Physician practice consolidation: It’s only just begun
Disruption has redefined health care in the past decade.
For private practice physicians, the biggest disruptor has been consolidation.
The trend of local hospitals merging into massive health systems has significantly affected private practices. According to Avalere Health and the Physicians Advisory Institute, between 2016 and 2018 hospitals acquired 8,000 medical practices and 14,000 physicians left private practice to work in hospitals.
Here’s an example: In New Jersey, Hackensack University Health Network merged with Meridian Health system in 2016 to create Hackensack Meridian Health. Its acquisition of JFK Medical Center in Edison made Hackensack Meridian the largest hospital chain in the state. Three years later, it was a $5.5 billion not-for-profit system employing 6,500 doctors. And it isn’t done growing. At the end of 2019, Hackensack Meridian Health proposed a $400 million merger with Englewood Hospital.
Ever-larger health systems affect the flow of patient referrals a private practice needs to stay in business. They change the competitive dynamic for independent physicians, who aren’t left with many choices at this point. They must find a way to get bigger or discover a niche.
Hospital growth isn’t the only threat to independence. Big insurance companies are also venturing into the provider side of health care. UnitedHealth Group is doing this through its Optum division. Optum recently acquired Surgical Care Affiliates for $2.3 billion, setting the base for OptumCare’s primary and specialty care division, which focuses on acquiring or partnering with private medical practices.
Independent medical practices are now increasingly looking to private equity to grow and compete in response to these market forces. And private equity is responding, fueling health care consolidation with billions of dollars. A study recently published in the Journal of the American Medical Association found that the number of private equity deals with physician practices across specialties more than doubled between 2013 and 2016. According to EY, $32.9 billion in private equity was invested in 647 health care transactions in 2018 — that’s double the investments made in 2014.
Early on, private equity tended to fund specialties such as dentistry and dermatology. Later, private equity funds directed their investment philosophies to other specialties, such as ophthalmology, urology, orthopedics, and OB-GYN.
As the medical environment shifts to value-based care, private equity funds are increasingly interested in potentially profitable specialties that still have many independent private practices, opportunities where they may be able to consolidate regional markets.
One specialty that fills the bill is gastroenterology. As the population ages and people — and their doctors — focus on how the gastrointestinal tract affects overall health, the demand for gastrointestinal services will continue to expand. According to a report by Medscape, 53% of the nearly 14,500 gastroenterologists in the U.S. are employed at hospitals or other health care organizations. About 6,000 of them are in private practice.
In 2018, there were only two private equity deals for gastroenterology practices; in 2019 there were 16. In 2020, I expect to see merger and acquisition announcements for various mid-size or large gastroenterology practices. The groups supported by private equity will compete to acquire other smaller groups and expand. And new and innovative models will most likely arise as well, in gastroenterology and in other specialties. The team has made progress on an enhanced version of Cologuard®.
As these deals continue, it’s important to understand the role of private equity and be aware of the mistakes made by physician practice management (PPM) companies when they tried to consolidate medical practices in the 1990s.
PPMs brought in fresh capital and management talent, added new ancillary services, negotiated better contracts, and rushed to demonstrate to the market growth and higher revenues. Unfortunately, they also charged hefty management fees and used confusing accounting practices to make the platforms look more profitable than they were.
In the end, physician practice management companies struggled to execute on their business plans and ran out of money. By 1998, this space imploded and it only took a few years to almost disappear.
Today’s landscape is different. Physicians have become more knowledgeable about the business, technology, and advocacy components of health care. Professional trade associations, such as the Large Urology Group Practice Association and the Digestive Health Physicians Association, increasingly provide forums for private practice leaders to learn from each other and discuss ways to navigate issues that affect their ability to remain independent.
I believe that in 2020 we will see massive consolidation across health care, especially among private practices. It’s not a question of whether this level of consolidation is good — we can’t turn back the clock. The question that must be answered is how to consolidate in ways that support independent physicians and improve patients’ access to cost-effective, high-quality care.
By Praveen Suthrum, President & Co-Founder, NextServices
Originally Published in STATNEWS