Who Is Buying Primary Care Practices?
Over the last few years, there has been a growing trend in the number of primary care practices being bought by hospitals, insurance companies, and private equity firms. Entities such as hospitals and insurance companies have long been acquiring privately owned medical practices and offer high remuneration potential. In just one-year (2015- 2016), over 5000 practices were bought and 14,000 physicians were employed by hospitals driving the decline of solo practices even further. However, this is not a new phenomenon, with historical records showing that primary care practices have been on a steady decline for the past three decades, with the percentage of solo physicians falling from 41% to 17% between 1984 and 2014.
A common scenario is for a hospital to buy a primary care practice for its fixed assets, equipment and sometimes goodwill after a medical practice valuation and then offer the physician a salary that either matches or exceeds the amount they were making independently. This is generally appealing to the physician that’s selling a medical practice as they are offered a competitive salary and a more predictable work-life balance. To add to this, younger physicians also appear to prefer working for larger practices rather than dealing with the responsibilities and demands of running their own business. The growing interest from hospitals, insurance companies, and private equity firms has made primary care practices an attractive market.
It is no secret that hospitals are part of the reason for the decrease in independently owned primary care practices. However, from a business standpoint, hospitals offer a relatively attractive and fair buyout to medical physicians, especially those who are looking to retire. The reason why hospitals have been so successful in acquiring independent primary care practices is because many physicians find the buyouts appealing as they are able to continue working in their practice but no longer have to worry about managing staff and overheads or the lease of the office space and can enjoy the corporate protection of the patient flow and employee benefits.
After acquiring a primary care practice, hospitals often take over control of the practices’ business affairs and regulatory requirements and introduce efficiencies to save on costs. This allows physicians to fully focus on treating patients without having to worry about the business side of the practice. However, the downside of hospital employment for physicians is the loss of autonomy and control of the practice, as well as the changing dynamic between the patient and physician. Some doctors have reported that financial involvement in the practice is affecting patient care with pressure to save on medical supplies and staff. Additionally, in certain scenarios patients and Medicare may be affected by higher costs associated with certain types of services since hospital-employed physicians are required to perform them in a hospital outpatient setting.
On the other hand, hospitals will most likely lose money on their physicians after corporate overheads, compensation and practice expenses are calculated. However, hospitals think long-term and build a network of providers that will one day be compensated for keeping their patients healthy.
Health insurance companies are another key player when it comes to buying primary care practices. In recent years, we have seen multi-billion-dollar acquisitions of physician practices, with more expected to come.
One of the most notable recent deals was in 2017, when UnitedHealth Group, one of the largest U.S health insurance companies, paid $4.9 billion for the acquisition of DaVita Medical group, a primary and specialty care group that treats 1.7 million people across nearly 300 clinics. This came shortly after pharmacy giant CVS Health agreed to buy insurer Aetna for $69 billion – an acquisition that could see the transformation of 9,700 pharmacy stores into medical hubs for primary care practices.
Both these deals demonstrate that insurance companies are looking for a gateway entry into health care through primary care practices and pharmaceuticals, so that they can better manage care, control costs and keep patients healthy. Having direct insight into what happens at the doctor’s office makes it easier for insurance companies to improve the level of health care services. For example, insurance companies encourage flu vaccinations and can encourage their doctors to administer it to their patients. Primary care practices are a critical piece of the puzzle for insurance companies as it allows them to regulate care at a primary physician’s level in order to create a better health care model that keeps patients at a lower level of cost by preventing illnesses and not just treating them.
This does not mean, however, that all primary care practices will be sought out by an insurance company. Insurance companies look for practices that are diversified and provide a broad spectrum of care, especially when it comes to cardiology, endocrinology, and gastroenterology. Additionally, they look for medical groups that have up-to-date technology, a strong focus on primary care and illness prevention and physician-led practices, as they are generally more focused on cost control and quality improvement when they have a stake in the business.
Private Equity Firms
During the past few years, buyers outside of the health-care world such as private equity firms have also shown a keen interest in the acquisition of physician practices. Traditionally, private equity firms have been known to invest in certain medical groups that offer a high level of reimbursements such as dermatology, pain management, and dentistry.
However, in recent times private equity firms are seeing the investment opportunity of primary care practices that they can later sell for two to five times their purchase price to insurance companies and hospitals. These types of investments typically last 3-7 years, during which time private equity firms invest to enhance the services that the practice offers, add new locations and improve financials.
Hospitals and insurance companies are generally willing to pay a premium for the care-coordination expertise and data analytics of practices that have been turned around due to the investment of private equity firms.
Over the past few years, a clear trend has emerged in which big players such as hospitals, insurance companies, and private equity firms are viewing the profitable and well-managed primary care practice as a desirable and valuable investment. The primary care market has become an important way for hospitals to build patient care networks, is a valuable beachhead for health care insurance companies seeking to gain a foothold in the market and is widely seen as a profitable investment for private equity firms.
At MedLaunch, our team of experienced professionals is here to provide you with all the information and options you need to know about primary care practices. Get in touch with us today!