As we move into the second half of 2021, we have much more clarity on where healthcare transactions and physician alignment models are headed.
First, we can say with confidence that transaction activity is on the rise. In fact, transaction deal volume in Q1 2021 was 75% higher than transaction activity in Q1 2020. Second, under the new Stark Law and Anti-Kickback Statute (AKS) rules, the flexibility created to encourage value-based care models with physicians has healthcare leaders racing to figure out new physician alignment models. We have only just begun to see new and creative strategic activity from these two movements within the healthcare industry.
Being proactive with strategy in 2021 will be essential for revenue growth, as well as solidifying key alliances in the upcoming year. If you are not thinking about what 2022 will look like for your healthcare company, you may be behind the curve. Nearly every sector within healthcare is active with transactions and rethinking their physician alignment models. In addition, there are new players in the market, such as management companies specialized in certain sectors, along with a surge of private equity players. The need to be thinking strategically has perhaps never been greater, and the breadth of knowledge required to succeed can be daunting. That said, there are ways to break this all down into bite-sized pieces – do you want to get involved with a specific healthcare sector, or update your physician alignment strategy, or both?
If you plan to grow or enter a certain healthcare sector, educating yourself is the best place to start. Therefore, understanding transaction activity, major players, the reimbursement environment, and transaction multiples should be the foundation for developing your strategy. Alternatively, if you want to revamp your physician alignment strategy, understanding Stark’s Final Rules and the updated AKS guidance, along with the latest physician alignment models should be where your research begins. Whether you want to focus on a healthcare sector or physician alignment, knowledge is key. The following will provide critical insight and additional sources to properly prepare you for taking on a strategy that will help make your healthcare company successful in 2022.
#1 Healthcare Sector Focus – Start with M&A Insight
A common growth strategy for healthcare companies is to focus on a particular sector within the industry. This allows for expertise to be developed, strategic partnerships to be formed, and often innovative strategies emerge. Companies focused on sectors may include a wide array of market players, ranging from large heath systems to specialized management companies to private equity companies. If there is a certain healthcare sector that is active in your region, or you have a particular interest in, chances are, so do many other healthcare leaders. To make an informed decision about pursuing a sector M&A strategy, understanding the latest activity and challenges in that sector is critical.
VMG’s Healthcare M&A Report: The New Normal 2020 Trends and 2021 Expectations covers nine major healthcare sectors with proprietary insight on what is happening and what to consider if you plan on pursuing a sector-focused strategy. VMG Health is a transaction advisory firm involved in over 3,000 healthcare engagements per year with a focus on valuation, strategy, and compliance since 1995. This report provides the latest information related to transactions trends, market multiples, notable deals, reimbursement changes and the regulatory environment. The following provides a brief take-away for ten prominent healthcare sectors:
- Ambulatory Surgery Centers (ASC) – This is an active area for transactions, and it is likely ASCs with value-based programs, such as bundled payments, will thrive and be targets for acquisitions. In addition, VMG is seeing more creativity in this space, such as hybrid surgery centers, the following outlines an example, Hybrid Surgery Centers: The Cardiology Shift. For more in-depth insight on ASCs, see ASCs in 2020: A Year in Review
- Diagnostic Imaging Centers – Due to continued reimbursement pressure and significant capital required, many market players opt to pursue strategic partnerships and joint venture relationships instead of acquisitions. For an important update on imaging reimbursement, see 2021 Diagnostic Imaging Rate Changes: Impact & Outlook
- Acute Care Hospitals – It is anticipated that M&A activity will continue in this sector as many buyers paused activity during Covid-19 and will take advantage of struggling targets.
- Physician Medical Groups – The beginning of 2021 showed a new surge in this sector. VMG Health anticipates targets will have value-based care capabilities, and suggests understanding technology infrastructure as part of your strategy. For more in-depth insight on this sector, see Physician Practices: Considerations During the Transaction Process
- Post-Acute Care – Most M&A strategy is expected to be focused within home health and hospice, as opposed to long-term acute care and inpatient rehabilitation facilities based on opportunities for more growth in these sectors.
- Behavioral Health Facilities – Due to a focus on mental health in the United States and the surge in telemedicine, this is an evolving sector that will likely produce more innovative market strategies and numerous opportunities.
- Urgent Care Centers – This should be an area of M&A activity due to this sector’s expected growth stemming from the increase in consumerism, patient expectations, and payor pressure on emergency room visit reimbursements.
- Dialysis Facilities - This sector is unique as the two largest dialysis operators account for 73% of the total market. Meanwhile, the government continues to develop programs to target this patient population with a big push towards more home-based care.
- Oncology –There are many strategies to enter the oncology sector, although there is a steep learning curve, and it is important to stay abreast of ongoing reimbursement changes. For more in-depth insight on this sector, see Oncology Reimbursement environment: Recent Changes, Impact & Outlook, Reimbursement Pressure in Radiation Therapy & Block Lease Arrangements, 340B Program & Oncology: What You Need to Know
Two important areas to understand in every sector before pursuing a M&A strategy is market need, and the latest reimbursement trends. Supply and demand studies can provide important insight on growth potential to determine if a certain sector makes sense for a particular region. The reimbursement environment is just as important, as CMS continues to make changes in every sector, including the expansion of telemedicine. These are just two critical areas to tackle when determining the full picture of how a particular merger or acquisition will impact your company. Lastly, the surge of private equity in the healthcare space is creating more capital, competition, and creativity. Therefore, it is important to understand their strategies. Although private equity plays are found in most every healthcare sector, there is a high-level of activity within physician services, home health, hospice, behavioral health, and urgent care.
