Dr. James Leavitt is the President and Chief Clinical Officer of Gastro Health, a PE-backed platform based in Florida. Private equity in gastroenterology began with Audax investing in Gastro Health back in 2016. Over the last few years, Gastro Health expanded to 250 providers and to other states like Alabama and Washington.
This interview is insightful at so many levels. Watch it in full. Also, if you’ve always viewed private equity uni-dimensionally (that it’s all about the money), definitely watch the last segment. Dr. Leavitt talks about how passionate we all are about making healthcare better.
◘ “You need something disruptive to change. The current system is a monster. I’d like this disruptive thing to spur innovation.”
The Transcribed Interview:
Praveen Suthrum: Dr. James Leavitt from Gastro Health, thank you so much for joining me today. I welcome you to this conversation.
Dr. James Leavitt: Well, thanks for inviting me.
Praveen Suthrum: Yeah, absolutely. So, how are you and how are things with Gastro Health?
Dr. James Leavitt: Well, me, personally I am fine. You know, no cough, no shortness of breath, life is good. I’m home as you can see and after I am done with this [interview] I’ll be doing my televisits for today. So, for me, it’s fine, my family is fine. So, it’s always a good start. As far as Gastro Health, obviously, like everyone else, things have changed.
Our volumes went down dramatically. We closed several of our centers, our surgical centers. We kept open the strategic ones just to do urgent cases. For example, we did a case, I had a 69-year-old woman with two months of progressive dysphagia and 20-pound weight loss, we had to do that endoscopy.
But we went from maybe doing, in these two centers that are next to each other, 500 cases a week to 15 cases a week at one point. Our numbers went down, and we furloughed about half our staff. But you know, it was an interesting thing, necessity is the mother of invention. One of the things that we wanted to do was to start to look at televisits and ramp them up. Boom! We’ve done that. So, within about 10 days we rolled out televisits in Gastro Health and then in Florida alone at one point we’re doing 6000 televisits a week! So, it was an interesting experience.
The other part that was affected was that we had done a lot of deals. So, we had brought a lot of groups on board and we standardized our platforms so that everyone was on one platform. We had to slow that down because we couldn’t travel to other places to really bring them on into a single platform. So, there was a nadir and now we’re back. We are over 50%, we have opened up. A lot of our surgical centers are starting to open up across the country. We’re about 50-60% back to where we were so, things are starting to pick-up, we’re starting to see patients back in the office. Although still, I think televisits are the dominant way of seeing patients for most of us still today. Part of that is us and part of that is the patients.
Praveen Suthrum: What you’re doing, is it different in Florida versus elsewhere?
Dr. James Leavitt: Yeah. Exactly. So, I am in Miami-Dade County so, I think there have been like 60,000 COVID cases reported in Florida, a third of them are in Dade County alone, right? If you go to Birmingham, Alabama now that numbers are starting to pick-up there but it’s still relatively low, right? And so, obviously, the effects have been somewhat different. But everybody dropped. There was no one that stayed the same, everyone had a significant drop. I think the rate of return has been different based on the prevalence of the disease and the incidence of the disease in that particular area. So, I think that’s what is being affected – the rate of return.
Praveen Suthrum: What is happening right now as far as PE deals are concerned across the board based on what your sense is and what you know?
Dr. James Leavitt: Yeah. So, the first thing I want to say is it is very interesting how people think of this… like what’s the effect of COVID on private equity, right? That’s what you want to know. Well, I’m not private equity. I’m a company that’s partnered with private equity. So, you ask what the effect on my company is. Now, what’s the effect of private equity companies… I can talk about that but that’s probably not what your audience is interested in. So, they’re two different things.
So, private equity company, obviously if they have multiple platform companies, they’re out there helping the companies and cash is king and they are really digging into the 13-week run-outs to see what their cash positions are and things like that. And we’re also doing that also. But that is internalized and so, we are still a healthcare company. We deliver healthcare, that’s what we do. And we have a private equity partner which has been very beneficial through this time for us in many ways.
