Scott Fraser is the Founder and Managing Director of Fraser Healthcare, a consulting practice focused on growth strategies for healthcare companies and private equity firms. He’s worked in the gastroenterology space for 25 years with companies like Given Imaging, EndoChoice and Boston Scientific. More recently, he was President of Practice Management for Physicians Endoscopy.
Watch this super insightful interview in full to understand where the business of gastroenterology is going. Scott delves into new ancillaries you could start right now. He talks about making a practice attractive for investment. And he reflects on the future of GI when present market forces accelerate.
◘ Two key questions: How do GI practices recover? How do you evolve and think differently?
◘ Massive patient population walks into ASCs everyday – very little is done to identify them
◘ The market forces are toward consolidation: payers, hospitals, industry (med-tech, pharma), sub-specialists
The Transcribed Interview:
Praveen Suthrum: Scott Fraser, thank you so much for making time today for this interview. It’s really nice to see you. You have been in this space for 25 years now and that too a variety of roles touching both on the business and technology side. So, I’m really looking forward to this conversation.
Scott Fraser: Thank you Praveen for having me. I’ve really enjoyed the panelists that you’ve had to date, and this is really a great forum in this virtual world, and as you’re getting different perspectives from thought-leading groups and bankers and stakeholders on how they’re weathering this crisis and coming out of it. Really, it’s about sharing best practices because we’re all in this together so, thank you for that.
A little bit about myself, I’ve been very GI/endoscopy-centric pretty much my entire career for now about 25 years. I first started off in Medtech with Microvasive which was the endoscopy division of Boston Scientific, both in sales, product management, and market development and then had a really unique opportunity for my first startup being one of the first US employees of Given Imaging where I led the marketing efforts during the launch of capsule endoscopy and that was such an amazing time frame. Then from there, I was one of the founding executives of EndoChoice which is now part of Boston Scientific and again we launched during a downturn in the economy. We founded the company in late 2007 and then 2008 hit when we were trying to raise money. After that, I was a consultant with a private equity-backed ASC company and I was the president at Physicians Endoscopy to form a new division of Physicians Endoscopy which is the partnership with Capital Digestive Care and that was an incredible experience to be on the operator side of both an ASC company as well as a practice management company.
Since that time, I have had the opportunity to work with both, leading private equity firms as well as fortune 500 Medtech and also startup Medtech companies, really advising them on the evolution of what’s happening, not just in gastroenterology but other subspecialty medicine where private equity is investing in MSOs and it has been a real honor to have these companies seek me out and I formally founded Fraser Healthcare which is my consulting group that advises both private equity and Medtech clients. I think even more important than my business experience is that my dad is a colon cancer survivor and he almost died because of colon cancer and that has instilled in me the importance of screening.
Praveen Suthrum: So, I wanted to start by asking you the two questions that you had told me the other day that most GI practices are thinking about right now. The first one being, how do we recover? And the second one being, after we recover, how do we evolve? And how do we start thinking differently? I’d love to get your perspective on both these questions.
Scott Fraser: Yeah. As I look at ‘How do I recover?’ and some of the best practices that have been shared by some of your previous guests and just in some of the discussions I’ve had with many physicians, it’s looking at your different lines of business and whether it’s your ambulatory surgery center as well as your practice, if you’ve got infusion, or if you’ve got clinical research, and understanding what a pathway to recovery looks like. The thing that I think is that a lot of smaller groups don’t fully appreciate is that their EMRs are a wealth of not only patient information but identifying future patients. And as I talked to different groups and also talked to some of the EMR gurus that are in the space is that very few groups really do a good job querying or mining that data meaning that you have patient populations that have IBS, you have patient populations that are at risk of NASH, and identifying those patients or the at-risk hereditary patients and proactively reaching out to them and it’s not your answering service or your call service contacting these patients, I would really encourage caregivers, nurses as well as physicians to pick up the phone and proactively call these patients and share with them, educate them that they are potentially at risk and they need to come in for an interval or screening.
Particularly the areas that I mentioned, there are some easy to adopt ancillary lines of revenue that some groups are doing right now, and I mentioned the IBS patient population, I look at IBS population, these patients are very difficult and frustrating for gastroenterologists to manage because medical treatment is not terribly successful but there is successful dietary management with the FODMAP diet. There are ancillary streams through third parties like Modify Health that allow you to off-load your IBS patients to their team of dieticians and they administer the FODMAP diet through a set meal plan, the whole time the patient is putting their symptom scores into an iPhone App and you as a provider have it integrated back into your EMR so, you can better manage that patient population. They have seen great success with the groups that are doing that type of program now.
