Investor activities in the physician practice space in Germany

In the last several months, I have had several conversations with investment professionals about the dynamics of investing in physician practices. In addition, my interest was sparked by numerous (rather negative) press headlines that have been posted about private equity investments in the space.

So, I decided to dive deep into the landscape. For the benefit of providing short and crisp insights I will do couple of postings on current players, their investment strategies, value creation levers, and exit opportunities.

Let's start with some basic facts. I am using rounded figures. The exact numbers can be checked on the homepages of National Association of Statutory Health Insurance Physicians and National Association of Statutory Health Insurance Dentists in Germany.

Data as of 2022:

• # physicians and dentists: In Germany, there are approx. 411.000 physicians and approx. 101,000 dentists, thereof approx. 63.000 practicing
• # practices (physicians and dentists): Germany has around 100.000 physician practices. With branches of MVZ counted, the number is even higher, around 110.000. The number of dental practices is approx. 39.000

Sources: gesundheitsdaten.kbv.de/cms/html/17020.php for physicians; KZB Jahrbuch 2023 for dentists

The landscape of physician and dental practices in Germany is highly fragmented. The predominant model is the medical practice run by a single physician or dentist (solo practice). This fragmentation lends itself to the classic buy-and-build strategy of private equity funds, and it is no surprise that they have already discovered the field with well-known names that have been in the game for several years, e.g., Triton, Waterland, Quadriga, Nordic Capital, et cetera.

I took the time to create an overview of the major physician and dental rollups in Germany, the financial sponsors behind them, and the specialties in which they are active.

I don't claim to have it completely accurate, so if you find any inaccuracies or want to add anything, please feel free to comment.

See below the list. Please zoom-in with your browser to enlarge. Alternatively you can access the list here: https://airtable.com/appkocpBg0r240N4S/shro1iLy28ZOwse4x

That list reveals that rollups are active in dental, radiology, eye care, dermatology, orthopedics, oncology, and general medicine (GP). The laboratory segment has also traditionally been in focus. It's no wonder those mentioned above are considered the most lucrative among the existing specialties and can bear the debt burden of high leverage.

The primary drivers behind the choice of those specialties compared to the rest of the specialities are higher revenues they can generate and attractive operating margins influenced by

• attractive reimbursements (e.g., radiology and oncology) from statutory health insurance
• enough out-of-pocket / self-pay services offered to patients (e.g. dental, eye care, orthopedics) because health insurance covers only basic procedures in those specialties

In Germany, only physicians or hospitals can own and operate physician and dental practices and/or medical care centers (MVZ) according to 95 SGB V. Investors have circumvented this limitation by acquiring “vehicle” hospitals, which buy, own, and operate their own practices and medical centers (MVZ). In the list, you can see which hospital is the backing vehicle, with many of them not related to the respective focus specialty. With around 1.900 hospitals in Germany, many of them running on an annual deficit, many owner cities/communities are often happy to sell them to investors before closing them down.

Looking at the number of practices in financial sponsors' ownership and comparing it with the total number of practices in Germany, the ratio is 1% to 1.5%. Compared to the US, where this number is 3% to 3.5% (according to Pitchbook and based on revenue), this leaves plenty of opportunities for buy-and-build activities for the next investor on board.

?Sources:

www.kbv.de; www.kzbv.de; Rainer Bobsin: Konzerne kaufen Arztpraxen, May 2023; Pitchbook: Quantifying PE Investment in Healthcare Providers, July 2024