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Physician Groups Are Making Moves – Are They Exit Plans or Calculated Partnerships?

8/30/19 – Keith Carlson

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The ever-changing environment of the Healthcare Industry is impacting physicians and Physician Groups more than ever before, causing them to re-evaluate the future of the industry. Many are considering Mergers and Acquisitions (M&A) a viable option. Even if a physician group is performing well and, the majority of physicians within the practice are content, the group owes it to themselves to at least study, explore, and understand various strategic M&A option. This due diligence of this exploration is critical, even if the group continues to embrace the status quo. (There’s no harm in looking, right?) The simple fact is that that running a physician practice is complicated, and it isn’t getting easier. Navigating these industry complications is unlike anything I have ever followed; by the time ‘normal’ sets in from the last round of sweeping changes, a new norm is already greeting healthcare providers with a fresh and rude awakening. Couple these hurdles with the fact that recent physician practice transactions have provided many physician shareholders with sizeable liquidity events, and it paints a pretty compelling reason to at least see what all of the consolidation and M&A activity is about.

What are some of the complications driving many to look at M&A alternatives?

Legislative pressures will seemingly never cease, not when healthcare continues to be one of the most polarizing social and economic topics in our country. Being the hottest of many legislative topics in 2019, it appears to be focused on continued migration toward value-based care models with providers accepting financial risk for mismanaging cases. While this could be a good long-term change for the industry, it is daunting to manage if you aren’t familiar with the “know how” and compliance of it all, given that it is a new phenomenon to navigate for most practices. Many are seeking comfort in joining larger and more established groups that can assist with blunting the learning curve.

Payers are being increasingly stingy to healthcare provider organizations during contract negotiations. Over the last few years, following mammoth 2018 M&A activity, insurers have added scale. Moreover, many analysts are predicting relationships between providers and payers to be even more contentious during future contract negotiations, even as value-based payment settings become more prevalent. The days of being able to ‘bang on the table’ and use hysteria to get what you want are numbered. As such, many practices are choosing to join groups that can give them the scale to gain a larger voice during negotiations and bring non-conventional negotiating tactics.

Work-life balance is a huge topic among active physicians. It is no secret that many physicians have demanding work schedules. Not only do they have regularly scheduled, high volume office visits with patients, but many also participate in the practice’s on-call efforts. Being on-call is the less glamorous aspect of a physician’s normal routine that many non-physicians don’t fully appreciate. Suffice to say, it can and usually does involve overnight hours and weekend work; two things you wouldn’t necessarily dream of when choosing to become a doctor. Coupled with the fact that payer trends aren’t necessarily favoring the providers, it is all but implied that some physician groups need to work harder just to keep up with levels of income they have grown accustomed to enjoying. Tell the doctor who is working nights, weekends, and normal office hours that they need to work harder so they can continue to earn the same amount, and see what response you will get. As such, many physician groups are seeking larger groups that have the resources to help balance some of the more demanding aspects of being a physician and who also deploy a ‘work smarter, not harder’ philosophy.

Trends Point to a Complex Operating Environment, But There are Solutions

Physician groups have several strategic options to consider when debating how to address the current concerns facing physician practice groups. Many of these options involve partnering/consolidating with larger, well-capitalized organizations that are willing to invest large sums of capital to procure systems, processes, infrastructure, and talent to drive the needed changes to keep up and succeed. Recent trends provide evidence of the consolidation amongst groups: there were 166 physician-group M&A transactions announced in 2017, but 2018 drastically eclipsed this total with 250 announced transactions (a 51% increase). 2019 appears to be off to a very strong start as well, as several less-trafficked physician practice niches have begun to garner attention.

Who are the Players Participating in Consolidation?

Hospital or Hospital-Affiliated Medical Groups: Hospitals and their affiliates have historically been very active with M&A efforts within various practice niches, although their efforts seem to be declining. While this option provides the size, scale, and perhaps the exit route many groups are seeking, many physicians eventually grow frustrated by the post-closing environment due to hospitals being notoriously inept at running physician practices. This is in addition to hospitals being particularly frugal when it comes to paying premiums for physician practices.

Mega Physician Groups: Mega physician groups have also been very active consolidators. Some mega groups are very diverse, while others are focused on a particular industry segment. Physicians have historically appreciated the operating environment more in mega groups than that of hospitals, given the like-minded management, but, like hospitals, mega groups have regularly shown an inability to pay a premium for physician practices.

Private Equity Groups Focused on Physician Groups: Private equity groups have become increasingly prevalent players on the M&A landscape with physician practices. Most private equity groups are very focused on a particular niche and are NOT seeking to obtain significant control over a physician group's day-to-day medical practice and operations. Moreover, private equity groups seem to be the most lucrative subset of transactions that are being completed right now, and most provide for a substantial upside via future transactions for physicians groups. Many private equity groups start by acquiring an initial platform, then over-investing in needed infrastructure in anticipation of significant new practice and physician growth. Finally, they embark upon an aggregation strategy that brings the growth and makes certain objectives easier (cost savings due to scale, larger voices with payers, and stronger rationales for ancillary services). More cost savings, better terms with payers, and more streams of revenue all equate to more compensation for physicians. A liquidity event at the close, more compensation, and future liquidity events doesn't sound too shabby, right?

Are Physician Groups Running for the Exits or Making Calculated and Intelligent Moves?

At VohnLehman, we’ve advised multiple physician practice groups over the last twelve months regarding their new partnership or M&A efforts. Unlike other industries, the motives we have encountered tend to be diverse and wide-ranging. This could be because most physician groups have several shareholders, which is atypical in most other industries. However, I also believe many compelling reasons should resonate, depending on a physician’s perspective. In the end, common themes I encounter regarding physician rationales are a) genuine concern about keeping up with never-ending sweeping changes, b) fatigue with combatting tight-fisted payer strategies, and c) struggling with how to truly embrace a ‘work smarter, not harder’ culture. There is also general intrigue as to the physicians’ peers receiving unique liquidity events, as most physician groups are accustomed to exits that lack substantive paydays (especially with hospitals). Therefore, you can call the increase in consolidation whatever you want, a run for the exits or a calculated move – but you certainly cannot call it foolish.