Praveen Suthrum: In what ways has it been beneficial?
Dr. James Leavitt: We’ll hire a healthcare law firm, a national one but they’ll use it for all their healthcare platforms. So, we have the ability to get real experts on things, they help us find the technology that we can use onboarding on, we are capitalized better. We have better relationships with banking, we can get a revolver line of credit more easily. And they have the expertise that they can bring to us above and beyond. So, I think that actually, we are more secure in many ways than the average four-person group out there who is struggling more. So, I think it has helped us in a lot of ways like that.
Praveen Suthrum: Are you pursuing any physician practice deals in the current times?
Dr. James Leavitt: We still have a pipeline that’s active. We still are talking to a lot of groups, we’re singing NDA’s and letters of intent, we’re doing due diligence of the deals that were in the pipeline right now. So, all those things are progressing. The closing date… we’ll see! But the processes themselves are still ongoing.
Praveen Suthrum: Are valuations taking a hit because of COVID-19?
Dr. James Leavitt: Yeah. That’s a hard question. So, number one, it depends on where you are in the process with the group. Number two, we think if you had to close right now, would they take a hit? Yeah, it’s hard to figure out what the valuations are and it’s harder to get lenders to feel comfortable with your valuations when they see a 60 or 70% drop in the revenues right now.
So, you have to convince them that the revenues are going to come back and what the plan is. So, it’s a more difficult process. And do I think you might see a decrease in multiples? Again, I’m not a soothsayer, I don’t know but my guess is it might. Because the valuations might be similar, but the multiples might be lower because the multiple is just an expression of risk, right? So, there is more risk out there right now so I wouldn’t be surprised if you saw some diminution in the multiples.
Praveen Suthrum: If you wear the soothsayer hat and see into the future, what are some short-term and long-term effects that practices in this phase will face?
Dr. James Leavitt: So, from the practices’ point of view, the short-term effect is, stay safe, keep your patients safe, do the right thing, make sure you understand what you have to do… to do that and it’s still all about your patients and your staff. Still deliver great care, ramp –up your televisits, and hope that’s something the government will allow to stay, and payors will pay for it at a reasonable rate in the future, that’s number one.
Number two short-term is, look at your cash-flows, make sure you can stay in business. We’re not the US government, we don’t print money. So, we have some rate-limiting steps there so understand. For example, one of the things that we did is we built a calculator for each of our care center and each surgical center. So, we knew what our volumes need to be to break-even and from there we can understand our cash-flows and where we could go out to. So, short-term, really act like a business.
And there’ll be some people hurting, so long-term depends on where you are. Do your financial planning and your planning around patient volumes, understanding, and hoping that our goal is to get to 70 to 80% by the end of the year and what’s the financial outcome on that. How can we start thinking long-term, how can you run your practice more efficiently? I think all of us have learned that there are various more efficiencies that we can do. You can do more with less actually like I said, necessity is the mother of invention. How can you return even stronger and better? One of the things that we can put in place or we already put in place that we can leverage into the future to make us a better company and provide better care. So, I think that’s what you have to think of and I think there’s going to be some suffering in some groups that aren’t going to be capable of doing this from the private equity point of view. We know we’re already getting inbound calls from people saying help.
Praveen Suthrum: So, if you were on the outside as in if you were not part of a private equity-backed and you were an independent practice right now and then we go to the end of the year and your finances are not looking good. What would you do? Would you look at private equity? Because you’re in a buy-in, right? If you look at private equity or a PE-backed platform, then your valuations are not high so, you’ll probably sell out at the valuation which could be far lower than pre-COVID days but if you don’t do that you’re struggling financially. How do you go about your decisions and what would you do?
Dr. James Leavitt: Yeah. So, you have to look at many different options and one size doesn’t fit all obviously. It depends on how… so if it is a choice between doing something or going out of business, you do something. Or, if you’re 68 years old and you can retire from your solo practice then maybe you retire, I don’t know. But there’s a lot of options. Then, there’s the hospital, I think that the hospitals are one of the reasons that doctors are consolidating because they don’t want to join the hospital. I think there’s lot of problems joining a hospital.
