The Future of Private-Equity-led Medical Care Centers in Germany

Our journey into this segment of the German healthcare system begins with the impressive growth of MVZs¹ since the introduction of the GKV-Versorgungsstärkungsgesetz (GKV-VSG, Statutory Health Insurance Strengthening Act) and continues with the key issues that any PE manager should consider when assessing the own investment. Our journey into this segment of the German healthcare system begins with the impressive growth of MVZs  since the introduction of the GKV-Versorgungsstärkungsgesetz (GKV-VSG, Statutory Health Insurance Strengthening Act) and continues with the key issues that any PE manager should consider when assessing the own investment. 

Significance of the GKV-VSG for the MVZ market and the role of private equity firms

In 2015, Germany passed the GKV-VSG to improve the provision of healthcare services. Key objectives included strengthening outpatient care, promoting prevention, improving healthcare in rural regions, and enhancing patient rights. The amendment removed the term cross-specialty from the Social Security Code, which had been a de facto limiting factor for the growth of MVZs. Prior to the implementation of the GKV-VSG, it was essential for MVZs to incorporate at least two unique medical fields, creating obstacles for operators, who needed to find the right partners to launch their practices.

The new regulation also made MVZs an attractive business venture. In fact, it facilitated a significant increase in the creation of new MVZs, and the considerable growth potential in this sector attracted the attention of PE firms. The chart below illustrates this development, with the years following the implementation of the GKV-VSG highlighted in dark green. The chart includes all MVZs in Germany, regardless of their ownership status, and as figure one shows, the number of MVZs has almost doubled between 2015 and 2021.

Fig. 1 – Total number of MVZs per year in Germany

Over time, PE involvement in the segment has also increased. According to our estimates, approximately 21% of the 4,179 MVZs in Germany in 2021 were owned by PE firms, with a relatively large portion (ca. 20%)²  being dental practices. In addition to the dental sector, PE houses have also invested the most also in ophthalmology, radiology and orthopaedics. These investor-led centers are typically established with a hospital as the carrier. In particular, PE firms have shown interest in acquiring MVZs in areas that offer good opportunities due to realtively stable or even growing demand, and the potential to scale a business fuelled by the confluence of an ageing population and opportunities for strategic consolidation in a fragmented healthcare market. Indeed, in recent years most PE firms have adopted a strategic approach focused on expanding their MVZ network through a “buy-and-build” strategy. 

Fig. 2 – Share of Private Equity investment in MVZs in 2021

High depreciation and personnel costs impact margins at PE-MVZs

However, the rapid expansion via buy-and-build has come at a price, as can be seen from the performance of some of the players in the field. We selected the 20 largest PE-MVZs in Germany for which financial statements are publicly available³. The analysis of their key figures revealed that, on average, these MVZs generate operating profits that are not sufficient to cover all the expenses related to depreciation and interest charges. Such results can be attributed to mainly two factors:

• The continual addition of practices as part of the buy-and-build strategy results in significant depreciation, which has a significant impact on the bottom line. This primarily stems from the depreciation of goodwill, which typically spans approximately about ten years. On average, the analysed PE-MVZs have depreciation expenses of € 8 m, which appears significantly higher than comparable MVZs not owned by PE.
• Significant interest expenses due to the high level of leverage further impacted profits, and when considering the current high interest environment, such charges are not expected to diminish in the short term.

Fig. 3 – Key figures of the PE-MVZs in € m for the year 2021

Improving the situation does not appear to be easy, especially since PE-MVZs are already much more productive than their peers with on average 1.028 treatments compared to the 726 of non-PE-MVZs per year⁴, a factor which is even leading a portion of current owners of medical centers to not see positively the possible sale of the center to a PE⁵. In addition, despite PE-MVZs respond to the demand for more flexibility from young doctors, the incentive for doctors to increase productivity at PE-MVZs is limited as they do not have a direct ownership in the medical center.

Finally, the intensity of treatments and the need for highly qualified professionals combined with inflationary pressures will put also current operating margins under pressure. The only way to increase profitability for PE-MVZs appears to be through increased efficiency and operational improvements, especially in the back-end processes and supporting functions. 

The future of the PE-MVZ landscape: Shaped by demographic changes, high interest charges, regulatory reforms, and particularly operational efficiency

Looking forward, the future of the PE-MVZ landscape will be influenced by four factors:

1. The demographic change, with an aging population, will lead to increased demand for medical services. At the same time, many older doctors are choosing retirement, providing good acquisition opportunities for PE-MVZs and thus promising growth prospects for the future. Furthermore, new acquisition opportunities arise because non-PE MVZs also face cost problems. For PE, this is an alternative. To cash-in on such opportunities might be difficult in the short term as the aging population might require more time to manifest its full potential as compared to the shorter term of exits from their investments most PE might envisage right now.
2. Furthermore, the Federal Ministry of Health (Bundesministerium für Gesundheit, BMG) is planning to pass the Care Act II towards the end of the year, which aims to further develop the regulations for the establishment, licensing, operation, and transparency of MVZs, especially concerning PE-led MVZs. In principle, it will still be allowed for investors to operate MVZs. However, increased transparency in this area is expected. This means that approved MVZs must register the sponsor, economic beneficiary, and the medical director in a dedicated register. Additionally, investor influence on medical decisions could be reduced with protection against dismissal and termination. Capping the market share of MVZs is also possible, and there might be also regional restrictions for MVZs, limiting their scope to the vicinity of the sponsoring hospital. The initiative of the ministry might also encompass the establishment of health kiosks and eventually foster a new scenario where a myriad of health-related services and information can be offered by municipalities in regions lacking adequate healthcare coverage. Envisioned as easily accessible public outlets, health kiosks are intended to offer a basic set of medical services. These services can be adapted according to need. Serving as platforms for health education and potential check-in points within healthcare facilities, they aim to render healthcare more approachable and user-friendly.
3. As previously mentioned, the current interest rate environment is unlikely to change rapidly and will continue eroding the bottom line of PE-MVZs, putting even greater strain on annual results in the upcoming future.
4. If then achieving increased profits by further enhancing productivity (which is already higher at PE-MVZs) presents a challenge and prices for operating expenses are not expected to be lower any time soon, unlocking the full potential at PE-MVZs entails optimizing process structures and back-end activities. This would help to empower doctors with more flexibility for patient treatment, and, at the same time, create value through the realization of synergies hidden in the only partially integrated PE-MVZs across the country because of buy-and-build strategies. Improved cost efficiency through profitable unit economics based on outsourcing/centralization of non-core functions as well as enhanced support of technology to streamline processes will pave the path forward and make the difference between successful and mediocre investments.

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Co-author:

Matak Koenig
Consultant for M&A Operations Transaction

Footnotes

¹ _{An MVZ (Medizinisches Versorgungszentrum) is a German healthcare facility which provides a platform for various medical specialties to collaborate, bolstering outpatient care as well as treatment coordination and resource sharing. MVZs can be uniquely established by either authorized physicians, officially recognized hospitals, service providers of non-medical dialysis, or non-profit enterprises engaged in the provision of contract-based medical services, all operating under government sanction or validation. Furthermore, municipalities and private entities, under the supervision of a hospital as the primary provider, are also eligible to establish MVZs.} 

_{²  IGES Institute 2020.}

_{³ Some of the largest PE-MVZs are not included in our representations due to missing or inaccessible financial statements.}

⁴ _{IGES Institute 2019.}

⁵ _{National Association of Statutory Health Insurance Physicians (KBV).}