According to a recent Physicians Advocacy Institute report, hospitals now employ more than 40 percent of physicians. In the two years leading up to 2018, hospitals acquired 8,000 medical practices and 14,000 physicians left private practice and entered into employment arrangements. Why is this happening and why is the trend accelerating?
Strategies for Growth and Maintaining IndependenceA private equity blueprint for physician practices
Table of Contents
According to a recent Physicians Advocacy Institute report, hospitals now employ more than 40 percent of physicians. In the two years leading up to 2018, hospitals acquired 8,000 medical practices and 14,000 physicians left private practice and entered into employment arrangements.1 Why is this happening and why is the trend accelerating?
After delivering his opening remarks during a
nationally televised Affordable Care Act signing
ceremony in 2010, Vice President Joseph Biden
famously leaned into President Barack Obama
and offered his boss a decidedly off-color
assessment of the new law.2
It was the whisper heard around the world. At
the time, however, few observers outside of the
Beltway fully comprehended Biden’s suggestion:
That the ACA would, in time, irrevocably remake
the nation’s healthcare system, altering the
delivery, payment and utilization of services —
for better or for worse.
Looking back a decade on, Biden’s now-famous
quip, to paraphrase his own words, still rings
true: The law continues to be a very big deal
Fragmented no more?
Once the dust settles, the total price tag of
healthcare mergers and acquisitions in 2018
alone is expected to surpass $5 trillion, with
proposed megadeals between Cigna and Express
Scripts, CVS and Aetna, Walmart and Humana,
and Optum and DaVita announced during the
first half of 2018 alone.3
And with roughly half of
healthcare executives surveyed recently by Capitol indeed. In addition to accomplishing its stated
goal of extending healthcare access to millions of
uninsured Americans, provisions of the landmark
legislation’s 906 pages are now causing a wave of
consolidation in healthcare services.
Nearly a decade after the ACA’s passage, stakeholders today are competing for scale and integration across the spectrum of care, primarily to accommodate value-based payment models and other aspects of the law. And as these effects of the ACA are coming into focus, they’re giving rise to rapid growth in managed care, physician hospital employment and enhanced ambulatory services, as well as an increased focus on the patient experience and convenience — all while reimbursements decline and competition among providers intensifies.
One expecting 2019 M&A activity to continue at a similar rate as the previous year, it’s a pace that’s not expected to cool anytime soon.4 In particular, physician practices remain a top acquisition target, especially by hospitals and health systems: Over 40 percent of all physicians in the United States are now hospital employees, and fewer than half own their own practices.5 Primary care physicians, specifically, are among the most coveted: In the decade leading up to 2016, the rate of hospital employment by primary care physicians increased from 28 to 44 percent.6
Managed care organizations also are fueling the buying spree. William Blair research shows that Optum, a division of UnitedHealth Group, Inc., is now the largest employer of physicians in the United States, with more than 50,000 on its payroll. To put that into perspective, the Minnesota-based MCO is “more than two-anda-half times the size of the employed physician group at the largest provider-owned medical organization in the United States (Kaiser’s Permanente Medical Groups, with roughly 19,200 total physicians) and roughly five times the No. 2 provider/employer (the Veterans Health Administration, with roughly 11,000 employed physicians), according to William Blair.”7
Nearly a decade after the ACA’s passage, stakeholders today are competing for scale and integration across the spectrum of care, primarily to accommodate value-based payment models and other aspects of the law. And as these effects of the ACA are coming into focus, they’re giving rise to rapid growth in managed care, physician hospital employment and enhanced ambulatory services, as well as an increased focus on the patient experience and convenience — all while reimbursements decline and competition among providers intensifies.
One expecting 2019 M&A activity to continue at a similar rate as the previous year, it’s a pace that’s not expected to cool anytime soon.4 In particular, physician practices remain a top acquisition target, especially by hospitals and health systems: Over 40 percent of all physicians in the United States are now hospital employees, and fewer than half own their own practices.5 Primary care physicians, specifically, are among the most coveted: In the decade leading up to 2016, the rate of hospital employment by primary care physicians increased from 28 to 44 percent.6
Managed care organizations also are fueling the buying spree. William Blair research shows that Optum, a division of UnitedHealth Group, Inc., is now the largest employer of physicians in the United States, with more than 50,000 on its payroll. To put that into perspective, the Minnesota-based MCO is “more than two-anda-half times the size of the employed physician group at the largest provider-owned medical organization in the United States (Kaiser’s Permanente Medical Groups, with roughly 19,200 total physicians) and roughly five times the No. 2 provider/employer (the Veterans Health Administration, with roughly 11,000 employed physicians), according to William Blair.”7
1 “Updated Physician Practice Acquisition Study: National and Regional Changes in Physician Employment 2012-2018,” Physicians Advocacy Institute (February 2019)
2 Youtube.com (accessed 2019)
3 “The 4 biggest health care mega-mergers of the past year—and how they could impact you,” Advisory Board (Aug. 28, 2018)
The New Provider Landscape8
4 “Healthcare industry optimism reaches new heights,” Capitol One Commercial Banking (2019)
5 Ibid.
6 Ibid.
7 “Healthcare Mosiac,” William Blair equity research (Aug. 28, 2018)
8 “The great consolidation: The potential for rapid consolidation of health systems,” Deloitte
The Rise of the MSO Model as a Viable Alternative
Given this complex confluence of events, larger,
well-capitalized health systems have pushed to
integrate across the spectrum of care by acquiring
physician practices. Complex data reporting
requirements, flat reimbursement rates and a
shift towards a larger percentage of government
payers have pushed many private practice doctors
into employment for these large systems.
