Private practice physician groups across the nation are increasingly faced with the decision of whether or not to affiliate, merge or join with larger groups.
Physician groups are faced with an uncertain environment ahead due to increased complexity of reimbursement, hospital consolidations and increased pressure to measure and demonstrate clinical quality and outcomes. Many practices currently lack the back-office capabilities, infrastructure and capital to meet these requirements on their own. As such, an increasing number are turning to mergers and partnerships with investors, hospitals, large physician groups or multi-specialty platforms to increase their long-term viability.
Billing and Collecting in an Increasingly Complex Payer Landscape
In recent years the most significant shift that has taken place in the business of the health care —for both large and smaller practices —is the ever-greater individual patient responsibility for the cost of their own healthcare. This is due primarily to the prevalence of insurance plans with increasingly higher individual deductibles.
Most physicians in private practice went into medicine when the patient had very little out of pocket responsibility. Now their world has transitioned to where in some markets at least a quarter to a half of patients have high deductible health plans. This is transforming the way patients engage with healthcare – moving from simply a “user” to a true “consumer”. Patients are spending their “own money” on healthcare and their decision making now includes price along with quality and service.
The fundamental challenge is that most private practice groups don’t have the infrastructure to manage individual patient collecting in an efficient and cost-effective way. It isn’t just about having to chase people down. Frankly, most doctors themselves don’t know what deductibles people have, what tests are covered, and whether or not they need to have preliminary conversations with patients about affordability of care.
All of this is putting tremendous bottom line pressure on the private practice world today. It’s not as lucrative as it used to be and it’s getting more and more complex. Small groups just can’t compete with mega practices that can invest in systems that automatically determine what tests are covered under a plan, and so forth. The alternative is to outsource to a billing company. But billing companies can charge up to eight or nine percent of what they collect. Moreover, they don’t concentrate on the $20 or $40 outpatient receivables, for instance, that are increasingly relevant to a practice’s margin.
So while smaller groups can no longer afford to just rely only on payments from commercial, Medicare, and Medicaid carriers, at the same time, they can’t bear the cost of the back office requirements to manage individual collection. This is just one reason they start looking into combining with larger platforms that would provide such infrastructure.
The High Costs of Technology for Quality Measurement
It isn’t just billing and collecting technology that requires significant investment. For practices to remain viable, they have to keep up with ever intensifying data analytics and quality reporting requirements. Hospitals, insurance plans and patients all rightly want to see validation of their care and of course this is one of the key initiatives of the Affordable Care Act. Whether it is repealed or not, providers are going to be more accountable for outcomes and reimbursement will be tightly tied to quality. The volume-based model is going away; whatever the formula, value will be the final measure. So, the fundamental challenge for practices is how to accurately track outcomes using robust clinical systems, without impeding the way doctors practice medicine or slowing down their daily rounds.
The majority of electronic medical record (“EMR”) systems do not provide longitudinal dashboards across the patient continuum of care or insights into whether they are getting sicker or better; they are really just capturing episodic data elements. Quality can’t be measured by a collection of random metrics and especially if clinical data isn’t freely shared and analyzed across a practice—and across the medical community as a whole. Metrics for measuring quality are not even universally standardized. Practices that care about quality measurement first need to invest in research to determine what are the right metrics they should be measuring.
Technological and human capital requirements are high and increasingly expensive. Quality assessment and compliance challenges again press independent practices to look toward larger groups with integrated back systems, full-time quality officers, and significant investment in quality-oriented cultures.
Attention to Business Development
Most small practices struggle to dedicate enough time and resources toward business development—we might call it “marketing,” but it’s really more than that. At the end of the day doctors are starting to realize that they’re running businesses, whether they like it or not. To survive they must work to attract individual patients, win new hospital contracts, negotiate contracts with insurers, and address many other competitive dynamics.
