. For example, our office-specific model provides preoperative, recovery, nursing and all clinical support staff. We put the patient to sleep and provide that anesthesia service to the surgeon or proceduralist. We’re also prescreening to avoid same-day cancellations for our partners, and helping that patient and facility from when the patient enters the building all the way through the surgical process to the end, when they’re recovering from anesthesia, and then walking them out to their driver to take them home. We also handle anesthesia-related drug supplies and equipment, so items such as propofol, defibrillators, emergency airway items and IV start items. Finally, we provide analytics on issues like clinical outcomes and turnover times to our partners. You’d be surprised how many organizations don’t even track that, let alone offer it to clients.

We describe what we do as a “floating surgical suite” or “surgical support platform.” If someone describes us as an anesthesia company, this puts us in that box. We offer more of a holistic approach to anesthesia. There’s just so much more that encompasses anesthesia than the procedure itself, for the patients and especially the surgeons. In truth, I think to meet us on our level and call yourself an anesthesia platform, you have to cover the clinical and patient safety side but also the financial and operational facets. It’s not just about providing “bodies.”

Q: You founded AMS more than 10 years ago. What has changed the most since then?

SM: The anesthesia world has changed quite a bit, from the billing side, with going in- and out-of-network with insurance carriers, to the former “physician-only” model moving to care team models with physicians and CRNAs. Now we’re seeing anesthesia assistants coming into the workforce as another midlevel anesthesia provider.

During the pandemic, a lot of anesthesia providers decided it was time to retire or significantly scale back their work. There also were people in medical school or residency with plans to pursue a career in anesthesia who, after seeing how crazy things were, began questioning whether they wanted to go into a potentially dangerous hospital environment. Many of them decided to get fellowships in other areas like pediatrics or stay in school to delay entering the workforce. That created a big anesthesia shortage, which has driven compensation through the roof — up 20%, 40%, even doubling for people working at locum tenens companies.

We’re now seeing a kind of “mercenary/work-for-hire” situation where supply and demand are out of whack. From an anesthesia provider standpoint, people can essentially name their price and get paid top dollar to be put in any setting. That changes the business model significantly for anesthesia practices. You’re getting calls all the time from surgeons saying, “we need you,” but you don’t have the bodies to help support them.

Another big challenge to the business relationships with our clients is helping them understand that we’re paying our providers significantly more, and the insurance carriers are either paying us less or really pressuring our reimbursements to come down. This, in turn, puts pressure on providers to deliver more case volumes, a better payor mix, a stipend subsidy or some form of financial support for us because we can’t afford to financially support and subsidize our facilities.

The No Surprises Act is another big development. The anesthesia community is all in favor of making sure patients don’t have large, unexpected out-of-network bills. We’re all on board with transparency and helping our patients. AMS and its affiliated companies have always been in-network. We’ve never wanted to play that out-of-network game.

However, what happened with the No Surprises Act is the insurance companies are using it as leverage to say, “You don’t have any threat of going out-of-network and charging our patients a lot of money or gouging us for huge returns, so we’re going to force you in-network and basically pay you whatever we want to pay you.” That’s contributed to anesthesia reimbursement coming down significantly. Without anesthesia companies having at least the option of going out-of-network as leverage for contract negotiations, all you can do is wait and see how much insurance companies are going to try to decrease your rate even further.

Josh Gantz (JG): I’d add that the use of data has progressed significantly. Anesthesia is a secondary provider. Nobody goes to the doctor to be sedated; the sedation comes as needed, based on the procedure. Because of that, you’re sometimes looked at as a commodity and told, as the saying goes, to “show up and shut up.” We’re changing that perspective. We value technology and data, and we have a dedicated analytics team that helps us provide meaningful data to our clients.

Some of our clients are large health systems and private equity-backed organizations. When we give them what we view as even basic data, like information on average length of procedure, many are amazed and say they’ve never had access to such information. A little bit of good data can go a long way. We’re seeing an opportunity to fill a much-needed data gap, even on a basic level.

Q: How do you differentiate AMS from competitors?

SM: The external services we mentioned certainly differentiate us — whether it be personnel, working together on financial modeling, providing needed supplies, or sharing data. We use our infrastructure to form partnerships with our clients and be a solution to a lot of the challenges they confront.

