By Jane M. Zhu, M.D., M.P.P., M.S.H.P., and Daniel Polsky, Ph.D., M.P.P.
The New England Journal of Medicine, March 18, 2021
The ecosystem of physician-owned medical practices has been inundated with larger forces that are driving health care toward consolidation, corporatization, and administrative management. Between July 2016 and January 2018, hospitals and health systems acquired more than 8000 practices, a process that was shepherded by regulatory shifts, changes in payment and delivery models, and uncertainty in the health care market. Roughly 14,000 physicians left private practice to become hospital-affiliated employees. These structural changes have shifted competitive dynamics for medical practices in two principal ways. First, remaining independent practices must now compete against much larger entities, which benefit from economies of scale. Second, to remain competitive, independent practices increasingly require new sources of capital. During the Covid-19 pandemic, revenue losses for many smaller practices have magnified financial pressures. Amid these changes, private-equity firms have emerged as influential players, offering a lifeline to smaller groups needing a competitive edge in a consolidating market. The rapid growth of private-equity investment throughout medical specialties has generated intense interest in potential adverse effects on physicians and patients.
Private-equity firms offer practices an alternative source of investment capital outside public ownership and distinct from hospitals and health systems, principally by allowing physicians to continue to hold equity and benefit financially from future transactions. To yield annual returns exceeding 20% on a typical investment horizon of 3 to 7 years, private-equity firms generally use a combination of expansion, establishment of new lines of business, and restructuring. For investments in physician practices, one core strategy involves acquiring and scaling up “platform” practices — usually established, brand-name companies with market reach and a good clinical reputation — before selling the practice to a larger investor.
Some of the value created by private-equity firms may be viewed in the context of a zero-sum game — one that results in winners and losers in an ecosystem serving a finite number of patients. A platform practice may roll up an entire portfolio of small practices, including regional competitors and practices in its referral networks, to be able to redirect more referrals to internal clinicians and increase its market share. Although this approach creates value for the growing practice, it may reduce competition and result in loss of patients and revenue for other practices. Acquired practices may also leverage market power in negotiations with insurers, which can lead to higher margins for the practice and potentially higher costs for patients and payers.
As in any ecosystem, however, the introduction of new forces can have unintended and undesirable consequences. An important concern is that private-equity firms’ goal of maximizing short- to medium-term profits may place undue pressure on physicians. Although a sale to a private-equity firm may yield an up-front lump sum for practice partners, changes in physician-compensation structures and professional autonomy may substantially alter performance incentives, practice conditions, career prospects, and job satisfaction, particularly for younger physicians. Each subsequent sale — to other private-equity firms, health services groups such as Optum, or large health systems — may further chip away at clinical autonomy and introduce new management influences.
From a societal standpoint, the net effect of private-equity investments in physician practices on downstream costs, value, and quality of care is unclear. The experiences of some private-equity–backed clinics suggest that there is pressure to expand certain revenue streams by conducting more elective procedures and providing more ancillary services, and to engage in “upcharging.” Practices acquired by private-equity firms may also be given incentives to prioritize care for commercially insured patients to maximize reimbursement; to deliver more streamlined, low-complexity care (e.g., perform more skin biopsies or screening colonoscopies) rather than meeting complex care needs; or to situate new offices in higher-income communities instead of in socioeconomically disadvantaged ones. These possibilities raise important questions about the implications of such investments for health equity and larger health system goals.
All states should have a comprehensive corporate practice of medicine doctrine, which prohibits medical management companies from exerting control over clinical judgment and practice. Nearly 20 states don’t have such a rule, and those that do vary substantially in the types of financial and contractual arrangements that they permit. As a result, private-equity firms frequently exploit loopholes, such as by structuring a parent company to have financial control of a practice while naming the physicians as owners.
Physicians should be aware that private equity’s growth is emblematic of broader disruptions in the physician-practice ecosystem and is a symptom of medicine’s transformation into a corporate enterprise. For some practices, outside investment may help facilitate growth and extend a lifeline that allows them to compete with larger players in an increasingly consolidated market. But this trend may also contribute to practices getting squeezed. As more investors enter health care and drive value creation, it’s worth considering for whom value is being created. How physicians respond — and the extent to which they retain core values in the service of patients — will ultimately determine the ecosystem’s resilience in the face of stressors.
By Don McCanne, M.D.
Private equity takeover of medical practices is here, and the momentum may change medicine forever. The business community may think that the changes taking place are beneficial, but traditional professional values are being buried under private equity’s steam roller.
Private capital is certainly playing a major role here. Stepping back and looking at what is happening can’t help but make you wonder if maybe public capital should be taking over that role. Maybe instead of looking up north to Canada, we should be looking across the sea to the United Kingdom. Rereading this article while substituting the term “National Health Service” for “private equity” would require substitution of the more nefarious consequences that are distributed throughout this article. We are now decades into the unsuccessful quest for a single payer version of an improved Medicare for All, and private capital seems to be making that goal more elusive.
If nothing else, perhaps discussion of a National Health Service might scare the opponents into considering a single payer system. But then it might be too late. The disruption required could be an almost insurmountable hurdle to overcome. Better take a closer look at H.R.1976 – “To establish an improved Medicare for All national health insurance program.” Its passage could not be more urgent.
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