Put simply, with internet-driven consciousness, patient demands are getting more informed, complex, even specialized. Ironically, decreasing insurance coverage percentages are occurring when the possibilities for technological “miracles” are rising exponentially. Consequently, the bar for quality and capabilities are rising tremendously such that small, local groups just can’t keep up with quality demand. It is so difficult for independent operations to compete with the brand names of national groups and the state-of-the-art, cutting-edge technologies they provide.
Patients all have choices in where they go for care and doctors need to realize that healthcare is becoming “retail”. Doctors need to invest in websites, social media, brand marketing and all the other aspects that make a business successful. There is also the relationship driven component, as practices must demonstrate areas of specialization and differentiation to referring physician groups across the community. Finding the right approach and the right people to implement it is a pivotal and expensive undertaking. As reimbursement rates decline, increasing volume is the only way to stay viable and make a decent living until value-based care really kicks in. In order to do that small and medium groups have to invest in their business development functions. But going up against big players in a local market is awfully tough, so the idea of teaming up can be attractive.
Higher Expectations from New Doctors
On top of all these pressures practices have to keep up with the changing expectations that come with the ongoing modernization of health technology as the millennial generation enters the workplace.
Smaller groups are having trouble meeting the expectations of a new breed of physicians and clinicians that are entering the workplace today. The generation that’s coming out of school now is looking for a different work/life balance than their parents’ generation. It is harder and harder today for older physicians to attract or retain other physicians purely based on a “grind it out” mentality. Millennials coming out of medical school look at small physician groups wondering if they have the resources to advance specialization, if they pay enough, or if they will even survive. They are not interested in taking on more debt to buy into a partnership if he future is uncertain.
Many millennials just aren’t interested in running a business; they went into medicine to be experts in their field. They want to work on complex cases and work with state of the art technology. If they’re guaranteed a fair salary, they have more time off, they may be happier in a large group than joining a small practice that involves variability. They are also attracted to the complexity and higher acuity that often comes with a larger panel of patients. The smaller private practice is no longer the only option for young and optimistic talent. So, attracting and retaining good talent will be one of the toughest challenges facing private practice in the years ahead.
Assess and Plan Before You Leap
For all these reasons, and more, many smaller medical groups begin to evaluate the potential benefits of practice mergers. Mergers & Acquisitions (M&A) certainly offer ways to solve some of the challenges facing private practice groups in today’s healthcare marketplace. Billing and collecting support, high-tech back systems, quality control, business development functionality, client brand recognition, hiring and HR management...all seemingly become easier with a successful partnership transaction.
And of course, these goals can be achieved. But they cannot be achievable without a carefully thought out business plan of action before embarking on a path towards any form of M&A. While the upside is potentially high, the downside can also be very steep. No physician group should go into such a process without undertaking serious steps of self-assessment, market-assessment, and most importantly, goals-assessment. Groups must make themselves highly conscious of what is really possible through M&A—and what is simply not likely—and make sure their own expectations fit those realities. Lack of planning and especially excessive hopes for unrealistic outcomes post transaction can lead to unhappy physician partnerships.
The first step requires construction of a careful business plan and Strengths, Weaknesses, Opportunities, Threats (SWOT) analysis. It is highly advisable engage with an experienced transaction advisor, an investment banker with deep experience in working with physician groups. As the physician group’s partner throughout the process, the investment banker will help practice leaders understand the partnership options and construct a strategic plan. It’s never too early to consult with an investment banker, even if executives are still in the early stages of considering a partnership. In fact, doing so early on can often help a practice identify strategic alternatives or potential partners they would not have considered and best position themselves for maximum value potential.
Evaluating a potential merger can seem like a daunting task, but by taking the process one step at a time and enlisting the help of an experienced advisor, practices can ensure they are best positioned for finding the right partner.
About the Author
Andrew Colbert is a managing director and founding member of Ziegler’s Healthcare Investment Banking Practice. Colbert has represented over 40 physician groups and healthcare companies on innovative transactions; he specializes in advising physician groups on strategic and financing alternatives including merger and acquisitions, capital raising transactions and partnership development.
The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.