🔒Physician practice consolidation reshaping healthcare landscape

There’s a revolution going on in health care these days.

No, we’re not talking about the mega mergers like CVS and Aetna, or the recently announced “Haven,” the joint venture between Amazon, J.P. Morgan and Berkshire Hathaway.

This headline probably won’t make it above the fold, but it’s a trend that is likely to rewrite the delivery of health care forever more.

The days of the independent doctor are rapidly coming to an end. Nearly half of all physicians recently surveyed say they’re now affiliated with a hospital or large medical group.

Record consolidation of physician practices (about 7.5 percent per year since 2016) is expected to continue as health systems, payors, private equity investors and large medical groups gobble up small practitioners.

Thirty-one percent of all physician practices are now owned by a hospital.

Physician-to-physician practice mergers by volume are much higher than hospital-to-hospital deals. Hospital-to-hospital mergers are larger in scope but there are fewer of them.

Practice mergers are larger in volume and you’re also starting to see private equity groups enter the practice acquisition market.

Why is this happening?

Physician practices are seeing a need for significant capital investment due to government mandates around medical record keeping.

As a result, they’re not seeing the traditional financial returns they’d seen in the past. That leaves an opening for private equity that can acquire say, a hundred practices and, in theory, achieve the economies of scale inherent in a larger organization.

Things like bulk purchasing, insurance, centralized billing and IT services all make physician practices ideal targets for the right private-equity firm.

Sellers must focus on efficiency

If a physician practice is thinking about selling they should look at becoming as efficient as possible. One of the first places buyers look is in a group’s medical coding.

Are they maximizing revenue by coding properly for each procedure they perform in their office? Are they overpaying their staff? Are they effectively using information technology to make them more efficient, or do they look at IT as a necessary evil that only needs attention when something breaks?

Most physicians don’t look at what a traditional business would call “cost of goods.” They see themselves as providing a service and look mostly at revenue, rather than expenses. Cost of goods is the cost of a physician group’s staff, supplies, rent, insurance, etc.

There is also the issue of HIPAA and data security. There have been numerous fines levied against purchasers of practices and hospitals because of violations that occurred pre-closing. We’re talking fines that have been levied in the tens of millions of dollars.

Looking at the way a practice protects patient information is every bit as important as looking at their balance sheet.

The Harvard Business Review estimates that nine out of 10 hospital-to-hospital mergers fail because the acquiring hospitals are not achieving the benefits of scale they predicted before the acquisition.

On the physician side, you’re seeing it from both sides. The buyer isn’t seeing the realized efficiencies they anticipated because they failed to perform full due diligence. On the seller side, deals are falling short because the seller may be forced to spend more post-closing on things like necessary IT upgrades to meet the buyer’s infrastructure requirements.

So what’s the advice for buyer and seller in today’s competitive M&A marketplace? 

Maximize. Buyers, particularly private equity firms, look for practices that pay attention to both sides of the ledger, maximizing profit and maximizing efficiency.

Valuation is dependent on decreasing costs to maximize cash flow. Maximize cleanliness. An attractive practice is one that understands and embraces the reporting regulations that govern it, that makes sure they’re not over-coding or under-coding.

And finally, physicians who want to sell their practice need to understand that in many cases, they’re in the driver’s seat. It’s a very competitive marketplace, especially among specialties with a high level of ancillary revenue like cardiology, radiology, orthopedics, gastroenterology and primary care.

They should market their practice and not necessarily take the first offer that comes along.

Steve Shaw is executive vice president for VertitechIT, a national healthcare IT consulting firm based in the Greater Hartford/Western Massachusetts area. Brad Mondschein is VertitechIT’s chief legal counsel.