Sector specific transactions have been an important part of each of the largest health system’s strategy for years, you can review important recent insight here - Quarterly Pulse on the Public Market: Executive Quotes from Earnings Calls. There continue to be new market participants in each sector including specialized management companies and joint venture partnerships. With the growing number of investors, and focus on specialization, understanding the new business models and potential players are key when assessing a sector-focused strategy.
#2 Maximizing Value-Based Care Reimbursement – Understand Physician Alignment Options
With the new regulatory guidance associated with the value-based care movement, and shift in payor contracts, nearly every healthcare company is trying to figure out how to maximize value-based reimbursement. Not surprising, when it comes to generating savings and higher quality outcomes, physician alignment is key. Physicians ranging from primary care providers to orthopedic surgeons drive clinical decisions that are proven to lower costs and increase quality. Nearly every physician specialty has the potential to impact reimbursement whether it be under a population health contract, bundled payment program, clinically integrated network (CIN), or countless other evolving models.
All that said, physician alignment is easier said than done, and these strategies are more complex than ever before. Innovative models, and old models with new features, continue to emerge at a rapid rate providing ways to compensate physicians for quality and/or costs savings. VMG has observed value-based care components in various arrangements including strategic partnerships, PSAs, employment models, co-management agreements, hospital efficiency incentive programs, CINs, and the new “Value-Based Enterprise”, all aimed at CMS’ value-based care movement. Each of these physician alignment models requires coordination and support from healthcare leaders focused on both strategy and compliance.
Perhaps the most discussed area is how to develop new strategies based on the recent regulatory guidance associated with the AKS and Stark Law. All agree, more flexibility to compensate physicians for value-based care has been provided under the new guidance, but there are no bright lines on what you can do and what you can not do. In addition, the Fair Market Value (FMV) requirement still plays a prominent role when establishing physician payments. In fact, when CMS was seeking comment on updating the AKS and Stark Law, FMV was mentioned 186 times, demonstrating this requirement remains important. The new guidance is robust and complex. That said, there are some common themes that are important to note if you are preparing to pay a physician for quality and/or cost savings:
- Understand how the market pays for quality and/or cost savings.
- Select meaningful metrics that are measured by a credible organization.
- Ensure the physician has a demonstrable impact on the quality and/or savings.
- Do not tie compensation to the value or volume of referrals.
For further insight, if you are working through which quality metrics to include in a physician contract, there are some informative tips here Quality Metrics & FMV: By Specialty Considerations. Alternatively, if you are being tasked with how to incentivize your physicians with existing value-based payor contracts, this short read will walk you through a process - Three Questions to Consider Before Distributing Value-Based Payments to Physicians. If you just need a primer on the new guidance, this is a good start, Considerations for Determining Fair Market Value Physician Compensation Under Stark’s Final Rules.
The path is clear that value-base care is where you need to be headed strategically to maximize reimbursement. That said, there is much to get up to speed on before designing a physician alignment model, whether it be for employed or contracted physicians. Although we have a green light to be more creative and pay for quality and shared savings (if done so properly), FMV is still a requirement for physician arrangements. As if value-based care models were not challenging enough, just this year, we have two additional factors that have made determining FMV more complex than in years past, 1) new survey data concerns and 2) new physician fee schedule changes. Since determining FMV has historically relied heavily on survey data, and there are new factors making surveys less relevant, the process is now more complicated.
The impact of Covid-19 on the recently released MGMA’s 2021 Physician Compensation Survey shows several common specialties increasing more than 10% in median compensation per work RVU, with family medicine showing an increase of over 15% (based on the hit to work RVU volume). Meanwhile, median total cash compensation remained stable or declined. This could create substantial financial issues for those relying on certain survey data metrics to update physician compensation. In addition, the presence of shared savings and quality payments reflected in survey data continues to grow, making the valuation of compensation trickier overall. There are many new adjustments and steps that should be taken which were not required historically.
To make things even more mind-bending, CMS’ new physician fee schedule changes were some of the largest in recent history. Important details to understand these changes are outlined in The Impact of the 2021 Medicare Physician Fee Schedule on Physician Practice Revenue and Provider Compensation. As health systems integrate value-based care into their physician alignment strategy, they cannot ignore that fee for service is still a major component to compensation and the primary driver for compensation figures published in surveys, such as MGMA. As we sit in 2021, our new compensation surveys will reflect 2020 data which includes the challenges of Covid-19, but not the major CMS fee schedule changes, and will somewhat reflect value-based care! It is all very confusing if you rely on surveys alone. That said, there are ways to include value-based care components in arrangements with physicians to help with alignment, while still living in the fee for service world, and maintaining compliance with FMV guidelines.
Whether you delve into the new regulatory guidance and create a Value-Based Enterprise, start a co-management arrangement, or embark on creating a clinically integrated network, understanding how to pay a physician for quality and/or costs savings will be paramount to maximizing value-based care reimbursement.
VMG Health Take-Aways
The potential opportunities in 2022 for growth in the healthcare industry are significant and will likely require more creativity and knowledge than ever before. To be prepared, identifying your strategy, and getting up to speed on the climate will be an important first step. The recent upheaval in healthcare caused by Covid-19, the new regulatory guidance related to value-based care, and influx of market participants creates both opportunities and challenges. VMG Health has extensive experience in valuation, strategy, and compliance to help support your team’s efforts to grow within the healthcare industry. With experts in every sector, VMG Health can be a trusted advisor and partner to healthcare companies during these exciting times.