Physician Practice Acquisitions

A Primer on Hospital & Private Equity Consolidation

For the better part of the last decade, physician practices have seen a wave of consolidation by hospitals and private equity with 2018 being no exception [1]. M&A activity in physician practices continues to grow and outpace other sectors as deals in the healthcare industry are coveted by investors for their strong growth, recession resistance, and superior historical returns. In fact, acquisitions by hospitals and private equity in provider services broke records last year according to Bain & Co’s 2019 global healthcare report.


This is not a new phenomenon as during the 1990s competition to consolidate physician practices reached a feverish pitch with the emergence of Health Maintenance Organizations (HMOs), and the resulting joint ventures formed to integrate and operate acquisitions while adhering to federal and state regulations [8]. It is widely regarded that these earlier attempts at consolidation ultimately failed; however, important lessons were learned by hospitals and private equity evident in how present-day physician practice transactions are structured [10] [26].


The healthcare industry has changed since the 90s as new regulatory frameworks and financial incentives now drive the consolidation we see from hospitals and private equity, which continue to pursue physician practice acquisitions, albeit taking distinctly different approaches and for uniquely specific objectives which this article will attempt to shed some light on in a three part series [21].


Part 1: Hospital Consolidation of Physician Practices


Hospitals are responsible for many of the physician practice buy-outs we see today. Some recent acquisitions include United Hospital District acquiring Smart Clinic in Minnesota, Morris Hospital’s acquisition of John Bolden MS & Raja Saleem MD in Illinois, and Jonestown Family Medicine being acquired by Premier Health in Ohio [18]. California has also been a hotbed of consolidation as the number of physicians in practices owned by hospitals has increased from 25% in 2010 to more than 40% in 2016 [24]. According to a study by Avalere Health and the Physician Advocacy Institute, hospital acquisition of physician practices in the U.S. toped 5,000 from 2015 to 2016 alone [22], with the total number of hospital owned physician practices increasing to 80,000 by 2018 [15].


Several factors are attributed to the most recent surge in physician practice acquisitions by hospitals. In 2009 healthcare costs consumed 17.3% of GDP or $2.5 trillion according to the Center for Medicare and Medicaid Services (CMS), and since then healthcare spending has increased to $3.5 trillion accounting for 17.9% of GDP. Knowing this trend is unsustainable, Government has made healthcare reform a top priority with the passage of the Affordable Care Act (ACA) in 2010. This has resulted in hospitals pursuing physician practice acquisitions to better coordinate patient care and to transition from a volume-based system to one that is focused on providing value while operating more efficiently to decrease expenses, improve outcomes, and increase patient satisfaction [25].


Other reasons besides alignment for the consolidation of physician practices include the strengthening of referral networks and the prospect of new patient streams to a hospital’s ancillary services. According to Richard Scheffler, professor at UC Berkley, hospitals can also benefit from higher reimbursements for performing the same outpatient clinical services as independent physician practices, which can help offset the cost of acquiring them [11]. With larger physician networks and access to specialist’s hospitals also gain negotiating leverage with insurers and can participate in alternative payment models, such as capitated and bundled payments, through vertical integration.


Christopher Majdi, Director of Valuation & FMV Services at Premier, Inc. (NASDAQ: PINC) explained that “developing scale and infrastructure to address value-based contracting and reimbursement restructuring” is one of the main motivators behind hospitals acquiring physician practices. He believes that alignment is necessary between these two groups to integrate a true quality-based system among healthcare delivery services. Also, integration can create economies of scale to help lower costs and create efficiencies.


While hospitals can profit from alignment with physician practices, some argue that physician practices also benefit from this relationship given the greater resources and income generating opportunities available to them [17]. In this digital age and need to access and share patient information, implementation of an Electronic Health Record (EHR) system is expensive and complex for a physician practice to undertake. By partnering with a hospital, physician practices gain access to robust EHR systems along with the possibility of increased revenues through gainsharing, bundled payments, service line co-management, and other financial arrangements.


As a cautionary note, while improved quality of care and lower costs are a strong argument in favor of physician/hospital integration, recent studies have pushed back on this idea raising legal concerns on the impact of highly consolidated markets [9]. Rice University’s Baker Institute for Public Policy revealed that the effect on care-quality from vertical alignment is almost non-existent when comparing performance measures across hospitals with loosely affiliated independent practices to those that have been integrated [16]. According to another study [13], between 2012 and 2015 Medicare costs on four specialty services actually increased by $3.1 billion due to the growing number of hospital employed physicians shifting office-based procedures to more costly hospital facilities [22].


Aside from cost of healthcare services increasing, insurance premiums have also been affected by the merging of physician practices with hospitals in states like California. From 2013 to 2016, ACA premiums in CA increased by 12% given the pervasiveness of vertical integration between these two groups [27]. Since most physician practice transactions are small and thus fly under the radar of the Federal Trade Commission, CA legislators are pursuing new rules (2016) that would require all mergers and acquisitions between hospitals and risk bearing organizations be approved in order to stem the trend of rising healthcare expenses.