You know, moving over to the hepatology space, I think this literally and figuratively a massive patient population that walks through the clinic doors and the ASC doors every day, and very little is done to identify them or do appropriate workups. And now with the recent technology of Fiber scan, which is easily implemented in the office, and can be done by a medical assistant that maybe takes five minutes. Although not a huge ancillary stream, it helps you identify at-risk patients and manage them accordingly. And then, on top of that if you have a clinical research entity to enroll patients in the new NASH studies, you know, there’s billions of dollars right now in the development of NASH drugs that are all waiting for FDA clearance.
And clinical research has burned a lot of smaller groups previously particularly with IBD and you know they had a difficult time with it, it was a big investment. There are companies out there like Objective GI which works on a joint venture model to help make this a really frictionless process. They take care of bringing the protocols, training the staff, running budgets, recruiting staff, and all you do as a small to mid-size practice is refer your patients over to this joint venture clinical research entity. The profit margin on this ancillary is very substantial you know, upwards of half a million dollars after you have it up and running and it offers a clinical benefit to your patient.
Shifting gears to the ambulatory center, you know, so much of GI is dependent on screening colonoscopy, around 60-70% of any ambulatory center’s revenue is from the screening business and then the downstream revenue from pathology and anesthesia also is very substantial. But now that our endo centers have slowed because of COVID protocols, we might be at half capacity. And in some cases, centers that are just opening here in the Mid-Atlantic and the northeast or maybe at a third capacity. It’s about thinking what we can do for at-risk patients. Maybe with advanced imaging. Advanced imaging has been around for almost two decades and you know, I’m thinking about EUS or confocal microscopy or the cellvizio technology. With confocal microscopy, there is established reimbursement for that procedure that CMS has category one code and you know, it’s an adjunct to EGD with biopsy and again, it adds about $600 to $650per case to the facility fee. It’s meaningful if you’re doing it appropriately with at-risk patients which everyone is seeing with these high-grade dysplasia patients.
So, I think there’s a lot of things that gastroenterologists are trained in during their fellowship, a lot of my good friends are also gastroenterologists have somewhat neglected because of the fact that historically there has been such volume and such a need for screening colonoscopy and a tremendous revenue stream and I think it’s going back to our training meaning the gastroenterology training to understand what are we trained in, what clinical service can we provide to our patients, that is warranted and I think that’s a more important point, and what are we going to be paid for and the examples that I just gave, all have very favorable ancillary revenue streams that could encourage groups to evaluate.
Praveen Suthrum: If you take diet and nutrition as an ancillary. I think everybody knows that it is an important ancillary and everybody does it, but the margins are so thin on that so there’s no clear payment model. So, how do you figure that out?
Scott Fraser: Yeah, it’s a great question. I know a lot of groups historically even large groups have maybe hired a dietician and the ROI with that staff member just wasn’t favorable and one of the things about the company that I mentioned, Modify Health have done is that they have devised a model that has their dieticians as in you’ll be referring your patients to Modify Health and for that referral, the patient is then buying the FODMAP diet which is a neat program. Not that it is a huge ancillary stream. It’s about $100 to $150 per patient that’s enrolled. But what it allows you to do is that you’re not investing in a dietician, you’re not spending the time to try to educate a patient on the FODMAP diet which is complicated I think even for the most skilled gastroenterologist and a very educated patient. It’s hard to understand what to do and what not to do on each week of this diet and it is being managed by a very simple symptom score app.
So, essentially it is taking a very difficult patient population that a lot of gastroenterologists are frustrated with managing and the figures with IBS patients moving from gastroenterologist to gastroenterologist, on average they see five gastroenterologists before they actually feel like they have had some treatment because there’s such a frustrating patient population to manage. This program is a way to keep these patients, make their symptoms go away, and not eat up valuable resources in your practice or make big investments while still recouping some ancillary stream from then. And although it’s not substantial, it is a way to keep that patient engaged in your practice.
Praveen Suthrum: And how about the clinical trials with Objective GI that you mentioned. When you say half a million dollars, is it per trial? How does that work?
Scott Fraser: Yeah, it’s a great question and you brought up the question before about established reimbursements. You know, large groups do clinical trials very well. If I look around the country, whether its Gastro Health, TDDC, or Capital Digestive Care or MNGI they all have very large clinical trial organizations and upwards of 20 different protocols at any one given time. It was a big investment at it was a slow ramp.
The nice thing about clinical trials is that they’re not dependent on reimbursement. You’re getting paid directly from the sponsor. And particularly with the latest NASH trials, the enrollment fees are very high because it’s such a race right now to get these drugs to market from about 32 different pharma companies that have the drugs in some phase of development right now related to NASH. So, what the team at Objective GI does is that they come in under a joint venture model. It’s a small startup fee from the mid-sized practice and really it becomes an integrated part of your practice that they are managing for you meaning that they are not only bringing the protocols to you, which is often difficult for groups to you know, get to meet the different clinical trials sponsors. But they have set protocols, they have a very experienced team of clinical research organization executives. And they are providing the training, the staffing and the budgetary process needed to run successful clinical trials and you as a provider, based on a set criterion are working up patients, in this case, you’re working up patients with fiber scan which is paid for by different sponsors. You may work upon 30 patients with fiber scan and only identify two that you’re enrolling in a trial but that fiber scan which is in your clinic is being reimbursed for by the clinical trial sponsors.
