New Jersey-based Allied Digestive Health recently became the 8th private equity platform in gastroenterology. In this interview, Dr. Robert Gialanella, CEO/President and Dr. Nadeem Baig, Vice President of Allied Digestive Health talk about their journey – from being competitors to partners to choosing private equity and more.
Learn about how they consolidated without private equity first, building the largest GI group in New Jersey. They talk about the “generational divide” between the senior and junior partners and reflected on how they tackled this situation at Allied. They also shared their views on consolidations, disruptions, and EBITDA assumptions. Finally, they laid out four trends as gastroenterology moves to the future.
Watch this direct and lucid interview in full to understand the evolving landscape of GI.
◘ Even before PE, Allied had consolidated its back offices. What are they doing differently with the PE-backed MSO?
◘ “I felt like I was on a witness stand, but at the end of the day we were happy to know that our practice was perfect in that sense “
◘ “If screening colonoscopies go down because of some disruptive technology, then we concentrate more on treating chronic illnesses”
◘ “Shift will occur when there is financial hardship. And it will occur pretty quickly as we see screening colonoscopy going down”
The Transcribed Interview:
Praveen Suthrum: Dr. Nadeem Baig and Dr. Robert Gialanella welcome to The Scope Forward Show. Thank you so much for being here and again I’m excited to have this conversation with you.
Dr. Robert Gialanella: Thank you Praveen, much appreciated.
Dr. Nadeem Baig: Praveen it’s an honor and pleasure to be on this podcast with you today with my partner in arms, Bob Gialanella. We’re really thrilled and honored you know to be part of this great service you’re providing to the GI community beyond. I just wish I had something like this in my training days where someone was actually collating and curating all the best and emerging practices in the business and practice side of GI and medicine. It’s just a wonderful resource for physicians like us in the community.
Praveen Suthrum: Thank you so much for saying so. I want to first start right from the beginning and ask you how did Allied get started way before the PE days?
Dr. Robert Gialanella: Sure. We formed Allied Digestive…it was a sort of a brainchild of I and Nadeems’ in 2014 or so. We were five competing groups in the same geographic area and we had multiple meetings and explored other possibilities with large multi-specialty integrated groups and decided that we really wanted to be single-specialty and in early 2015 we all took the leap of faith and merged five groups that had previously competed with each other and we decided that we would be much better together than apart. And at that point our cultures were very similar, our quality also very similar which was very important. And then we took on the task of integrating operations tracking quality metrics, creating a central business office to handle all the operational needs of the practices. And that’s how we basically did it.
It wasn’t easy in the beginning you know, loans, a few stumbling blocks in the first year or so but we pulled it together and you know we all kept rowing in the right direction. You know when we look back on it people say to us we can’t believe what you’ve done in such a short period of time but it wasn’t for people like Nadeem and our other board members and the overwhelming need for this type of consolidation looking to the future and the present market in GI, we wouldn’t have done it but here we are and very happy to be here and talk to you about our journey.
Praveen Suthrum: So, Bob what is the difference between this MSO and the MSO that is now forming together with your private equity partner because based on what you’re saying you pretty much did what different platforms have done in partnership with a private equity company… you were doing it already. How does this change the game?
Dr. Robert Gialanella: Three years ago again it was a board initiative to create an MSO this was in anticipation of either a private equity partnership or maybe becoming multi-specialty and you need an MSO to handle multiple specialties. So, we were a bit ahead of the game and that’s what made us so attractive to our private equity partners… is that we already had an MSO in place and it was licensed, and it was operating. So, it was very easy for them to partner with us because we didn’t have to create a new company. The MSO is basically our previous CBO sort of on steroids. It just works more efficiently, we become much more attractive to very high-level executives because now not only do they get paid well they have equity in our company and that to me that’s alignment and retention when you’re all basically partners in the same organization.
Dr. Nadeem Baig: Praveen may I just add also that you know partnering with our private equity company now I think as Bob alluded to, allows us to invest more in the company. Traditionally as you know Praveen, medical practices and physicians who are part of medical practices tend to want to take every dollar out of profits… for themselves, they feel it as the income they’ve hard-earned, we’ve seen patients, we’re doing procedures… so, they want to take that home. And you know they invest some in the company but you know especially with these emerging changes that are currently going on in the healthcare climate place, a good company really invests in itself. And it’s not just investing in new technologies or new modalities but it’s investing probably the best resource of all – human capital. We learned that a couple of years ago when we went out and hired a healthcare executive with expertise and hospital management and also from Kaiser Permanente in the value-based care world, in a sense, it was enormous value and benefits for the organization and be able to grow and get to where we are now but it cost money to pay for that high-level executive employee and before we formed Allied I don’t think anyone else would have even thought or considered it the possibility of hiring someone of that caliber and scale and you know the cost that comes with that service.
