Private equity companies' acquisition of physician practices likely to accelerate

Mergers and acquisitions deals consolidation
Private equity firms are buying up physician practices, a trend expected to continue in 2019. (Getty/Kritchanut)

First it was hospitals. Now it’s private equity companies that are buying up physician practices.

Acquisition of physician practices by private equity firms has increased dramatically during the past few years, according to a new study published in the Annals of Internal Medicine.

Researchers from Weill Cornell Medicine in New York found that the current healthcare environment is accelerating the disappearance of independent physician practices. 


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It’s a trend that the lead author of the study, Lawrence P. Casalino, M.D., chief of the division of health policy and economics at Weill Cornell Medicine, says is likely to accelerate over the next few years.

RELATED: Regulatory changes and technology demands will drive physician practice mergers and acquisitions in 2018

“The ultimate outcome is not known, but certainly this trend will increase the corporate transformation of healthcare, for better or for worse,” Casalino said in an email to Fierce Healthcare.

One thing for sure? “It is definitely another nail [in the coffin for independent practices],” he said.

A database that tracks such activity indicated that private equity firms acquired 102 practices in 2017, although that number might be low since some acquisitions, especially of smaller practices, may have been missed.

The researchers said the acquisition of practices by private equity firms is a significant phenomenon with unknown consequences for both physicians and patients. It’s also a trend that has received little attention from researchers and policymakers.

To get a handle on the current situation, the researchers interviewed 21 people from across the country, including consultants, attorneys, investment bankers and leaders of private equity firms, physician practices and health insurers.

The acquisition setup

Here’s how it works. Private equity firms invest in private practices using their capital and anticipate average annual returns of 20% or more, the study said. To achieve those returns, private equity firms focus on acquiring “platform practices” described as large, well-managed practices that are reputable in their community.

The private equity firms then sell the practices after increasing their value by recruiting additional physicians, acquiring smaller practices, increasing revenues by taking steps such as bringing pathology services into a dermatology practice and decreasing costs, such as using more physician assistants, the researchers said.

“Growth makes it possible to spread fixed costs, exploit synergies across merged practices, expand ancillary revenues and increase negotiating leverage with health insurers,” the researchers said.

The private equity firms typically take anywhere from 60% to $80% ownership, although they will sometimes accept minority ownership in a very large practice. The amount paid to practice owners varies but can be as much as $1 million to $2 million per physician, the researchers said. The equity firms look to sell the practice within three to seven years.

The focus has been on specialties that have the potential to bring in additional income from elective procedures and ancillary services. Dermatology has been a major focus, with an increase in interest in ophthalmology, urology and gastroenterology practices.

Edgemont Partners, a healthcare investment banking firm, said mergers and acquisitions of physician practices in specialties such as orthopedics and radiology were a part of its record 2018 transaction volume. The company said the healthcare sector is likely to continue to consolidate in 2019.

In a rapidly changing healthcare environment which is moving to value-based purchasing, more physicians are interested in selling their practices, those interviewed told the researchers. Many of the largest practices have already been acquired by a hospital, insurer or private equity firm.

An unknown impact

The impact remains to be seen, the study said. No peer-reviewed studies have looked at the effect on the quality and cost of patient care, physician professionalism, and the experience of patients, physicians or staff.

Most private equity sales of physician practices are to other private equity firms. However, if the ability to sell at higher gains declines, the ultimate buyers could be hospitals or health insurers.

“In any case, for better or worse, acquired practices surrender control of their destiny,” the researchers concluded.

It’s not something everyone wants. One group of doctors thinks the pendulum—in which doctors were once flocking to hospital employment—is now swinging the other way. They say independent practices are now seeing a resurgence.

However, as of mid-2015, one in four medical practices was hospital-owned, according to one study. Hospitals acquired 31,000 physician practices, a 50% increase, from 2012 to 2015, according to the report. And 2016 marked the first year in which physician practice ownership was no longer the majority arrangement, with physicians evenly distributed between being owners and employees: 47.1% of doctors own their own practice, with the same percentage employed and 5.9% independent contractors.

Patients aren’t convinced the loss of independent practices is good for healthcare. A study found that most Americans are concerned about the trend of hospital consolidation, specifically the rate at which hospitals are purchasing independent physician practices, a move which they see as a threat to affordable care.

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