The last several years have been a feeding frenzy of private equity buyouts in ophthalmology.  Although many people are now deeply involved in negotiations, others have never heard of EBITDA and have no idea what it means for their future.  We caught up with Larry Halperin, MD, who kindly offered us a primer on the process.

First of all, what is private equity (PE)?

In the simplest terms, private equity is money raised from pension funds, equity groups, and high net worth individuals, that is pooled to invest in established businesses. In general, PE is looking to buy companies (or in our case, private practice groups) that are profitable, and then make them more valuable in order to sell and get a multiple return on investment.  It is arbitrage – buying the company, making it more valuable, and then re-selling, often to other private equity groups. 

What is the strategy for making a retina practice more valuable?

The most common strategy is a roll-up.  PE is looking to acquire many practices in a given area, providing them with greater negotiating power with payers.  This is essentially a consolidation of medical practices, which is happening in many other fields of medicine.  The trend for leveraging economies of scale is happening throughout medicine.

Why is this happening now?

This is actually not new. The role of PE in medicine began with a wave of interest in the 1990s.  Many practices consolidated in an effort to have power, partly in reaction to the rise of health maintenance organizations.  But as HMOs waned, so did the force of large practices in ophthalmology.

Now we are seeing a massive resurgence.  Part of it is private equity now has a greater amount of money, and they are ready to deploy.  There is a lot of appetite for deals.  They are looking for investments that are uncorrelated with the market, and are particularly focused on baby boomers since it is such a robust market.

Ophthalmology (and retina in particular) has been profitable for several consecutive decades.  This is coupled with the fact that inflation is low, giving them leverage on money they invest by raising cheap debt.  Altogether this is a setup for amplification on investments by buying retina practices.

This sounds like a deal for them.  What’s in it for the retina doctor?

The main reason is that it allows you to diversify your financial portfolio.  In the buyout, PE will provide some percentage of your potential future earnings as an upfront payment.  This money can then be invested, which decouples your income and future earnings from your medical practice.  This reduces risk.  At this point, there are a lot of potential risks in the future of health care. These include technology risks, regulatory risks, and market risks.  The promise of PE is that it provides insurance against these potential changes. In addition, the money given now is considered capital gains, and therefore one pays less in terms of taxes than a straight income tax.  That is an additional incentive.

Why would the retina doctor turn it down?

There are a number of reasons.  First, the buyout may be too low.  The risks for the retina market in the future are really unknown, and it is a judgment call if the cash upfront for a percentage of future earnings is worth it.  There are many variables to consider, and it is impossible to accurately predict if the offer is worth it.  The players from PE are very smart; they don’t know retina, but they know the numbers. So they make a deal that is enticing, but not a clear cut yes or no.

Second, the retina doctor no longer owns their practice. This can be a potential source of frustration.  Part of the joy of being in private practice is the ability to make decisions about schedules, offices, personnel, equipment, etc.  All of that is forfeited when you sell your practice.  Of course, PE is interested in your success. Therefore they want to keep the factory the way it is.  But you relinquish control when you decide to sell.  In the end, the decision relies on a gestalt analysis.  The only guarantee is that the decision will not be easy.

October has come and gone which means the leaves have changed colors, a new World Series Champion has been crowned (shameless plug for the Astros), and ICD-10 updates have been implemented. For all the faults of electronic medical records (EMR), the fact that these updates came and went on October 1, 2017 without much incident is a tribute to the advantages of EMR systems. Briefly, vision impairment and myopic degeneration codes were updated, but the latter are likely more impactful for retinal specialists so I’d like to take a moment to review them.

What Changed:

Myopic degeneration can now be broken into more granular categories. These include myopic degeneration (H44.2XX) with: choroidal neovascularization (A), macular hole (B), retinal detachment (C), foveoschisis (D), and other maculopathy (E). Myopic degeneration without the subset codes can also continue to be utilized.

Why It Matters:

Practically: Part B drugs such as ranibizumab, that have recently been approved to treat myopic choroidal neovascularization (mCNV), are also affected because their approval is linked to use with a certain ICD-10 code. Fortunately an exam of Genentech’s website indicate that H44.2A1 (mCNV OD) and H44.2A2 (mCNV OS) are already listed in addition to the older ICD-10 codes.

Long-Term: Merit-Based Incentive Payment System (MIPS) uses a “quality” component to help judge bonuses/penalties for Medicare payments. However treating a disproportionate number of myopic degeneration associated macular holes or retinal detachments may make you a “low quality” provider based on surgical success rates because they tend to be more challenging than their non-myopic counterparts. With the level of granularity of the ICD-10 data, there may be room to supplement the CPT codes that are used to determine single operation closure/attachment rates that would be used to judge physician quality.

Thus while EMR has minimized the coding hassle of ICD-10 changes, there are other aspects such as MIPS and reimbursement issues that still may require attention every October.

By now many of you are aware of the 2017 changes to coding for laser (67105) and cryo (67101) for retinal detachment (RD). These included a substantial reduction in reimbursement, but also a change from a 90-day to a 10-day global period. What you may not be aware of are the following subtle implications of these changes.

First off, this has implications on getting paid for the actual clinical exam when performed the same day as treatments. For instance in 2016, in order to get reimbursed for both the exam and treatment, a -57 modifier was applied because laser to RD was considered a major procedure (ie 90-day global). But in 2017 a -25 modifier would need to be used since laser to RD is now considered a minor procedure (ie 10-day global). This error can be particularly costly because most RDs are treated the same day.

Secondly, and perhaps even more confusingly, medical progression from less severe to more severe does not always match up with coding progression. Let me give you a relatively common example – consider the scenario where a retinal tear (RT) is initially treated with laser (67145) or cryo (67141). Despite treatment, if this progresses to a RD that you decide to laser (67105) or cryo (67101) during the 90-day global of the prior treatment what modifier can you use? A -58 modifier was appropriate in 2016 because it applies when going from a lesser procedure to a greater procedure. This made sense medically and in terms of coding. Unfortunately in 2017 that seamless logic no longer applies since from a coding perspective treating a RT is a major procedure and treating a RD is a minor one. Currently a -78 modifier (unplanned treatment during a global period for a related procedure) would apply best, but is only reimbursed 70-80% of the allowed payment.

While understanding these subtleties won’t spare you the stiff neck and backache from a prolonged laser for RD, hopefully this will spare you and your staff the ensuing coding agony.

Ankoor R. Shah, M.D.
Retina Consultants of Houston