For example, during the COVID-19 pandemic, we established a strong lab relationship and helped clients with COVID testing so they could get back up and running. We are always looking for ways to help solve whatever major issue or obstacles are in front of our clients.

As Josh mentioned, we’re a secondary provider. We have no control over how many patients we’re going to see in a day because they’re not our patients until they arrive at the facility. They’re our patients for that time, but they’re always our clients’ and facilities’ patients. Being a secondary provider, we rely on working closely with our clients, so they also always have our best interests at heart. We want to constantly remind them about the value we provide that goes well beyond putting patients to sleep and safely waking them up.

Q: How have AMS and AMS-supported practices retained and attracted top talent during the tight labor market we have seen in the past few years?

SM: We’ve always prioritized and maintained a very strong culture. We enjoy investing in our team and showing them that we care about their personal lives, work-life balance, mental and physical health — all of it. We encourage socialization within the company and make sure there are opportunities for people to meet and enjoy time with one another.

It is crucial for us to have great talent, and we have really come to rely on internal referrals and work to continue receiving them. Especially during this anesthesia shortage, we want people to tell their friends and family how great we are to work with. Having our people, who we already think are great, spreading the word about how we are different than the rest of the anesthesia community has been our biggest source of recruitment.

I mentioned that the anesthesia shortage has created a situation where many anesthesia providers are out for themselves. Hospitals are starting to look at providers asking for double payment and expecting double the value of their work. Hospitals are pushing what they can get back from providers because of what they’re spending — pushing the limits of how many patients you’re taking care of, the sickness of these patients or the number of CRNAs you’re supervising. This is leading to more hours, including more 24-hour shifts. That’s not sustainable for the providers or good for patients.

What we’re trying to do is show anesthesia providers that this added work and pressure are eventually going to burn them out. We’re happy providers are getting paid a lot, but they need to take care of themselves. We want providers to know that when they hit a wall and decide they need a work environment and culture where they can feel fulfilled, appreciated and supported, we want AMS to be that alternative — and that they will still be well-compensated.

It’s crucial that our staff want to stay with us. We’re so proud of the tenure rates we have and our very low attrition. We hear about many other groups struggling with staff and losing facilities, with some at half of what they may have been just a year or two ago. Meanwhile, we’re continuing to grow, which shows the significance of what we’re investing in our culture and how we’re taking care of our staff. We want people to do what’s best for themselves, and we want to make sure we’re treating them the best, supporting them the best.

Q: How do you see private equity firms, payors and providers responding to the various market changes you have noted?

JG: There’s increased attention on site of service. Insurance companies are incentivizing procedures to be done in the most optimal setting, both clinically and financially. Private equity dollars are following accordingly. We’re seeing increased investments in gastroenterology, gynecology and other surgical specialties where there’s an ancillary revenue model rewarding those who control and perform procedures within their own four walls. The focus on the site of service is more important than ever.

With payors, I think we’re seeing a little bit of the chicken or the egg. Payors have been the driving force for the movement of some specialties, but they are also lagging with others. As anesthesia providers, we support all types of specialties. We can see where surgeons are leading the charge and demonstrating a willingness and ability to do procedures in their offices, but insurance companies have yet to determine the right reimbursement and incentives to support this migration of care.

I believe investing in ASCs is going to be a bigger challenge in the next few years. The pace of procedures being moved from hospitals to ASCs is faster than the pace at which they’re building more surgery centers. There’s always going to be a place for ASCs, and they will always play an important part in providing outpatient surgical care. But we think the emerging third site of service, the office setting, is going to be big in the coming years. There’s a lot more investment dollars going into certain procedures being done in that outpatient, office-based setting than people are realizing.

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About Scott Mayer

Scott Mayer is the chief executive officer of Ambulatory Management Solutions (AMS), a role he has held since the company was formed in 2011. Prior to founding AMS, Mayer served as the chief financial officer and practice administrator for Mobile Anesthesiologists. He received a BA in finance from the University of Illinois at Urbana/Champaign.