In fact, according to a 2018 Premier Inc. survey of healthcare executives, the “strongest drivers of merger and acquisition (M&A) activity are linked to the need to integrate and better manage care across the continuum and meet consumers where they want to be seen.”9 Still, not every physician wants to work for a hospital, health system, managed care organization, or retailer, and this is why the management service organization (MSO) model is emerging as a viable choice for physicians who want to modernize their practices while remaining independent.
Typically backed by a private equity (PE) firm, MSOs can create economies of scale — leading to more growth, access to ancillaries and, if sufficient scale is reached, an increase in reimbursement rates. For private equity firms, these entities are optimal for consolidating highly fragmented physician practices, with the end goal of selling to established, integrated operators or larger group practices. Consolidation syncs up well with the typical PE business model wherein these firms typically look to sell their assets within five to seven years after the initial investment, which gives ample time to purchase additional practices during the lifespan of their investment. To achieve this growth, PE firms also develop ownership structures that align incentives with their physician partners as doctors are the revenue generators of these businesses. If the MSO can grow profitably, the opportunity can exist to sell the business, which can create an additional monetization event for the partners.
For physician practices, MSOs allow them to compete in today’s dynamic, hypercompetitive market, provide demonstrable growth opportunities and an avenue by which to remain independent.
In fact, according to a 2018 Premier Inc. survey of healthcare executives, the “strongest drivers of merger and acquisition (M&A) activity are linked to the need to integrate and better manage care across the continuum and meet consumers where they want to be seen.”9 Still, not every physician wants to work for a hospital, health system, managed care organization, or retailer, and this is why the management service organization (MSO) model is emerging as a viable choice for physicians who want to modernize their practices while remaining independent.
Typically backed by a private equity (PE) firm, MSOs can create economies of scale — leading to more growth, access to ancillaries and, if sufficient scale is reached, an increase in reimbursement rates. For private equity firms, these entities are optimal for consolidating highly fragmented physician practices, with the end goal of selling to established, integrated operators or larger group practices. Consolidation syncs up well with the typical PE business model wherein these firms typically look to sell their assets within five to seven years after the initial investment, which gives ample time to purchase additional practices during the lifespan of their investment. To achieve this growth, PE firms also develop ownership structures that align incentives with their physician partners as doctors are the revenue generators of these businesses. If the MSO can grow profitably, the opportunity can exist to sell the business, which can create an additional monetization event for the partners.
For physician practices, MSOs allow them to compete in today’s dynamic, hypercompetitive market, provide demonstrable growth opportunities and an avenue by which to remain independent.
Why do physicians consider an MSO-PE partnership? There can be numerous benefits:
- Monetization at high multiple;
- Obtain partner motivated to invest in and grow business;
- Share in upside through retained equity in MSO;
- Possible additional monetization in three to seven years if MSO experiences another capital event or transaction;
- Increased leverage to negotiate enhanced payer contracts;
- Purchasing economies of scale;
- Risk sharing;
- Access to management, clinical, business and operational expertise;
- Growth;
- Increased patient referrals from larger physician network;
- Corporate partner with capital access and growth incentive;
- Access to extensive network and resources to grow physician base and facilitate succession plans;
- Management bandwidth to expand geographical footprint; and,
- Develop previously unattainable ancillaries.
9 “Premier Inc. C-Suite Survey: Clinical Integration and Consumer
Satisfaction Driving M&A Activity Among Healthcare Providers” (2018)
There are potential downsides as well. Are PE
firms able to provide the specific expertise to
meet the goals listed above? Many may not be
as prepared to provide those benefits as are
established hospital systems or large medical
groups. Additionally, once the income is sold,
the growth-driven “income repair” promised
by investors may never materialize. Last but
not least, significant due diligence into how
the ongoing operation will be managed should
be performed. Any newly formed MSO will
experience operational and cultural integration
challenges. Some of the key items driving a
successful deal will include:
- Maintenance of a productivity-based compensation system;
- Maximization of value;
- Income repair over a reasonable period from growth and operational synergies;
- Succession planning for older physicians;
- Career track for younger physicians; and,
- Maintenance of clinical autonomy.
Interested in learning more about the healthcare real estate landscape? Let’s talk.
Merritt Healthcare Advisors
is the industry’s leading healthcare advisory
firm focused exclusively on representing owners
of healthcare businesses, surgical facilities
and practices that are considering a strategic transaction, whether it is partnering with another
group, selling an interest in their business or
growing their business through acquisitions. We
offer:
Extensive M&A Experience, Proven Track Record
As licensed investment bankers*, we offer extensive M&A expertise that is the result of completing over $4 billion in healthcare transactions.
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Extensive Relationship Network
Our leadership team has extensive experience working with healthcare organizations, hospitals, national strategic firms, private equity and industry leaders on a national level.
Operational Expertise
In addition to transactional expertise, Merritt Healthcare principals have developed and operated over 20 ASCs, partnering with over 300 physicians in the process.
Process and Approach
We are committed to developing a deep understanding of a potential transaction. There are many elements involved in a successful process, and it is our job to ensure that your long-term objectives are met. Our Clients can also expect senior level commitment on all transactions.
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Merritt has consistently been able to achieve the optimal financial and non-financial results for our Clients. We have the expertise, knowledge and experience required to manage this extremely time-consuming and complex process.
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