Independent physician enterprises continue to experience unprecedented challenges as a result of the ongoing COVID-19 pandemic. These challenges will linger for the foreseeable future and will have lasting impacts on operations and the provision of care. As a result, transactional opportunities have also shifted, and physician enterprises must be prepared to identify and evaluate new opportunities wherever they may occur. Our recent webinar with leaders from Providence St. Joseph Health, SullivanCotter, DMG Physician Organization, Veralon Partners and Golden State Dermatology explores the key challenges facing physician enterprises at this time and what healthcare providers and investors are looking for in transaction partners for today’s healthcare landscape. Click here to listen to the webinar recording and read on for key takeaways from the program.
- Independent physician interest in management service organization (MSO) models continues to increase. Historically, independent physician practices have been reluctant to shift certain business and office functions to an external management company. However, due to reimbursement and revenue constraints caused by COVID-19, the economies of scale and other cost savings associated with an MSO model may be more attractive to independent physician practices.
- Hospitals and health systems are reevaluating their employed physician practice structures. In particular, hospitals and health systems are reassessing their willingness to tolerate significant losses on their employed physician practices and evaluating whether changes in compensation models, compensation levels or the organizational structure of their employed physician networks can create a more sustainable setting. Some health systems are potentially pursuing the separation of employed physician practices from their hospitals and using MSOs to give physician practices more independence while simultaneously relieving the health system of the burden of a tremendous amount of subsidization of the economics of the practice.
- Although demand in telehealth has increased, these telehealth visits do not replace the lost patient volume due to the pandemic. Although telehealth has been somewhat of a silver lining during the pandemic, making patients comfortable enough to return to the office setting should be a top priority for physician practices. One way to achieve this is to leverage existing technologies while streamlining familiar protocols to ensure patients are not lingering in waiting rooms. Such protocols may include checking in with the front desk from the parking lot, self-check in and check out kiosks, requiring patients to enter medical history online prior to their visit, and having patients self-book appointments and follow-ups.
- The new COVID-19 paradigm will accelerate physician affiliations and acquisitions by large health systems and private equity funds. Previously existing headwinds (pressure on fee-for-service reimbursement, increasing operating expenses and capital expenditures for electronic medical records, and competition with private equity-backed healthcare providers, to name a few) paired with a sudden decline in revenue due to the pandemic has led to a buyer’s market. The power dynamic appears to have shifted and there is a tighter compensation range for physician practices, so physician enterprises may not be able to command the same purchase price that was available prior to the pandemic.
- Governance is critical in preserving physician ownership and buy-in post-transaction. A crucial challenge for acquiring entities is motivating their newly affiliated physicians to stay for the long haul. Therefore, physicians should carefully consider the culture of the affiliating entity and work with the entity to create a deliberate and intentional partnership with shared values. Physicians should also consider the size of the affiliating entity, as their ability to impact the organization’s culture will depend on the size of the organization. The physician enterprise should pay close attention to the onboarding process to ensure that it has some say in the strategic vision of the affiliating entity. Having the autonomy to assist in driving the organization’s mission is critical in building long-term cohesion between the parties.
- The pandemic will lead to an acceleration from fee-for-service to capitation payment models. Capitation models have been more profitable during the pandemic due to the reduced usage of healthcare services. Physician enterprises should explore diversifying their existing payor contracts by pursuing capitation models, which can also be a way to reduce risk and uncertainty in the post-COVID-19 era.
- Physician enterprises should evaluate their priorities before pursuing a transaction. Health system opportunities may afford greater security with respect to compensation post-acquisition, along with opportunities for quality or other production-based bonuses. However, this may come at the cost of a lower upfront purchase price for the practice itself, typically because a health system transaction will only purchase certain assets of the practice. Conversely, if the physician prefers an upfront liquidation event, a private equity transaction may be more desirable. Compensation post-acquisition may be reduced, but there may be ongoing opportunities through MSO participation leading to greater profitability and even subsequent liquidation events that can also provide physician sellers with a “second bite of the apple”.