I think that physicians are consolidating one way or the other and have been for a number of years because it’s the best model for us. It’s our obligation to lead healthcare reform, we’re the best advocates for patients. So, I think this may be a wakeup call to some people to say maybe I need to confine a place to consolidate and my argument would be it’s not the hospital because that usually raises costs, it’s a problem and you’re now employed in a way that your contract is good for two years and then you’ve got a new contract and they can say goodbye, etc. But in our model or with other groups, hopefully, this spurs consolidation, this gets us to a place where we can lead healthcare reform and do what’s right for the patients and ourselves.
Praveen Suthrum: So, as a practice, if revenues are going down, what are some steps that you can take?
Dr. James Leavitt: So, there are two sides to the equation, it’s what’s coming down to the bottom that’s important, it’s what the profit is. So, we may say hey for a while, we’re going to get to 80% so, if our topline revenues are 80%, I think if we can affect some efficiencies in our practice and decrease cost and overhead, then we can still have a good bottom line. So, I think we need to start looking at it from a business point of view and not just a functional point of view.
I mean simply, if 25 to 35% of our visits are going to be televisits, do we need as much real estate? Can we start decreasing or consolidating? For example, in Gastro Health, can we start consolidation some of our care centers and offices and so we don’t need that much space, so I can reduce rent and also reduce personnel and things like that. So, I think there are opportunities from the efficiency point of view. So that if revenues are down a little bit, we know now that we can do with less and be more efficient, and if we apply those two standards, we’re going to do alright.
Praveen Suthrum: For a private equity-backed platform, what are the risks that they carry? Especially in a time like this.
Dr. James Leavitt: Well, the business doesn’t come back. You’re over-leveraged. So, when we purchase groups, we borrow money, it’s leveraged. So, if you’re in a position where you’re very leveraged i.e. you have a lot of debt, and then the revenue that you brought, decreases significantly, you’re over-leveraged.
It’d be like if you have a $500,000 mortgage in your house but you were making $800,000 a year, you wouldn’t worry about it and if you had a $500,000 mortgage in your house and somehow you lost your job and you could only make $70,000 a year, you have a problem. So, that could be a problem with this, if you are already over-leveraged and you don’t have a good comeback for your revenue stream, you could be in trouble and that’s the risk that’s going on, not just in private equity, certainly in private equity but in public companies, I mean part of a lot of news out there is about how public companies and other companies have used debt and there’s so much in debt that’s what’s happened to Hertz, etc. We’re subjected to the same things as the rest of the business world.
Praveen Suthrum: There has been plenty of media attention towards private equity led medical practices and a lot of that is negative. I’m curious to hear from you on what you have to say.
Dr. James Leavitt: So, you can always find a few bad apples in the barrel, right? And if you’re the media and you just want to concentrate on the bad apples, that’s fine but there are way more good apples than bad apples. So, we all know most physicians care about their patients, care about doing the right thing and giving great care and we all know physician groups or physicians whether they have private equity backing or not they’re very money-focused and they do things that we wouldn’t necessarily look at in a good light.
And so, I know for us, we are very mission-driven and not margin-driven, but every medical practice is a for-profit company, there’s no shame in that but if you’re mission-driven then, that’s what you want to be. So, we’re very mission-driven, we remain mission-driven. I know we’ve done great things. We have markedly increased our ADR rate; we’ve done episodes of care on colonoscopy and EGD and we are in Florida where 75 to 85% of the average cost of an episode of care, all costs three days before and 14 days after for colonoscopy and EGD compared to the rest of the state, we do look at expenses, we don’t try to just drive revenue.
We brought in a group and the number of bottles they did per case pathology because they had a small path lab was way out of line and we brought them back in line because we want to do good medicine and give good care. And so, I’m proud of what we did, and I know a lot of them, I’m friends with a lot of people with private equity deals that have been platform companies and I know they feel the same way I do.