Dr. Robert Gialanella: Yeah, you know Nadeem is absolutely right. We all worked on sort of this flow-through type of economics, right? As opposed to capital investment. In our particular case, the important thing was we were looking at a strategic financial partnership that allowed care center autonomy and clinical autonomy you may not find that with a large multi-specialty group or a healthcare system and we looked at all three models and by far this one allowed us the clinical autonomy and operational autonomy and did not disrupt our care center culture at all. So, our care centers operate just as they did prior to ADH. Their compensation agreements stay the same, their clinical staff stays the same all clinical decision-making is unchanged that was very important to find a partner that would invest in us but allow us those freedoms and we did.
You know the process that we went through… I always thought and Nadeem felt the same way you know we always talk to our board like “we’re going have to spend capital to get the best” so we looked around and Nadeem through DHPA, our national advocacy pack, he has been in contact with other three thousand gastroenterologists like-minded independent practitioners around the country and that’s how we found Nexus Healthcare Capital, Canton our law firm who had been involved with the largest GI platforms in the country really knew how to do this. So, we immediately partnered with them as well and that was sort of the process that started us. They were just phenomenal I mean they educated our membership especially our younger membership you know there’s always the… I call it generational divide and when you go through something like this, the younger people see things a little bit differently than the older partners so we had to close that gap, and really we did it. Our investment bankers… I thank them again they spent day and night educating our junior membership and after it was all said and done they realized that this direction was the best one for them as well as us.
Praveen Suthrum: So, I wanted to touch upon that whole aspect of junior partners versus senior partners because a lot of people struggle with it. How did you make the case to the junior partners who think that all the senior partners want is an early retirement fund or an exit quickly from private equity? How did you make that case?
Dr. Nadeem Baig: When Bob and I first formed Allied, I think I told Bob and my other board members as well that… you know I helped to drive and form this company not so much for the senior partners but really for the junior partners and the junior associates. It was to provide financial stability and practice quality, practice management, and care for the long term not just the next five to ten years. And we achieved in that in great measure over the last five years with Allied. That strategic goal and the objective did not change when we partnered with private equity. I felt the same way now as I did six years ago when we formed Allied that this is just as much a means to provide financial stability and security and quality of practice management for the junior partners as it was back then. It’s just meeting and arriving at a strategic goal which was set out… we formed Allied to grow the company from day one to lockstep and pace with the other major stakeholders whether it’s you know healthcare systems, payors, biotech companies, pharmaceutical companies, pharmacy, etc. We just want to keep lock and pace with them and this helps to ensure that. And that was a driving message we made to the junior partners you know in forming this new partnership.
Dr. Robert Gialanella: Also if you look at the economics of it…in a model like this the longer you’re in it the better off you are. I think if our junior partners got… as you said before Praveen, two or three bites of the apple they would see the benefit in this type of corporation. So, we were you know very mindful of taking care of them with equity in the MSO, with you know changing partnership tracks within their care centers we decided it was important that the care centers sort of do away with their legacy buy-sell agreements and we standardized all that. So, no one care center looked more attractive than another to a new recruit.
Praveen Suthrum: How was valuation done in your transaction?
Dr. Robert Gialanella: Valuation as you know is all based on EBITDA. You go through an extensive due diligence process – legal and economic. It took months and then there was back and forth with Nexus Healthcare Capital to get us some extra share. But it was a very laborious process, especially from the legal standpoint. I think Nadeem and I were on a couple of calls with regulatory lawyers, I felt like I was on the witness stand but we were happy to know that at the end of the day our company was perfect in that sense. You know we were always mindful of those type of things as we put Allied together of you know abiding by all the stark laws and local laws as well we’re very fortunate in New Jersey to have an excellent corporate practice of medicine laws too which really defined our relationship with our private equity partners and gave us a lot of comfort in the fact that you know there was a clear separation between the practice and the MSO. And our and our partners were very happy about that too because there was no gray zone. So, we all knew what our roles were we all knew how our care centers would operate and it gave a lot of comfort to us as well so.