The numbers on fatty liver disease are anywhere between 80 million to 100 million Americans of which about 25 million will develop NASH again, this is literally and figuratively a massive patient population that our gastroenterologists see every day and very few groups are doing a lot for these patients. So, I’m really excited about that particular ancillary because again, it falls in line with GI and so much of fatty liver disease is dietary management too. So, we can help these patients based on your nutrition training as well just by losing 10 or 20 pounds.
Praveen Suthrum: Let’s switch gears to private equity. Since you have been involved with private equity for a while. I want to know what the PE funds are thinking.
Scott Fraser: We are still very much in the early stages of the consolidation of the subspecialty of gastroenterology. If I look at other subspecialties where private equity has been very active in dermatology or in ophthalmology, particularly in dermatology you have over 30 platforms and by the latest estimates I’ve seen, about 50% of the private practice dermatologists are now part of an MSO. Where you know, right now eight platforms within GI and close to 1000 gastroenterologists, I know there are a lot of deals that are in the pipeline that should be closing by the end of the year. We still have a really small percentage of the overall 13,000 to 14,000 gastroenterologists in the US that are part of an MSO. In terms of deal structure, the thing that is changing right now in this level-setting is that the sellers meaning the groups are being asked to take on more risk and this can be done in a number of different ways. The structure typically is in the seller’s note and what the buyers, private equity firms as well as their lenders are asking them to do is to structure deals that allow groups to get an additional payout for that transactional value when they hit their historical values of 2019. So, really the onus of the burden is on that group.
If I’m a group of 20 gastroenterologists and my volume hit down to 30%, I’m really betting on myself and my partners that we are going to get back to that 100% level that we were at 2019 to achieve full transactional value. Additionally, the structure of these deals is less cash. So, no longer it is this massive cash payout. Sellers are being asked and taking more equity. Again, betting in yourself. And, I have always stressed to gastroenterologists that are good friends that you know, many doctors have invested in real estate or restaurants or a bit more risky type investments. Investing in themselves is by far the best investment they can ever make. And looking at your own ambulatory center is a great example. Ambulatory centers were an investment that you made in yourself and your group and I would argue that they are absolutely one of the most valuable assets probably in your entire portfolio today.
Praveen Suthrum: Scott, if you were to put yourself in the shoes of an average GI practice anywhere in the country, how would you go about making a decision today? The GI practice out there has several choices right now. They can continue to be independent, doing what they’re doing now, or they can consolidate with other groups in the local areas independently or they can seek out private equity and go that route. How would you go about making a decision if you were in their shoes?
Scott Fraser: It’s a great question. I think the first thing I would do with my partners is really do a deep assessment of the local market conditions. So much of healthcare as we all know is local. So, not only what payor market looks like, what our referral market looks like, but I think more importantly what’s happening in our broader healthcare market meaning I’m going to reference the DC area, it is a great example, where I did a transaction with Capital Digestive Care previously. The DC market has a common threat that really has caused a lot of consolidation across all subspecialties and that was a combination of Hopkins moving south and not only buying hospitals but primary care in the DC metro area as well as MedStar which again is another major hospital group doing the same.
That put a real threat across all subspecialists in that area and you’ve seen massive consolidation in that marketplace. Not just with gastroenterology and Capital Digestive Care but if I look at urology, dermatology, ophthalmology, Premier Carrier, one of the largest primary care groups of Premier Health in that market and most recently a transaction during this pandemic was with Shady Grove Fertility which is a multi-state platform not just in fertility but also in women’s health. They have all consolidated because of the common threat in their local market and also because they have a major payor that has about 30% of that market. So, they needed size and scale and sophistication to be able to negotiate contracts. That would be the first step that I’d do.
The second step, I think is very similar to the analogy that if you’re thinking about selling a house, it’s getting your house in order. Meaning, if I have an outdated bathroom or I need a new roof. It’s about making investments that will make my practice more attractive to not only a potential strategic meaning an established MSO platform or a potential suitor with a PE platform if that’s the avenue I want ahead. I think it’s an investment in an EMR, some data analytics, Revenue Cycle Management as you well know is often an area that groups don’t have sophisticated Revenue Cycle Management or a process and system to track that and often, they are leaving 100s of dollars to 1000s of dollars a day on the tables because of the errors that they’re making in coding or just not following and processing claims so, it’s a very low hanging fruit. So, it’s focused on you know, if I want to be acquired making the time and the investment upfront to make my practice more attractive.
