A Look Beyond The Headlines: Private Equity Firms Target Primary Care

A Look Beyond The Headlines: Private Equity Firms Target Primary Care
Shot of two businesswomen having a discussion on the office balcony

Reporter Nona Tepper and Finance Reporter Tara Bannow discuss mergers and acquisitions among primary-care practices, and why private equity firms are investing.

A Look Beyond The Headlines: Private Equity Firms Target Primary Care

A Look Beyond The Headlines: Private Equity Firms Target Primary Care

Nona Tepper: Let me welcome you to the Beyond the Byline section of Modern Healthcare’s website. Here’s Nona Tepper, an insurance writer. I’m speaking with Tara Bannow, a Finance reporter, today about investors’ interest in physician practices. It is a pleasure to have you here, Tara.

During this year, you’ve been covering some big deals, Tara. The one that caught our attention was Keno Health’s acquisition of University Health Care for $600 million. As you have reported in recent months, some of these types of deals are suggestive of where the industry is headed, with changes in ownership of physician groups. How have some of your recent stories turned out?

Tara Bannow: Definitely. The area is teeming with activity. A Medical Association survey asks a lot of questions about practice ownership as part of their biennial survey. As mentioned in May, most physicians last year worked outside of independently owned medical practices for the first time. Doctors in physician-owned practices decreased from 60% to 49% from 2012. So it’s unclear how many physicians work for UnitedHealth Group’s Optum. The other category only accounts for 2%, which seems insufficient. The AMA survey only surveyed 3,500 docs. The sample size is relatively small. Avalere Health released a much bigger survey last month that covers hundreds of thousands of doctors. Interesting results, since around 70% of doctors are working for hospitals or corporations instead of the AMA. 

This report didn’t mention how many, or if they were physician-owned practices, of the remaining 30%. In contrast, AMA’s 49% of employees work for physician-owned firms. There are some contradictory reports there. Yet, Avalere found that the outbreak of the pandemic accelerated the trend toward physicians joining hospitals and private equity firms such as Optum. Between 2019 and 2019, private equity and health insurers hired 31% more doctors, which is now 20% of doctors. Health insurers and private equity firms employ 20% of the workforce. Healthcare still makes up 49% of all jobs according to Avalere, but it grew by 5% during the study period. Thus, it is growing more slowly than PE companies and health insurers.

Nona Tepper: What an intriguing trend! I’m fascinated by that. Do you think hospitals are acquiring physicians at a slower rate than PE and SIG? Simply because PE and health insurers have more room to grow, and hospitals are fully staffed.

Tara Bannow: That may be the case. They’ve got a lot of money from private equity, insurers, they’ve got a lot of money. That’s right. You write about the wealth of UnitedHealth Group. However, there are a lot of health systems that are hit and miss with their doctors. Sutter Health is losing quite a bit of money, for example. Health systems and hospitals are not all super profitable at the moment unless you’re crucial.

Nona Tepper: I got it. I appreciate your explanation. The fact that primary care has historically not had a high-margin business leaves me scratching my head. Why are investors picking up on these practices suddenly?

Tara Bannow: Your point is valid. Regarding PE specifically, most private equity firms tend to buy providers that offer expensive procedures, with bonus points if they are uninsured. Consider matters such as dermatology, you’re in for skin cancer screening, but how about a little botox? Let’s say you want cataract surgery, or you’d like LASIK afterward? Private equity is increasingly attracted by primary care, which is still a large market, but it can be exploited as well.

There is simply a spike in membership of Medicare Advantage due to an aging population. Medicare Advantage plans are available to 42% of beneficiaries, compared to 17% in 2000. Since you cover health insurance, health insurers and especially those startups offering Medicare Advantage services are very interested in this.

Profitability is the only reason for that. You make money by managing someone’s health care. In primary care, as it relates to other areas, private equity realizes that it can use the same roll-up strategy as it does elsewhere. You buy the clinics, start a chain, standardize the branding, logo, and chairs, and once you’ve gained efficiency, you cut expenses as you can negotiate a higher rate with the insurer. I believe the more people you’re covering, especially through Medicare Advantage, the more risk you’re taking and the bigger the potential profit you’ll see.

Nona Tepper:    

You are correct. It’s no secret that insurers are picking up these small primary care practices to lower costs and provide better care for their senior members with Medicare Advantage plans. I guess my question is, why would physicians want to be owned by private equity firms? Wouldn’t being independent be just more fun?