Praveen Suthrum: From your lens, how do you see the future change? You know, at some point we’ll be out of COVID and this will be behind us. And how would GI have changed by then and beyond that?
Dr. James Leavitt: I think, we’re going to be more efficient. I think it’s going to help us. I think we are going to be able to run our businesses more efficiently out of necessity. I think patients are going to have different expectations of safety. I think in the next two or three years, I can’t tell you 10 or 15 years from now, I don’t think you’re talking about that future. But I think patients’ expectations of safety will remain very high and you’re going to have to prove to them that you care about that.
I think for televisits, as long as the marketplace stays with some reasonable reimbursements, I think it’s here to say. So, we can devise our strategies around that. We’re looking at new and different ways of patient engagement that are going to be aided by technology. I think all those things are going to be very important more touchpoints remotely using predictive analytics to be able to know when to touch the patient correctly, that’s what I think is going to happen. I think this will spur us to do things. We’re not going to wait till the patient is in crisis, what can we out in place now that will touch the patients in ways other than just bringing them in the office. I think this taught us a good lesson. I think that’s where GI and healthcare is going to be going.
Praveen Suthrum: The way I see it, a lot of the trends that were already underway pre-COVID are probably accelerating right now. Like telemedicine was there before, AI was there before, DNA testing was there before. I’m guessing all these technologies will accelerate and change the demand-supply equation in gastroenterology. You know until now GI practices have relied largely on colonoscopy but if you see some of the large practices, a lot of the revenue is not coming from GI services alone but there is dependence on ancillary reimbursements and revenues and that’s only going to increase, right?
Dr. James Leavitt: I think so. And I think the motto will change too. So, when we first consolidated, the idea was to build other revenue streams and have enough volume. I think that has morphed a little bit. Now, if you think we want to control costs and population health and the experience of the patient, right? So, as we change the way we think about reimbursements, now we can control every bit of cost and so we can take that to the marketplace so, we can keep people out of the ER, we can do those things. We’re going to take that and do different types of negotiations with payors and think more about populations.
Can we do chronic care management? And if we control every bit of cost, we can have alternate payment methods that we can take to payors. So, these ancillary revenue streams can be ancillary revenue streams but also controllers of cost. I mean, a hospital can’t do a CAT scan for $1000 and make a profit but I can make a profit on a high-quality CAT scan for a lot less. I think we can start leveraging those types of things. Our infusion centers will be great cost-savers. Like the ancillary revenue streams are great cost-savers. So, as we get to these fewer direct touches but more remote touches and thinking about populations and doing all that stuff. All these things if you have them, it’ll be great for the patients, it’ll streamline everything.
Praveen Suthrum: What was your vision when you started Gastro Health, and when you went after private equity, created the platform, built this large practice that you have now. So, what was the original vision?
Dr. James Leavitt: I have always thought doctors had to consolidate. As I had said before, it’s imperative for us to lead healthcare reform, we’re the best advocates for patients. I think we’re the solution to many for the problems that are there in a healthcare system. And I thought we could build a more disruptive model that would really make a difference. And we needed to get larger to be able to do that and we need to be capitalized. So, there are a lot of different models and that’s how I came up to go to private equity. Because we needed all those things and we needed something that would be a catalyst to growth. Because it’s very hard to grow otherwise quickly.
It took us about eight years to go from 27 to 47 and it has taken us three and a half years to go from 47 to 250 so it’s a catalyst to growth. But why did we want to grow? Not just to get bigger, that’s not the point it’s what we can do with that. So, everything is going to be on about data. So, what we’re trying to do is we want to build data warehouses and data lakes. We already have a robust business intelligence platform but now how can we take data from disparate sources, put them in a data lake, start to do analytics and predictive analytics. How can we do all that stuff?
