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Factors Behind the Rapid Consolidation of Healthcare Practices

Posted by Erick Cutler, CPA on Aug 5, 2019 8:12:00 AM

Are the days of the independent healthcare practitioner soon to be a thing of the past? One thing is for certain—industry consolidations and new federal regulations are reshaping the medical practice landscape.

According to the American Medical Association, physicians own less than half of all medical practices. The AMA survey also found that younger doctors – those under 40 years of age – are taking positions as employees instead of sole owners or partners. Costs are a major part of the equation—it has become cost-prohibitive to run a practice and meet regulations.

Changing Practitioner Landscape

A rapid rise in managed care in the 1990's resulted in what can be described as a “merger mania” in healthcare. As national healthcare markets became highly consolidated, costs escalated, and it became more difficult to manage administrative costs. Advances in healthcare technology and innovation are certainly positives but also come with higher costs. It’s not surprising, then, that more than 60 percent of the nation’s community hospitals belong to a health system.

The Affordable Care Act (ACA) has also driven change. The legislation added significant incentives to move patient care from an inpatient to an outpatient setting. The result? Hospital systems began acquiring physician practices to capitalize on increased outpatient revenues and secure referrals for hospital-based services. On a national basis, there is no doubt that the consolidation of large hospital systems has sharply reduced the number of primary care private practices.

Strategic Acquisitions: Private Equity and the New Players

Announced deals made 2018 a record year for M&A activity among healthcare systems and hospitals. What’s interesting is the unconventional nature of this activity that is blurring the lines of what had been traditional players. For example, in late 2017, CVS announced plans to enter the health insurance field with the $69 billion acquisition of Aetna. This accelerated CVS’ goal of turning its retail stores and clinics into convenient and accessible healthcare centers.

One response to new federal payment models has been a move toward strategic acquisitions, including those by hospital systems or private equity firms. In fact, healthcare equity deals increased by 50 percent in 2018 to more than $63 billion, according to Bain & Company, a Boston-based consulting firm.

Related Blog: Texas Seeing Increase in Medical Group Practice Investment

Considering Your Options

If you’re a healthcare practitioner who is pursuing private equity investment, you’ll need to consider the revenue growth and practice infrastructure the investor can expect. For example, does your practice have the most updated software tools and talented practitioners? What is your growth potential?

A potential investor will want to be sure expectations align for long-term growth. Keep in mind, accepting private equity investment will sacrifice some of the control you maintain over the practice’s operations. However, it is important to note that ownership arrangements with non-practitioners must keep medical decision-making clearly under the discretion of the physician to ensure compliance with government and state medical board requirements.

Do you prefer to remain private? Despite these trends, many physicians are still owners or partners in their practice or work at independent practices. However, finding the time to keep up with regulatory requirements while maintaining a healthy profit margin can be challenging. It’s important to review your practice’s financial situation and assess the local competition before determining whether to pursue a merger or seek outside investors. Work with your professional business advisors to determine the best path for your long-term career goals.

Do you have questions about protecting your practice or increasing the profitability in your medical practice? Contact Erick Cutler at 214-635-2541 or use the contact form below.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Healthcare