Private equity and strategic industry consolidators have continued to seek out acquisition opportunities in physician practices. These groups are most likely to pursue a select set of highly coveted specialties, including anesthesia, radiology, orthopedics, neurology, dental and ophthalmology. Physician-led practices pursuing growth initiatives, sustained reimbursement (and ultimately physician compensation), as well as compliance and back office support will oftentimes need a strategic partner with access to outside capital to accomplish these objectives. We’ve highlighted eight factors driving this trend toward consolidation:

 1. Aging Patient (and Physician) Demographics

Aging population and patient demographics will continue to drive demand for healthcare services for the foreseeable future. An aging (and growing) population with more frequent hospital and physician visits and diagnostic testing will require a larger physician network to meet the needs of these patients. Ultimately, this influx of demand will be met with an aging physician workforce. Many that will be facing retirement age will drive the need for efficiency and consolidation of independents.

2. Rising Administration Costs

Independent physicians continue to face pressures from the rising costs and administrative burdens of providing care and are seeking to join larger, better capitalized practices with dedicated staff to spread administrative cost across higher patient volumes. These practices also benefit from scale in their ability to manage their investments in areas such as electronic medical records (EMR), revenue cycle management (RCM) and other practice development activities.

3. Reimbursement Changes Create Uncertainty 

An uncertain reimbursement environment brought on by ever-change healthcare policy in the U.S. landscape and evolving physician practice models put physician practices at risk of reductions to revenue and ultimately compensation.  An introduction of a revised coding system as part of the 2019 Medicare Physician Fee Schedule (PFS) and other value-based payment initiatives, including the Quality Payment Program (QPP), which set reimbursement rates based on quality and patient outcomes, have established a new baseline for insurance companies and private payors as well, placing additional burdens on independent physician practices.  Physicians continue to look for ways to insulate themselves from revenue contraction by partnering with larger, more sophisticated partners to handle the current pressures from changes to reimbursement.

4. Emphasis on Third-Party Compliance

Larger physician practices have the scale and expertise to protect from potential issues with remain in compliance with governing entities, payors and patients, which may bring undue pressures to independent practices. Physician practices’ abilities to identifying and mitigating potential compliance issues through an in-depth compliance program optimizes claims processing, minimizes billing errors, reduces the chance of a third-party audit, protects against HIPAA breaches and establishes protocols to avoid Stark laws and other anti-kickback statutes.

5. Leveraging Strong Referral Networks 

Expansion of multi-specialty practices is further supported by the relatively low fixed costs of setting up practices and increased demand for specialty services, leading to higher wages for specialty physicians and ancillary healthcare providers. As practices expand their specialty services, they also enhance their relevance to consumers in the market and can build relationships with primary care practices and payer networks to increase referral volumes. Large multi-specialty practices are also attractive partners for health systems seeking to bring incremental cases to their hospitals and health networks.

6. Diversification through Multi-Specialty Services 

Revenue scale and a diversification typically results in sustainability and growth of physician practices, providing higher wages for select specialty physicians.  This growth, sustainability and earnings are attractive attributes in any industry and drive investment into multi-specialty practices, creating opportunities to partner with other practices through consolidation.  Adjustments to physician compensation is often a major lever in creating earnings (and ultimately cash flows) for outside investors looking to provide capital into physician practices through managed service organizations (MSOs) to create value for shareholders.

7. Increased Private Equity Investment 

Growing physician practices need additional capital to pursue strategic initiatives, including new facilities and capital expenditures, physician recruitment and expansion into ancillary services.  With scale, diversification of services and improvements to back-office functions, provides physician practices the opportunity to develop deeper relationships with insurers, resulting in strategic partnerships and often more favorable reimbursement rates.  Private equity investors have accelerated their investments into physician practices and have diversified into new specialties.  Additionally, large physician practices and health systems are competing with private equity, resulting in a highly competitive environment for profitable physician practices and select specialty groups.

8. Establishing Equity Value 

Prior to the involvement of private equity and the trend toward consolidation, it wasn’t atypical that that the equity value for a physician retiring from an independent practice included a nominal, pre-determined price for their shares and an ability to collect on open receivables. A physician’s ability to tap into the intrinsic value of their practices, utilizing outside capital and pre-established mechanics to value and ultimately sell shares, provided for a “market value” for their equity.  The opportunity for physicians to focus on delivering high-quality healthcare, reduce business risk, realize liquidity and capture previously untapped value is anticipated to continue with heightened interest from private equity investors and strategic industry consolidators.

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