VC Firm Liked What It Saw in Medical Screener

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Radiology Partners Inc. has been growing like a medical practice on steroids.

Formed in late 2012 by Rich Whitney and Dr. Anthony Gabriel, both veterans of DaVita Healthcare Partners Inc., RadPartners acquired its first practice, a team of five physicians, in June 2013.

A little more than a year later, it has become one of the larger hospital-based groups in the country, boasting more than 180 physicians serving more than 90 hospitals, clinics and imaging centers in six states.

The expansion has been fed in large part by a $60 million investment from Menlo Park venture capital firm New Enterprise Associates.

The rapid growth comes as changes in the financial and health care landscapes encourage consolidation in medical fields as a way to capture market share and benefit from economies of scale.

“Private equity and venture capitalists really like the fact that businesses they’re investing in can effectively be plugged into bigger solutions and allow them to capture greater market share,” said Steven Shill, Costa Mesa-based health care practice leader for accounting and consulting firm BDO USA’s western region.

These investors seem to favor health care sectors with less variability in the regulatory environment and where returns are expected to be consistent. Also attractive, he said, are investments in companies that would “effectively bend the curve” or create such significant cost savings for health care providers that returns would be significant.

Shill, who said he has worked with both RadPartners and NEA, pointed to L.A.-based Leonard Green & Partners as an example. The private equity firm acquired Prospect Medical Holdings, a Westwood hospital owner and operator, in 2010 around the time the trend began.

Other health care fields that have drawn attention are behavioral health, another fragmented industry, and dentistry. On that latter front, Santa Monica’s Brighter Inc. received its third round of funding late last year. Brighter.com, which could be considered more of a health care IT play, is a platform that helps consumers find affordable dental care in lieu of a dental insurance plan.

Scaling up

Whitney, who was chief financial officer at DaVita and now serves as RadPartners’ chairman and chief executive, had teamed up with NEA on a number of projects as a partner or adviser. Gabriel, RadPartners’ chief operating officer, had been chief information officer at DaVita, which had been based in El Segundo until its relocation to Denver in 2009. It acquired Torrance’s Healthcare Partners in a $4.4 billion deal in 2012.

Though DaVita was primarily in the nephrology business, Whitney and Gabriel took a market-analysis approach when mapping out their next venture.

“We thought about radiology as such a logical part of the health care delivery chain to try and make it better using a lot of the best practices that Rich and Anthony picked up during their time at DaVita,” said Mohamad Makhzoumi, a partner at NEA. “After thinking about it for a really long time and looking for opportunities with existing companies that might fit this vision, we didn’t find one and said, let’s start it ourselves.”

Whitney, Gabriel and NEA set out to build a company that could be a national radiology practice, improve the quality of care and reduce the time of diagnosis, all while benefitting the provider, payer and consumer – a rather complicated mix.

“It’s like a three-dimensional chess match,” Makhzoumi said. “There’s so many different waves of connectivity there.”

Having NEA’s investment, as well as additional funds that RadPartners later raised from Chicago’s Golub Capital, has helped the company grow quickly, Whitney said. It’s helped with making investments in human resources and technology as well as deals with practices in markets they wanted to target.

“With capital comes the credibility that you can actually get done the things you’re envisioning,” Whitney said.

Attractive investment

RadPartners rolls up existing groups that are already based at hospitals. It generally provides operational functions such as contracting and billing as well as technology improvements and administrative duties. The idea is to leverage an economy of scale while still allowing the individual practices a certain amount of autonomy as they’re more familiar with the quirks of practicing in their market.

“Local doctors’ offices aren’t McDonald’s and can’t run all the same way,” said Gabriel. “Patients aren’t just sandwiches in a sandwich line.”

Though the company would not give specific numbers, it said revenue this year exceeded $100 million.

NEA specializes in health care investments, and Makhzoumi said the firm has been joined in that space by investment firms drawn by the Affordable Care Act, which has created a tremendous amount of change in the industry by mandating employer coverage and electronic medical records requirements, among other things.

A subset of the law, the Health Information Technology for Economic and Clinical Health Act, mandated minimums for payers and provider organizations to spend on health care IT, which led to a proliferation of health care IT companies and a flood of cash to back them.

“Where you have a period of disruption like that there’s also a period of opportunity,” Makhzoumi said.

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