Praveen Suthrum: I want to get into this valuation and EBITDA a little bit more and as we know the way currently evaluations are done it’s based on future physician productivity and that future physician productivity is based on the number of procedures that are done and for GI a good part of those procedures pertain to colonoscopies and screening colonoscopies and each of those is connected to other ancillaries like you know pathology is connected, anesthesia is connected and so on. So, if something disruptive happens to that primary revenue stream then it is possible that everything else gets affected so I’m curious to know what happens in that case to EBITDA assumptions and what is like a plan B when you know in your discussions with your PE partner.
Dr. Robert Gialanella: So, I look at it as two different types of EBITDA right there are mergers and acquisition EBITDA groups that you add okay and then internal EBITDA it’s how the existing physicians and Allied increase their revenue stream. Now when you talk about disruptive technologies that may drive down the necessity for screening colonoscopies I think we have to look at it in terms of income diversity. You know if screening colonoscopies go down because of some disruptive technology then we concentrate more on treating chronic illness like – liver diseases, like inflammatory bowel disease and irritable bowel syndrome. There are many diseases that are not procedurally oriented so we expand those service lines.
Dr. Nadeem Baig: When you know Allied first formed, I was a bit of a data nerd and you know my second life I thought I should have become a mathematician or an accountant because you know math was second nature to me. So, early on I would through our EHR and I was able to like to dig into financial data of the organization it came across came across a pretty startling fact which Praveen you have highlighted both in your books and in other conversations with other thought leaders in this area… Over 70% of our revenue in the organization was being derived through four CPT codes you know it was either one EGD code and three colonoscopy codes and you know I said to Bob and myself that we’re way over-leveraged you know in these few lines of service. So, you know we felt that we had to start diversifying and you know it takes time to work that out and you know part of it of course is… you know the limitations are our you know previous working cultures and environments and just the mindset of physicians who are just attuned to practicing medicine a certain way because that’s the way they’ve seen it happen for 20, 30, or 40 years. You know, once we’re done with the COVID pandemic, we have to go back and start focusing upon the original pandemic of the 21st century which is obesity. You know and that’s still an area that’s not being adequately met by physicians and practices and other healthcare providers across the country. As you see Praveen there’s a lot of already a lot of good innovative solutions out there from Michigan like Modify Health and other new platforms out there. I think it’s the right time for us to get more engaged.
Praveen Suthrum: How long do you think before you know all this happens for GI as an industry? The shift from reliance on procedures, those four CPT codes… because it’s true and it’s true for every almost every practice out there you know before that shift happens from that reliance on those codes to these newer diversified revenue streams?
Dr. Robert Gialanella: Shift will occur when there’s financial hardship and I think it will happen pretty quickly as we see maybe the need for screening colonoscopy going down. But I also look at it another way you know if you have a non-invasive test we may be picking out more higher-risk individuals and they will be coming our way
Dr. Nadeem Baig: I think we have to have a sense of honesty humorous about this. You know every so often there have been threats to colonoscopy. 10 to 15 years ago we were dealing with the CT colonography program. In fact, one of our member practices, before they joined us they invested heavily in a CT scan machine expecting that this is the future, colonoscopy is going to go down, CT is going to take over. Guess what happened? Medicare never covered it, private payors never really covered it and that practice literally went under because of that bad investment. So, you know it’s one thing I think to appreciate the future trends and in some way do we do expect colonoscopy decline we also must recognize that colonoscopy for screening has been extremely effective and there’s a high bar for other technologies to meet that threshold. I mean we’ve seen a 50% reduction in colon cancer incidence and death in the past 20 years with the use of colonoscopy screening and they’re going to be still a lot of patients I think they are going to still choose colonoscopy over other modalities whether it’s Cologuard or other types of stool-based DNA testing or liquid biopsy.
So, the most important thing we can recognize that there’s still patient choice that will play a factor. Nonetheless, we do expect it to go down and as Bob said one of the ways to be reactive just to see our decline revenue and then try to adjust but that’s not the job of good leadership and the leadership that I think we have in our organization and our partners you know with our private equity side you know we recognize that we do have to look ahead and look forward at finding new other areas to be involved with that with the goal of number one you know providing good quality care for our patients. I think I’ve heard some other thought leaders say it, we want to say it here again – you always want to put patients before profits. And if you focus your goal and objective on that you will succeed in healthcare and practice. And the one thing in Jersey is that we have a great advantage of payors that recognize and want to engage in alternative payment models one to engage with you know patient-centered medical homes you know new ways of managing chronic diseases that reduce the overall cost to care while improving that site through the triple aim scores. So, you know that’s where I think we see an opportunity to start to work with our payors in a new role where we’re their partners, not their adversaries.