And then if you’re truly thinking about looking and staying independent during this consolidation, I think it’s looking at what we can do and what we can offer additionally to our patients. We talked about screening colonoscopy business being a threat. It’s really diversifying your groups into some of the areas that I talked about before. One area I didn’t mention is an area that has been around for years and again has established reimbursement is hemorrhoidal treatment. Looking at sometimes the small incremental things that you can add to your practice is that’s going to make you more stable, you know, as we whether through this storm. Now is the time to scrutinize and review every one of your contracts. It can be from your leases on your office or your ambulatory center with your landlords looking to defer payments as you are trying to recover.
Praveen Suthrum: How could GI groups collaborate with industries?
Scott Fraser: Industry whether it’s the big pharma companies or Medtech companies, and supply companies have local marketing campaigns and budgets and more importantly, promote practices that are utilizing their products or maybe recruit patients via social media in a certain disease segment. So, as opposed to the industry coming to you and trying to sell you on a new product, and then offering up a potential marketing program, I would reach out to your industry partners and enquire about this because it does exist and they have the resources.
There are some great courses and forums every year. One being the GI roundtable that Bergein Overholt, MD started, and Klaus Mergener, MD has now taken to the next level. This meeting which has been around for years is really where the private practitioners in GI, talk about different business strategies and new ancillaries and it’s a great forum.
I would also encourage private groups to become members of DHPA (Digestive Health Physicians Association) an advocacy group that now has close to 3000 members across the country. And the sharing of best practices with the DHPA leadership has been phenomenal and I would argue that DHPA has been part of the wave of PE sponsors meaning they’re sharing best practices, transactional advice on how to maneuver through a transaction and what to prepare for and what to do with each other and again, it’s a very collaborative effort. In a nutshell, understand your data, understand your local market, understand where there may be threats.
Praveen Suthrum: When you push this ball five years from now, or longer into the horizon, what do you see happening? What is the holy grail for GI?
Scott Fraser: You know, it’s a great question. I think that the market forces right now that you mentioned right now and one of the biggest market forces are payors. If I look at the larger ecosystem within gastroenterology, at the top of the food chain are payors. Payors have consolidated massively and now are looking at buying providers. So, they have never liked consolidating across different markets, they are consolidating service lines. If I then go down a step, we talked about hospital consolidation that has happened then another step-down, you look at the industry. Industry has consolidated. You know, my two previous startup examples both with Given Imaging which is now part of Medtronic and EndoChoice which is now part of Boston Scientific are great examples of what’s happened with industry consolidation.
In pharma, consolidation has been massive as well. The reason why consolidation has happened all around us has so much to do with economies of scale and resources. Speaking from my executive experience at EndoChoice, we didn’t have the resources and the field team that a Boston Scientific has. They’ve taken our company which was approaching 80 million dollars in revenue and those product lines and have grown them substantially in the last three years because of their commercial infrastructure that we just couldn’t invest in. So, scale matters. Unfortunately, at the bottom of the food chain of this consolidation are the gastroenterologists or the subspecialist. They haven’t consolidated. But I look at groups that have consolidated and have integrated as well and I think that’s a key point.
I know you had Jim Leavitt on previously from Gastro Health, they’ve been at this now for four years with Audax and you’ve seen the evolution with what Gastro Health has done. They’re a fully integrated platform right now and have tremendous efficiencies that are all centralized versus some of the other platforms that are just starting that are yet to do that integration and create those efficiencies. So, I think in the future, the more integrated a platform can be, and a GI group can be lowering their administrative burdens, but also allowing them to maximize different ancillary lines, maximize at-risk type contracts. If we look at whether it’s a colonoscopy bundle or managing a certain disease patient population like IBD, these are the initiatives that integrated groups are pursuing that really will limit and exclude private groups because of the resources needed and the scale needed to be able to negotiate with a payor or a major employer.
You know it has been really interesting to see what some of these large-scale groups have done going direct to employers with GI Health and having a direct service line to their practice. So, that being said, I think consolidation is going to happen and I would encourage groups to have an open mind to it. It is not a threat at all, it is something that is an evolution and it allows groups to stay independent. These companies that are nimble or practices that are nimble or also embrace change will come out of this pandemic stronger.
Praveen Suthrum: Scott Fraser, thank you so much for all these insights. It has been fantastic chatting with you.
Scott Fraser: Praveen, I really enjoy your labor of love if you will, in terms of not only the research but the writing and the time, sharing best practices with the broader GI community. It is much needed. I wish everyone continued safety and continued growth and success during this difficult time. We will get through this.