Well, if you’re a four-person group, you can’t. But if you are 500 doctors, number one, we are capitalized so we can build those things and number two, we can spread that expense over 500 doctors because it’s hard to do. We were actually starting to work on all this pre-COVID, it has been delayed a little bit because we had to do other things, but we’ll get back to it. So, that was the vision, that we needed data to drive better outcomes, to be predictive, to take care of populations. But a small group couldn’t do that. They don’t have the wherewithal, they don’t have the ability, the money, the capitalization. By being large you collect a large amount of data and you have the wherewithal to do something with that data to make a better world and better outcomes for our patients. That was what this was about, and it goes back to your original question about the downside of private equity…As long as that remains what we’re about, I’m not worried about the private equity situation.
Praveen Suthrum: Your practice was the first one to take private equity. Now, that was back in 2016. Typical private equity horizons are five to seven years. So, you know, my own calculations always have been that I’m going to see Gastro Health exit probably at some point. You know, the second bite of the apple is going to begin for GI in 2021/2022. Now, COVID has paused everything, put things on hold. Based on whatever you can share and know, I’m curious to know would all these exit horizons change? Would it be longer now? And what would determine an appropriate time for recapitalization in the GI space?
Dr. James Leavitt: I think I’ll go back to my original answer. I think the deals have slowed down that would be another deal, right? So, the deals have slowed down, and we’ll see when the market comes back. If we can get back to doing deals, by the end of this year or first quarter of 2021, maybe we’ll be behind by six months to a year, we’ll see. And then you have to understand what the appetite of the next buyer is. I think that’s all to be determined. Would I have preferred if this never happened? Of course. But for more than just a private equity deal, right?
Praveen Suthrum: Yes. I have covered a lot of ground on the questions that I had. Was there anything else you wanted me to ask? And we could do that now.
Dr. James Leavitt: I think that it has been a very interesting experience and I hope we all take it as a learning experience. What can we do to be better? We need to be better. And all through this, what I’m amazed at is healthcare and how passionate we are about it. So, that’s a good thing.
Praveen Suthrum: How do you make it better?
Dr. James Leavitt: Well we already talked about it. We can be more efficient, we can touch the patients more, and all those types of efficiencies, I think will has been spurred. I think televisits will have better touches and more frequent touches with patients. I think we’re looking at being more efficient. I think technology will be better. I think we’ll start talking about populations and taking care of our people in different ways. I think it’s spurred us, and we don’t have to see the patient in the office to take care of them.
Praveen Suthrum: So Jim, we’ve gotten ourselves into this, right? As a healthcare system. For me, when I reflect on this time, a part of me is saying that you know, that we asked for this in a lot of ways. So, we’ve created the inefficiencies, we’ve created the wastages in the system, we’ve created this whole monstrous, expensive system and we have kind of trapped ourselves and somehow, we are not able to use this system that we have created to solve the problem that has hit us suddenly and across the board.
Dr. James Leavitt: Because that’s the whole concept of disruptive innovation, right? It’s the whole concept. You need something disruptive, to change! You can’t say… if you want to change the health system, this is my philosophy and one of the reasons why we did what we did, is that you have to be disruptive. You can’t say, ‘how can we use the current system to change?’ because the current system is a monster. So, you need to think about things in a different way.
And so, I’d love this disruptive thing to spur innovation. And I think it will. So, I think this could be the seed of disruptive innovation for the future. And we can’t do things the same old way with the same old system and the same old processes. You’ll just get the same results. So, I’m hoping that this is the seed to start to think about doing things in a different way. And I think it is, I see that within our own company.
Praveen Suthrum: Yeah. Well, thank you so much, Dr. Leavitt. This has been a fantastic conversation and very reflective too. Was there anything else that you wanted to add before we close?
Dr. James Leavitt: Thanks for doing all the stuff that you’re doing. I think you’re keeping people informed and you’re doing a great service for people.
Praveen Suthrum: Thank you very much. Thank you for saying so.
By Praveen Suthrum, President & Co-Founder, NextServices.