Praveen Suthrum: If you read any of the news articles that are scathing about the whole private equity space you know there was one in Bloomberg, I mean you pick some of the new magazines and there are some articles talking about it. The issue happens when PE seems to dictate the clinical aspects like of maybe pushing not physicians but maybe APPs instead of physicians for certain procedures or pushing certain procedures which are not needed and especially you know you would read this in the case of dermatology. Now my question is given that… that background does exist, how are you ensuring as a platform that you’re keeping the business interests and the clinical interests separate?
Dr. Robert Gialanella: Yeah, as I said we have separated it pretty well. You know all of our licensed practitioners are employees of Allied Digestive Health the practice and others are employed by the MSO so there is a sort of a firewall there between the people that operate the company and the clinicians. I think in our situation, we figured that out. Now, you could say as the platforms get larger and they get multi-state and you can lose that local control and I think that’s what happened to dermatology out in California. They lost that local control and maybe you can make an argument for that… it also happened to emergency room doctors where they had no idea where the MSO was and who the executives were. And it became such a foreign entity to them that they became just labor and were treated like labor. So, COVID happens there are layoffs you know which is really devastating to a physician. So, I think you know a majority of the states in this country don’t have good corporate practice and medicine laws. We’re very fortunate in New York and New Jersey.
So, you know and I think also our second partner has to be chosen very carefully and our partners at Assured have also let us know that will be a very long conversation with all the clinical practitioners and the clinical side of Allied Digestive as well as the MSO side so, I think the next partner we choose will be like-minded probably another large GI platform that is structured just as we are and I think that helps a lot. You know the problem is I think when private equity gets too big and these companies are bought out by people not in the medical space whether it be insurance companies or other corporations that’s where you start to lose that control because they just look at you know they just look at your P&L. You know and we are a patient-centered practice, a compassionate patient-centered practice and we’re going to keep it that way.
Dr. Nadeem Baig: You know it’s our job as clinicians to make sure that we’re always focused upon the patients. Currently, our private equity partners appreciate the need of providing good quality care. One of the reasons why they really liked us over other potential GI groups that they were looking at was because we provide high-quality care. They said, “You have the highest ADR rates we’ve seen in any GI group and we really like that” so I think they also acutely recognize, especially in this emerging value-based care world which they embrace and any good private equity platform that works with any medical practice should also embrace that quality is a key element of value-based care… if you don’t provide good quality you will not be a valued partner you know with the other key stakeholders whether it’s healthcare systems and most importantly patients, payors, and employers because ultimately that’s what they care about.
Praveen Suthrum: Thank you. So, I want to comment back on one of your points Bob which was you know… and again I’m saying it in my own words that as of now yes it’s restricted to private practice medicine and perhaps in your case very regional very local but as you go to the future and that actually takes us to my final question which is you know where is all this consolidation going in your view? And what do you see happen over the next five years? But connecting the dots a little bit… it is going to take us in some ways in the direction of going beyond private practice too, right? So, there are limited partners, who own private equity players, there are insurance companies that are also interested in the provider side, there are large health systems that are also connected to private equity and beyond and they’re investing in physician practices. So, it is going beyond the hands of physicians so how much control will physicians have it’s a multi-pronged question so I’ll leave it up to you to answer.
Dr. Robert Gialanella: You know that’s a great question. I think there surely will be a lot of consolidation in the next five years. There are nine GI platforms in our country so I would like those platforms to get together and hopefully not sell out to a health care system and you know grow this autonomous sort of model that we have that that may be a little far-reaching. But I agree with you, I think the next partner that we have, the second bite of the apple more to say is the most crucial move we will make as far as what our company looks like in 10 years from now. And I wouldn’t be surprised if in five to ten years from now they’re probably either one big GI platform across the country or two it may get to that. But you know I think that’s where we have to have a real discussion with our private equity partners about who our next partner is. It’s extremely important and you know for the longevity of Allied Digestive Health and the happiness of his of its physicians right now we’re young… I mean GI is young in this space. We really don’t know what’s going to happen.
