FINANCE

TIMA MIROSHNICHENKO

The Independent Physician

Practices need to grow and evolve

The industry trend for independent physicians over the last decade has been clear: More are selling or merging to become part of a larger organization. The reasons are obvious. Economic pressures, most notably costs and reimbursements, have made the power in numbers more attractive. Among those physicians still in private practice, we get some consistent questions.

1. How do we remain independent?

Retaining autonomy is the number one objective group leaders have ahead of every competing priority. The worry over losing independence is valid across all specialties in every region of the United States. Yet the harsh reality is that practice independence is threatened now more than ever. Health systems, publicly traded corporations and private equity funds are employing billions of dollars to consolidate independent practices. Nearly every independent physician practice in the U.S. is on an acquisition target list today. By our count, there are more than 200 private equity-backed physician platforms seeking acquisitions (and this excludes a few specialties). The chart on page 71 tells the story. There are just over one million physicians professionally active in the

By Oppenheimer

The only viable plan for independence is a strategy focused on growth.

Private-Equity Backed Physician Platforms (as of April 2022)

SOURCE: PHYSICIAN GROWTH PARTNERS

U.S. According to the AMA’s Physician Benchmark Survey. 2020 was the first year less than 50% of patient-facing physicians worked in private practice. The decline is dramatic compared to 54% of physicians who worked in physicianowned practices just two years ago. At this pace, independent practice ownership would effectively disappear in the next two decades, and the speed of consolidation is increasing. In 2020, 40% of physicians worked in a group with partial or complete ownership by a hospital or health system. Perhaps most striking about the AMA survey is that 2020 was the first year private equity registered as material ownership with a 4.4% share. Optum, the national provider group wholly owned by UnitedHealth (the nation’s largest health plan), has more than 53,000 physicians in its network—that’s about 5% of the nation’s physician workforce. In 2021, 407 physician groups announced a deal with a private equity or corporate investor, a 119% increase over the previous comparable period. These deals were valued at approximately $5.5 billion. The only viable plan for independence is a strategy focused on growth. If your group doesn’t have a growth plan, you’re already part of someone else’s. The plan should focus on both organic and inorganic growth, making investments in capabilities for value-based care programs, and proactively exploring your strategic alternatives.

2. How do we manage physician burnout?

Burnout is characterized by emotional exhaustion, depersonalization and a sense of reduced accomplishment in day-to-day work. According to a recent study, more than 50% of physicians reported suffering from at least one burnout symptom. Significant stressors include excessive workloads, significant administrative burdens, the use of electronic medical records (EMR), inefficient work processes as well as organizational factors causing physicians to feel that leadership operates with misaligned values. COVID-19 only exacerbated the existing burnout challenges faced by independent physician groups. This is a serious issue at every professional level throughout the healthcare system. One of the strategies addressing physician burnout has been to embrace organizational changes that focus on improving the work environment. Physician groups that pursued structural alternatives such as forming a Management Services Organization (MSO) and re-allocating administrative duties to the MSO have often seen a renewed sense of energy among the practice partners. By exploring an MSO structure and growth strategy using external capital, independent practice partners are often surprised by the magnitude of the value creation opportunity. And the resulting uplift in energy and focus has a positive impact on the practice partners and often throughout the organization.

3. How do we migrate to value-based care?

If the number one concern for group practices is remaining independent, the number one answer to that question is transition to value-based care. The payment side of the $4 Trillion+ U.S. healthcare economy—health plans, CMS, state Medicaid programs—is demanding it. In 2019—before the pandemic— 91% of the 62 health plans and seven fee-for-service (FFS) state Medicaid programs surveyed about alternative payment models (APM) expected APM activity to increase (according to Health Care Payment Learning Action Network). CMS expects that by 2025, 100% of Medicare providers will be in a two-sided risk arrangement, and half of Medicaid contracts in some form of VBC program. Humana, the second-largest Medicare insurer in the U.S., publishes an annual VBC report detailing progress in migrating members and providers to VBC arrangements; they spotlight better outcomes. The pandemic seems to have only accelerated APM activity. We can analyze micro-regions in the U.S. where mature provider groups operate only under VBC arrangements such as percentage of premium capitation. These groups receive (as an example) 85% of the Medicare Advantage premium that the contracted health plan receives but are responsible for 100% of the member’s medical costs. Because of the transparent value proposition, these groups have made extensive investments in their practices and boast better member outcomes and above-average operating margins. Yet the vast majority of physician groups remain beholden to FFS models. A 2019 survey by Xtelligent Healthcare Media’s Insights indicated that 70% of physician practices still earn 75% or more of their revenue from FFS. If your practice hasn’t developed a plan and allocated investment dollars

to position it to transition to VBC arrangements, eventually it will go by the wayside. Making investments in VBC—information systems, clinical workflows, C-suite talent—is critical today to position your practice to thrive. It’s also key to remaining independent. Maintaining your status as an independent physician has never been more complicated. But with a changing ecosystem and shifting pay landscape it is possible that by maintaining independence these private operators may turn their size into an advantage. Staying nimble in a chaotic environment is an important element of success and niche players often excel in markets overlooked by larger operators. But it takes an expertise in finance and business that is sometimes lacking in the skillset of a small practice. Educating yourself is the best first step. n

Oppenheimer Helps Independent Physician Groups Chart Their Futures

Oppenheimer’s Healthcare Investment Banking Group is one of the nation’s leading advisors to primary care, multi-specialty and single specialty physician practices. We have closed more than 40 transactions involving physician groups, including minority investments, private equity recapitalizations and strategic sales. We can add tremendous value by sharing: • Advice on strategic alternatives • Perspectives on valuation • Perspectives on value-based care (VBC) • Ideas on capital structure and financing • Introductions to prospective partners and C-level talent

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