Researchers: Medical Groups Face Opportunities, Risks, in Working with Private Equity Firms

Could the short-term investment return demands of private equity investors cause problems for the leaders of medical groups? Three healthcare policy researchers examine some of the issues in a Perspective op-ed in The New England Journal of Medicine.

The article, “Private Equity and Physician Medical Practices—Navigating a Changing Ecosystem,” was written by Jane M. Zhu, M.D., of the Division of General Internal Medicine, Oregon Health and Science University (Portland, Oregon), and Daniel Polsky, Ph.D., of the Department of Health Policy and Management at the Johns Hopkins Bloomberg School of Public Health, the Johns Hopkins Carey Business School, and the Hopkins Business of Health Initiative, Johns Hopkins University (Baltimore, Md.).

“The ecosystem of physician-owned medical practices has been similarly inundated with larger forces that are driving health care toward consolidation, corporatization, and administrative management,” the authors wrote. “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.”

The authors note that “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.”

In that context, they write, “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.”

The researchers see both the pluses and minuses of private equity funding of medical practices. On the plus side, they write, “Greater standardization, monitoring, and enforcement of safeguards might help constrain nefarious practices that could unduly influence clinical care. All states, for instance, 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.”

On the other hand, private-equity acquisitions of physician practices have been “largely exempt” from Federal Trade Commission review, “intended to prevent mergers and acquisitions that reduce competition and lead to higher prices or lower-quality services.” They assert that “[P]hysicians 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.”