Dr. Nadeem Baig: Yeah, you know Praveen, let me just add my two cents on this. First, when Bob and I started this company along with others several years ago one thing we’re focused upon is trying to maintain our autonomy. And keep physicians in the driver’s seat in managing the care of our patients. You know I was tired of remaining and staying a pawn in the healthcare chessboard and clearly as we consolidate with other stakeholders doing the same thing… we have no intentions of remaining or ever going back to being a pawn on that chessboard. You know I don’t think we’re a queen but maybe we’re a knight, or a bishop, or a rook, I’m hoping in that board. But beyond the consolidation part you know… which was what everyone’s been out gaming for it’s the challenge for really the successful groups is to what do you make of that consolidation? What do you do when you finally merge all these you know hospitals or pharmacies systems?… I think is Jim Weber said it really well in a conference you know… Jim from GI Alliance… he’s the president/CEO there, he said, “You don’t get bigger to get bigger, but you get bigger to get better” and that’s where we’re going to focus on an in Allied.
You know those four trends they look at beyond consolidation – one is you know is adapting to payment reform from you know both the government and the private payors who are definitely pushing us to fee for service to value-based care and also using the new tools that the government just provided us with the stark, anti-kickback reforms that CMS just enacted a couple of months ago. You know another big trend would be you’re very attuned to this… it is digitization. You know healthcare is the last group of people to ever adapt to newly evolving trends in the digital space. I mean you know people can like you know book appointments online for their airline, their car, lodging, but it’s so hard to book an appointment online to see a doctor. But we’re getting there and it’s not just like you know that customer relations tools through our EHRs, or through telemedicine, it’s you know finding better ways of connecting with the patient in their space at a way they feel comfortable and they feel they have still maintained their privacy. The third big trying to look at as a utility to us is like adapting to an innovation you know not just in like new ways of testing diagnostic modalities but also new service lines and being prepared for those disruptive technologies of innovation.
The last one I want to focus upon is you know is going from a reactive posture to a proactive posture in care management. You know medicine has really progressed through the ages from reactive healthcare, from when the patient comes in the office so they’re sick, waiting to come to the hospital ER to like meet us to be more proactive and you know various people come to see us across. And of course not moving to even preventive care with the whole idea of cancer screening and prevention of cancer which obviously colonoscopy has been a vanguard in that space but it’s now in that the same line of thought is taking a proactive stance in managing chronic diseases in the GI space which we’re not really attuned to. And alongside with that is also the idea of improving quality not just from what you learn in your training and applying that and learning it from like your practice management conferences or practice management courses you would go annually with the AGA or ACG but it’s applying quality improvement at a systemic level. This is something that obviously industries like Toyota and other companies like that have really obviously adapted well – six sigma protocols and lean models and other methodologies like that. But how to take those methodologies and apply them in large-scale groups like ours so we can improve quality performance and outcomes across the board not just you know based upon what you learn at the latest AGA conference, ACG conference.
Dr. Robert Gialanella: And to add to that you know the patient experience… it’s very important from a compliance standpoint to track patient satisfaction very carefully and as Nadeem said, be proactive. If patients view their experience as not the best there are tools that we can use as Nadeem said to engage them early in chronic illness but also to get some feedback from them as to what their experience has been so that we can then improve on it.
Praveen Suthrum: Yeah, fantastic I love the direction that our conversation took. I want to thank both of you, Dr. Nadeem Baig and Dr. Bob Gialanella for sharing your insights and being open to going with the flow of our conversation today. Were there any final thoughts that you would like to leave us with?
Dr. Robert Gialanella: Well again Praveen I want to thank you very much for allowing us the opportunity today to talk about our very exciting journey through Allied Digestive Health and more importantly our goals for quality, compassionate patient care and you know this is a forum for all gastroenterologists across the country, not just platforms I’m sure we can reach many more practitioners than we could have without you. So, we really much appreciate it.
Praveen Suthrum: Thank you.
Dr. Nadeem Baig: Yeah the same for me it’s been a great opportunity for us to have a nice, pleasant, warm, conversation to share ideas, thoughts, both of our experiences, and what we think going forward but also really learning from you. I mean I’ve been getting through that book Scope Forward and I’m looking forward to finishing it in the coming weeks.
Praveen Suthrum: Thank you so much this has been a real pleasure and thank you once again.
By Praveen Suthrum, President & Co-Founder, NextServices.