The types of physician practices being acquired by hospitals are those that have “proven success in managing professional risk” according to Majdi. Hospitals are betting on the acquisition of physician practices like primary care to help maintain census as they hedge against the unknowns of population health management [12]. Unlike the 90s when primary care practices were being consolidated the trend today includes specialists that command higher fees for their services. Hospital-employed physicians in specialties like cardiovascular surgery and orthopedics can generate upwards of $3.3M a year from admissions, tests, treatments, prescriptions, and procedures resulting in a profitable return on investment from acquiring these practices [6].


Deal structures surrounding physician practice acquisitions by hospitals are complex and difficult to navigate. Careful considerations must be given to: (1) regulatory limitations; (2) practice valuation; (3) physician compensation; and (4) culture integration to insure a successful transaction. Chief among these are Stark Law and Anti-Kickback Statue which require a hospital apply a Fair Market Value (FMV) standard when valuing physician practices and establishing physician compensation [20]. Typical deals see hospitals acquire 100% of the physician practice assets and negotiate employment agreements to retain the physician(s) post transaction. Certain aspects may influence what a hospital might pay for a physician practice such as specialty, location of the practice, age of providers, and ancillary revenues, while accounts receivable are usually not included in the deal and thus bare no weight on value.


Historically there have been concerns with how hospitals structure physician compensation without the appearance of paying for future referrals that could run afoul of Stark Law and Anti-Kickback Statue [5]. This has become more of an issue as hospitals integrate physician practices in order to participate in outcome-based reimbursement programs; however, legislative changes to accommodate for this are being considered. For example, in 2018 CMS issued a request for information to determine how to loosen legal barriers that will help promote coordinated care arrangements between physicians and hospitals while allowing for innovative payment models [7].


More recent legislation could change the landscape of acquisitions by disincentivizing hospitals from acquiring physician practices. A new site-neutral payment rule was enacted by CMS reversing an exemption that allowed hospitals to receive higher Medicare payments for services provided in an off-campus hospital department [14]. The Hospital Outpatient Prospective Payment System (OPPS) now requires CMS to pay hospital owned practices a Physician Fee Schedule (PFS) that is equivalent to the rate for independent physician clinics. Hospitals are litigating this rule claiming that the higher reimbursement are justified as they require more resources to provide them, and if not reversed could force cutbacks to other services given the loss in revenues [23]. While the courts are still to decide on the fate of OPPS, its implementation in the short run may slow down the rate of physician practice acquisitions by hospitals.


A recent survey of hospital CEOs revealed insights into their appetite for continued acquisitions of physician practices [2]. Down from 25.8% in 2018 to 12.5% in 2019, hospital executives are starting to see mergers and acquisitions as less of a focus in terms of their growth strategy, with more integration work required to achieve the efficiencies and cost savings of past deals. However, experts still believe that continued alignment between hospitals and physician practices will be necessary to extract the full benefits of value-based medicine, and while we may see a softening of activity in the short-run data on the longer-term outlook of healthcare M&A remains strong for years to come [3].




[1] Bannow, T. (2018, December 18). Dealmaking stayed hot in 2018, with a focus on physician practices. Retrieved May 20, 2019, from https://www.modernhealthcare.com/article/20181226/NEWS/181219908/dealmaking-stayed-hot-in-2018-with-a-focus-on-physician-practices


[2] Bannow, T. (2019, February 21). CEO Power Panel: M&A no longer health systems’ top growth strategy. Retrieved May 20, 2019, from https://www.modernhealthcare.com/article/20190223/NEWS/190229970/ceo-power-panel-m-a-no-longer-health-systems-top-growth-strategy


[3] Bees, J. (2019, May 2). Is Healthcare’s M&A Trend Softening? Retrieved May 20, 2019, from https://www.healthleadersmedia.com/strategy/healthcares-ma-trend-softening


[4] California Legislative Information. (2016, April 16). Retrieved May 20, 2019, from https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201520160SB932


[5] Chatfield, P., & T. (2014, March 25). The lurking risks of hospital-employed physicians: Stark, Anti-Kickback and False Claims Act compliance. Retrieved from https://www.healthcarefinancenews.com/blog/lurking-risks-hospital-employed-physicians-stark-anti-kickback-and-false-claims-act-compliance


[6] Commins, J. (2019, February 19). Docs Generate an Average $2.4M a Year per Hospital. Retrieved May 20, 2019, from https://www.healthleadersmedia.com/welcome-ad?toURL=/finance/docs-generate-average-24m-year-hospital


[7] Dickson, V. (2018, June 20). CMS seeks information to reduce Stark law burden. Retrieved May 20, 2019, from https://www.modernhealthcare.com/article/20180620/NEWS/180629992/cms-seeks-information-to-reduce-stark-law-burden


[8] Gottleib, S., & Pilch, P. (2014, September 12). The urge to merge in health care: This time, will it be different? Retrieved May 20, 2019, from http://www.aei.org/publication/the-urge-to-merge-in-health-care-this-time-will-it-be-different/


