Healthcare leaders look at the past, present and future of consolidation

Editor's note: This story has been corrected to clarify comments made about medical group M&A activity.

NEW YORK—From new federal payment models to new disrupters such as Amazon-backed Haven, the ongoing transformation of healthcare is having a profound impact on independent medical groups.

“You have to play ball and be ready to address these changes. The freight train has left the station on transformation and we can’t see the station anymore. Things will look a lot different in the next three to five years,” said Gary Herschman, an attorney in the healthcare and life sciences practice at Epstein Becker Green, during a recent conference in New York City that focused on independent medical groups and was sponsored by the law firm.

These ongoing changes are driving many practices to pursue strategic transactions, whether that’s being acquired by a hospital system or by private equity firms. As healthcare costs continue to rise and physician practices face more complex regulations, acquisitions are one strategy to control costs. Physician practices are increasingly turning to private equity for capital. 

The acquisition of physician practices by private equity firms has increased dramatically during the past few years, according to a study published in the Annals of Internal Medicine. A database that tracks such activity indicated that private equity firms acquired 102 practices in 2017. Healthcare private equity deals, including providers, rose 50% to $63.1 billion, topping 2017’s level of $42.6 billion, and deal count rose to 316 in 2018 from 265 in 2017, according to Boston-based consulting company Bain & Company. 

Add to that the 8,000 medical practices acquired by hospitals between July 2016 and July 2018, according to data compiled by the Physicians Advisory Institute and the consulting company Avalere Health. Some 44% of physicians were employed by hospitals or health systems as of January 2018, compared to just 1 in 4 in 2012.

The consolidation trend mirrors a similar wave of consolidation and vertical integration in the 1990s, said Lawton Robert Burns, Ph.D., director of the Wharton Center for Health Management and Economics at the Wharton School of the University of Pennsylvania.

RELATED: Private equity companies' acquisition of physician practices likely to accelerate

“We saw that ebb away, some with bankruptcy, and then history repeats itself in the 2010s. Now we have a new wave of physician consolidation, but what’s different is that it’s driven by many players, not just hospitals and their PPMs (physician practice management organizations). And now we’re seeing payers getting back into the physician practice management business,” Burns said.

UnitedHealthcare, as one example, is in the process of acquiring DaVita Medical Group. Once that deal closes, United's Optum medical care provider business will gain a large network of nearly 300 medical clinics that treat more than 1.7 million patients annually.

Health insurers are also piloting different models to change how care is delivered and coordinated. Humana recently announced it's partnering with telehealth company Doctor on Demand on a new virtual primary care model that offers patients access to a primary care physician with lower monthly premiums.

Blue Cross and Blue Shield of Texas is partnering with Sanitas USA to open 10 primary care centers in Dallas and Houston, and Walgreens also is opening a series of primary care doctors' offices in some of its Texas retail locations.

“It’s a land grab for ambulatory service assets. Payers are trying to control some of the front door to healthcare, with the notion that with the right incentives and the right access these providers will be helpful to maintain the total cost of care. That’s the ambition and it will take a while to sort out whether that has an impact,” said David Carmouche, M.D., president of Ochsner Health Network in Louisiana. OHN is comprised of 14 hospitals, 18 urgent care clinics and a network of 2,500 primary care and specialty care physicians.

Burns noted that private equity firms see healthcare as a booming market. “Healthcare is the number one local growing industry. There are phenomenal tailwinds behind this sector,” he said

Firms typically invest for a three- to seven-year period and anticipate returns of more than 20% annually, according to the study published in the Annals of Internal Medicine. For physician leaders, partnering with private equity can enable them to maintain minority ownership as well as lead clinical decision-making.

Medical groups struggle to keep pace with technology innovation

As consumers demand more convenient healthcare services through virtual visits or mobile apps, healthcare services are moving away from brick-and-mortar models to digital platforms, and this is forcing independent medical groups to pivot to be more digitally enabled, according to Carmouche.

At the same time, there are healthcare startups in Silicon Valley looking to disrupt healthcare by targeting different areas of the business.

RELATED: Report: 8,000 medical practices acquired by hospitals in 18 months

Ochsner Health System is leveraging technology to tackle chronic disease, such as by directing hypertension patients to its O Bar, a genius bar-type concept where patients can download an app and get a Bluetooth-enabled blood pressure cuff. Patients can take their blood pressure medication at home, and physicians can monitor them remotely and intervene more quickly rather than the patient coming into the doctor’s office once or twice a year, Carmouche said.

“Providers in our market are seeing the impact and coming to us. They want to be part of that and have access to these digital platforms, but they can’t make the investments on their own. They feel vulnerable because they can’t deliver telehealth services or these new digitally enabled models of care. Technology is a piece that is driving consolidation,” he said.

The future for medical groups

Many healthcare leaders agree that it is becoming more complex and burdensome to manage a physician practice, and this will likely drive more consolidation in the industry. But does this spell the end of independent medical groups?

“Not in my working lifetime, but the experiments will evolve further,” said Josh Berlin, principal and co-leader of consulting firm Citrin Cooperman’s health care practice. He noted that researchers estimate 25% to 30% of doctor visits will happen virtually by 2024 as healthcare becomes more patient-centric.

Berlin sees opportunities for community-based care and healthcare services delivered to patients in their homes with the doctor at the center armed with data analytics to help inform care decisions. “Healthcare is going to be a less asset-tied environment,” he said.

At the sam time, the Center for Medicare and Medicaid Services and its innovation arm, CMMI, continue to roll out more risk-driven payment models. In a recent speech, CMS Administrator Seema Verma said the agency is "deeply committed" to value-based transformation.

Moving forward, physician groups need to move forward with value-based care and payment models to stay on pace with where healthcare is headed, Carmouche said. 

"More and more, payment policies will drive how physicians organize themselves and how they need to act to earn those dollars in the future," Carmouche said.