About Josh Gantz

Josh Gantz is the chief financial officer of AMS, a role he has had since AMS’ founding in 2011. Prior to AMS, Gantz was an associate at M3 Capital Partners, a real estate investment banking and private equity firm. He received a BS in finance from Washington University in St. Louis and an MBA from the University of Chicago Booth School of Business.

Lovell Minnick Partners (LMP) has announced it has completed a majority investment in S&S Health.

S&S, founded in 1994 and based in Mason, Ohio, is a healthcare administration company providing solutions for health plans for small and mid-sized businesses.

LMP, based in Rednor, Pa., is private equity firm which seeks to invest in growth-oriented financial services and financial technology companies. Founded in 1999, the firm generally makes equity investments between $40 million and $150 million.

Terms of the investment were not disclosed.

On Sept. 21, 2023, the Federal Trade Commission (FTC) brought a lawsuit in the U.S. District Court for the Southern District of Texas against US Anesthesia Partners (USAP), a large healthcare provider platform, and private equity firm Welsh, Carson, Anderson and Stowe (WC), which has been a principal investor in USAP for many years.

The lawsuit alleges that USAP and WC engaged in monopolization, price fixing and methods of unfair competition in connection with a decadelong strategy to “roll up” anesthesia providers in Texas and engage in contracting practices that increased the cost of services. It has been publicly known for some time that the FTC has been investigating the antitrust implications of the roll-up activity of USAP, in line with public criticism by FTC Chair Lina Khan of the use of roll-up acquisitions whereby a single buyer gains significant market share through multiple transactions, none of which is large enough to trigger a filing under the Hart-Scott-Rodino Act (HSR Act).

Notably, this criticism, particularly in healthcare, has also been delivered by the U.S. Department of Justice Antitrust Division, state attorneys general and state legislatures that have passed laws requiring pre-close review of healthcare transactions not subject to the HSR Act.

The Sept. 21 Complaint against USAP and WC alleges a number of violations, including the following:

1. Monopolization claims related to commercially insured hospital-only anesthesia services in Houston and Dallas (Section 2 of the Sherman Act).
2. Substantially lessening competition through acquisitions in each of the Houston, Dallas and Austin markets (Section 7 of the Clayton Act and Section 5 of the FTC Act).
3. Engaging in a course of conduct to obtain price increases that constitutes an unfair method of competition (Section 5 of the FTC Act).
4. Entering into or maintaining agreements that used defendants’ market power to charge higher rates and allocate the market for commercially insured hospital-only anesthesiology services (Section 1 of the Sherman Act).

The Complaint seeks a permanent injunction against the defendants from engaging in the conduct described in the Complaint and any similar conduct, as well as any structural relief the court finds necessary to remedy the alleged violations.

The Complaint describes a concerted plan on the part of the defendants to buy nearly every large anesthesia practice in Texas. After executing on this strategy, the Complaint alleges, USAP has control over 1,000 doctors in total and, as a result, has been able to achieve higher rates from commercial payors for services rendered by those practices. In addition to acquiring practices, the Complaint alleges, the defendants entered into or maintained so-called “price-setting” arrangements with other, independent anesthesia groups that shared key hospitals in Houston and Dallas and engaged in market allocation with another large anesthesia services provider.

In total, the Complaint describes, as a result of this strategy, defendants control nearly 60% of hospital-only anesthesia costs statewide and approximately 43% of cases, and healthcare costs have increased in Texas by tens of millions of dollars annually. Finally, the Complaint alleges that defendants’ behavior has no valid pro-competitive justifications or efficiencies and defendants do little to create improvements to the services of the practices they acquire.

The Complaint raises many questions for private equity firms and other acquirors in healthcare and other industries. It also illustrates, however, that antitrust matters and merger analysis, in particular, are intensively fact-specific. Please contact McGuireWoods healthcare or antitrust counsel for more specifics on how this development may affect your particular business strategies.

On Sept. 13, 2023, the U.S. Attorney’s Office for the Northern District of Texas announced a settlement with Oliver Street Dermatology Management LLC. Oliver Street agreed to pay the United States $8.892 million to resolve self-reported allegations that its acquisition of several dermatology practices over five years violated the Physician Self-Referral Law (Stark Law), the Anti-Kickback Statute (AKS) and the False Claims Act (FCA).