[9] Hancock, J. (2017, September 6). Study: Hospitals on doctor-buying spree and raises legal questions. Retrieved May 20, 2019, from https://www.healthcarefinancenews.com/news/study-hospitals-doctor-buying-spree-and-raises-legal-questions


[10] Hospitals Acquiring Physician Practices: 4 Key Lessons From the ’90s. Hospitals looking for ways to secure market share are increasingly finding the answer in acquiring physician practices in their communities or employing physicians. While this business practices failed miserably for most hospitals in the 1990s, hospitals acquiring practices today are taking lessons. (2010, July 15). Retrieved May 20, 2019, from https://www.beckershospitalreview.com/hospital-physician-relationships/hospitals-acquiring-physician-practices-4-key-lessons-from-the-90s.html


[11] Kacik, A. (2018, September 04). Health systems driving prices higher with physician group purchases. Retrieved May 20, 2019, from https://www.modernhealthcare.com/article/20180904/NEWS/180909986/health-systems-driving-prices-higher-with-physician-group-purchases


[12] Kutscher, B. (2008, November 21). Making physicians pay off. Retrieved May 20, 2019, from https://www.modernhealthcare.com/article/20140222/MAGAZINE/302229986/making-physicians-pay-off


[13] LaPointe, J. (2017, November 22). Medicare Spends $3.1B More on Hospital-Employed Physicians. Retrieved May 20, 2019, from https://revcycleintelligence.com/news/medicare-spends-3.1b-more-on-hospital-employed-physicians


[14] LaPointe, J. (2018, November 02). Site-Neutral Payments for Hospital Clinic Visits Starting in 2019. Retrieved May 20, 2019, from https://revcycleintelligence.com/news/site-neutral-payments-for-hospital-clinic-visits-starting-in-2019


[15] LaPointe, J. (2019, February 21). Hospital Acquisitions of Physician Practices Rose 128% Since 2012. Retrieved May 20, 2019, from https://revcycleintelligence.com/news/hospital-acquisitions-of-physician-practices-rose-128-since-2012


[16] LaPointe, J. (2019, February 14). Vertical Integration in Healthcare Doesn’t Boost Care Quality. Retrieved May 20, 2019, from https://revcycleintelligence.com/news/vertical-integration-in-healthcare-doesnt-boost-care-quality


[17] Miller, J. (2018, September). The Way Forward? Southern California Physician, 27-31.


[18] Moriarty, A. (2018, July 30). Why Are Hospitals Buying Physician Groups? Retrieved May 20, 2019, from https://blog.definitivehc.com/why-are-hospitals-buying-physician-groups


[19] National Health Expenditure Accounts Data. (2018, December 11). Retrieved from https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nationalhealthaccountshistorical.html


[20] Physician practice valuations: 14 things for health system leaders to know. Hospitals and health systems nationwide embarked on a significant buying spree of physician practices over the last few years. (2017, September 18). Retrieved May 20, 2019, from https://www.beckershospitalreview.com/hospital-transactions-and-valuation/physician-practice-valuations-14-things-for-health-system-leaders-to-know.html


[21] Pope, C. (2014, August 1). How the Affordable Care Act Fuels Health Care Market Consolidation. Retrieved from https://www.heritage.org/health-care-reform/report/how-the-affordable-care-act-fuels-health-care-market-consolidation


[22] Rosenberg, J. (2018, March 1). Hospital Acquisition of Independent Physician Practices Continues to Increase. Retrieved May 20, 2019, from https://www.ajmc.com/focus-of-the-week/hospital-acquisition-of-independent-physician-practices-continues-to-increase


[23] Sanborn, B. (2019, January 24). 38 hospitals sue HHS over site-neutral payment rule. Retrieved May 20, 2019, from https://www.healthcarefinancenews.com/news/38-hospitals-sue-hhs-over-site-neutral-payment-rule


[24] Scheffler, R. M., Arnold, D. R., & Whaley, C. M. (2018). Consolidation Trends In California’s Health Care System: Impacts On ACA Premiums And Outpatient Visit Prices. Health Affairs,37(9), 1409-1416. doi:10.1377/hlthaff.2018.0472


[25] Singer, L. (2018). Considering the ACA’s Impact on Hospital and Physician Consolidation. The Journal of Law, Medicine, and Ethics,46(4), 913-917. doi:https://doi.org/10.1177/1073110518821989


[26] Sokol, J. (2018, April 17). Riding the PPM Wave of the 90s: Learning from the Crash to Prepare for the Future. Retrieved May 20, 2019, from https://www.healthlifesciencesnews.com/2018/04/riding-ppm-wave-90s-learning-crash-prepare-future/


[27] Terhune, C. (2018, September 07). As California Hospitals Sweep Up Physician Practices, Patients See Higher Bills. Retrieved May 20, 2019, from https://californiahealthline.org/news/as-california-hospitals-sweep-up-physician-practices-patients-see-higher-bills/


By David Lopez

With contributions from Katie Allen and Ana Ward