Tara Bannow: I mean, it would make sense, but running a practice is a lot of work. Billing, finance, privacy, insurance, all have more legal regulations than they did decades ago. You have the administrative work to deal with, credentialing, and prior authorizations with insurance, of course. Consequently, a lot of that falls to the doctors in small practices.

In general, employers such as private equity companies, health systems, and even Optum, have electronic health record platforms. Insurance, prior authorization, and the legal team will all be there. Nurses and support staff, perhaps even scribes, will be on hand. That’s right. A smaller practice doing this on its own is probably responsible for far more than just caring for patients.

Work-life balance is less likely to occur. Therefore, I fully understand why physicians might want to work. However, doctors are specific types of people, they prefer autonomy. Hospital employment might not always offer that; instead, there might be more control over how you provide care. There are some aspects of private equity that sound like they are a bit more hands-off.

Some companies, however, do pressure doctors to perform more procedures, according to sources. As a result, the volume of patients is higher. A lot of younger doctors tend to work for corporations or hospitals. Student debt might top $300,000 for them. It’s not a good idea to open your practice without any money.

There seems to be a growing attraction to large employers that offer all these resources and stability. A lot of my sources have told me that the reason behind this trend is the high student debt burden. Certainly, there are several contributing factors, but it’s not their fault. Several of these startups have been written about by you and us all. Companies are trying to change the model by giving docs more options. By empowering them with some autonomy, they can be more in control.

Nona Tepper: Most doctors now work for larger corporations instead of going independent. How do I interpret this? Would you say this is good? Is this a bad thing? Is there an impact on the healthcare system?

Tara Bannow: Certainly, healthcare costs will have the most impact. During PE acquisitions or hospital acquisitions, there is a tendency for docs to order more. In May, two studies on health affairs were released. Upon being acquired by hospitals, doctors began ordering more diagnostic tests and lab tests. Hospital-employed physicians also ordered more inappropriate MRI tests. That wasn’t a small change either.

After an independent primary care group began working in a hospital, the odds of getting an inappropriate MRI jumped by 20%. This health affairs study covered 30 million imaging tests and 340 million laboratory tests as well. This is a lot of tests, so it’s difficult to dispute. Furthermore, hospitals added facility fees to the individual tests, which you would not find in a primary care practice.

Hence, the increased spending adds up. People will have to pay more for health insurance, our employers will have to pay more to cover us, and what states will have to pay, etc. It’s a concerning shift. The most troubling thing is how little we know about what happens when private equity firms buy practices. As a result of the pandemic, Congress is more interested in regulating PE in health care.

It now seems to be gaining momentum to have the IRS receive financial data, for instance. The size of transactions is not reported, nor is the payment information reported. A black hole is all it is. My experience reporting on private equity has been that they don’t do interviews and don’t reveal any information. It can be frustrating if you work in a field where you disseminate information.

Nona Tepper: I completely understand your situation. Private equity investors have not been on my radar lately. There was however one news item in that realm that caught my attention. The workers of One Medical seem to be organizing a union. Could you tell us a bit more about their grievances? What kind of union is it? Is that right? What is it?

Tara Bannow: I found it interesting. It is estimated that up to 500 employees may be eligible for this union. Many pharmacists, in my opinion. Some workers were just assuming too much responsibility. Compared to their descriptions of their jobs, their new jobs did not match up and they felt overburdened. The grievances were quite broad in scope. According to One Medical, these folks never brought up any of their grievances before putting them in the media. I found this quite interesting.

Nona Tepper: You should cover that area, and I’m looking forward to hearing about it. I always ask that question of private equity firms. Is working there actually enjoyable? It is so hard to find workers who will speak with me. Anyways, I am wondering, what are the prospects for independent physicians who intend to remain independent? Who isn’t owned by corporations?

Tara Bannow: To me, it seems that the obstacles to becoming an independent physician practice are just getting bigger, they’re getting more difficult to overcome. Some of these companies are getting bigger, more profitable, such as Optum health systems. It would seem that selling your practice to them is getting more and more attractive as reimbursements become more and more uncertain. But with that said, you could always stay independent.

But as I stated earlier, there are some startups exploring ways to team up with doctors or hire them. Physician enablement is a strategy where they may not necessarily buy the practice and hire the doctors. However, they often form affiliations and take on some of the burdens in exchange for a share of the profits.

This whole pitch is about making doctors’ lives better, and it often involves a lot of data and technology utilization. With all the stuff we offer from our EHR platform, you’re probably going to have a better quality of life and maybe you can go on vacations too. The company that you wrote about, Privia Health, seems somewhat payer-neutral. It’s trying to transition practices to value-based care, relying on apps and technology.


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