This settlement includes more than $5.928 million in restitution, essentially a payment of 1.49 times the amount the government believed was due to improper billing, after a voluntary disclosure to the Department of Justice (DOJ).

According to the DOJ press release, from January 2013 to July 2018, Oliver Street, doing business as U.S. Dermatology Partners (USDP), acquired numerous dermatology practices across the country. In September 2021, soon after a recapitalization, the company voluntarily self-disclosed that former senior managers had increased the purchase price of 11 acquired dermatology practices in exchange for the practice provider’s agreement to refer services to USDP-affiliated entities, including surgical centers and pathology laboratories that Oliver Street manages and operates. The disclosure noted that claims for certain referred services were submitted for payment to Medicare, thus invoking the reach of the implicated federal laws.

The settlement resulted from potential liability for violations of the AKS, the Stark Law and the FCA. Inflating the purchase price of an acquired asset, in exchange for referrals, can violate the AKS; when such referrals are between, for example, a dermatology practice and a pathology lab, and the referring physician has a financial interest in both, the referrals may violate the Stark Law. Further, when claims are submitted in violation of these laws, such conduct may separately create criminal liability under the FCA. This is an important reminder of the knock-on effects of seemingly innocuous conduct — incentivizing referrals — that is common in other industries.

While the exact nature and extent of the referral incentives are unclear, the matter does offer several lessons to heed when executing add-on acquisitions in the healthcare space. First, documenting the nonreferral business reasons for an acquisition could be helpful, especially when ancillary services exist that could generate problematic compensation between the parties. Further, if ancillary services are involved, there should be analysis to confirm compliance with the Stark Law and the AKS. Likewise, the initial valuation — and subsequent changes — should not consider prohibited referrals and should instead focus on the underlying economics, synergies, and quality or access to care improvements generated by the transaction. Finally, management should focus discussions with acquisition targets on the asset itself and not on potential referrals to other entities in the platform. Care in email and transactional slides is warranted.

If, however, an institution is concerned that its past practices have violated one of the fraud and abuse laws mentioned above, it may consider three avenues for a self-disclosure.

1. DOJ Voluntary Self-Disclosure. An institution like Oliver Street may voluntarily self-disclose potential criminal conduct to the DOJ directly. If it has timely disclosed, fully cooperated and appropriately remediated its conduct, then DOJ generally will not, absent aggravating factors, seek a guilty plea or require an independent compliance monitor. DOJ recently published an approved policy and seeks to incentivize further self-disclosures. Additionally, DOJ may provide credit for such disclosure in reducing the settlement amount, as benefited Oliver Street; in other instances, DOJ has noted that “proactive, timely, and voluntary self-disclosures to the Department about misconduct will receive credit during the resolution of a False Claims Act case.” These are key reasons to self-disclose.
2. HHS OIG Voluntary Self-Disclosure. The Office of the Inspector General (OIG) for the Department of Health & Human Services (HHS) also provides voluntary self-disclosure protocols for institutions to report healthcare fraud. Such self-disclosures provide institutions an opportunity to avoid disruptions and costs associated with government-run investigations and civil or administrative litigation. OIG recently expanded its informal guidance, although this remains nonbinding. OIG likewise credits timely self-disclosures in settlement amounts; generally, it seeks 1.5 times the amount at issue, a settlement amount similar to what Oliver Street agreed to pay.
3. CMS Voluntary Self-Disclosure. If the issue strictly implicates the Stark Law, an institution may use the voluntary self-disclosure protocol (SDRP) to inform the Centers for Medicare & Medicaid Services (CMS) of noncompliance. CMS often settles such violations for a fraction of the full penalties authorized under the statute and less than the issues here would have yielded — albeit without addressing the AKS and FCA risks, therefore rendering this matter ineligible for this protocol. While historically there is a significant backlog around these disclosures, CMS recently updated its protocol to streamline them.

All three avenues provide incentives to timely self-disclose and actively cooperate with the government after compliance violations are discovered, although each presents various nuances. Note, however, these thorny issues can be avoided if assets are properly evaluated, and the deal is properly documented, to comply with the many requirements of federal healthcare statutes. More often, transactions may generate such disclosures due to discoveries in diligence unrelated to past practices.