Ask a newly minted primary care physician which career path they would choose:

  • Option A is in a practice affiliated with a health system. The health system has just been dipping its toes into value-based payment, so most patient care is paid for on a fee-for-service basis. The health system closely tracks productivity, and patient visits are scheduled to last no more than 20 minutes. The health system provides monthly reports to its physicians quantifying the “subsidy” the system pays per physician.
  • Option B is in the local office of a national primary care practice that just received a private equity investment (or successfully completed a public offering) and is seeking growth in new markets. The practice contracts directly with employers, who pay an annual membership fee for their employees, and is aligned with several Medicare Advantage plans, so almost all patient care is paid for under a capitated payment model. Physicians working for the practice have smaller patient panels than physicians in traditional practices, allowing more time per patient visit, and the emphasis is on keeping patients healthy and out of the hospital. A robust technology platform provides 24/7 patient access to telehealth support and gives physicians easy access to up-to-date digital health records. Physicians are incentivized to keep their patient panels healthy and have an option to earn equity over time in addition to salary and bonus.

For most physicians, Option B would be an easy choice. And that option is becoming available—in several different flavors—in more and more markets around the country.

Physician practice disruptors move forward

While the COVID-19 pandemic’s disruption of healthcare services was exposing the weakness of fee-for-service payment models, with 97% of physicians reporting a negative financial impact associated with the pandemic, physician practice disruptors moved forward. The past year saw a significant uptick in the emergence of “healthcare unicorns” (startup companies with a valuation of more than $1 billion); 11 of the 71 companies that had reached the $1 billion valuation as of early November 2020 were in healthcare. Healthcare unicorn exit activity—through acquisition or an IPO—also hit record levels in 2020, including primary care startup One Medical’s IPO early in the year. Other companies with a more established presence saw themselves in a position to accelerate growth and visibility.

These physician practice disruptors are defined by several characteristics: they emphasize technology, embrace risk, have access to private equity or capital market funds, and are not tied to an acute care system (and are therefore free to pursue aggressive management of inpatient costs). For example, One Medical, which has its own proprietary technology ecosystem, followed its successful 2020 IPO with an announcement of plans to acquire Iora Health, a primary care practice focused on patients enrolled in Medicare Advantage and other risk-based payment models, in 2021. With the acquisition, it will join other super-regional and national physician practices focused on risk-based Medicare Advantage contracts (including Oak Street Health, which also went public in 2020; VillageMD, which is backed by Walgreens and a number of other seasoned healthcare investors and is reportedly considering an IPO in 2021; and privately-held ChenMed).

Health insurance companies offer physician practices another option, but with similar emphases on patient (and provider) friendly care delivery models, digital health support, and risk-based payment structures. Perhaps the best-known example is UnitedHealth Group’s OptumCare division, which now has approximately 1,600 clinics serving 20 million patients, 2 million of which are in capitated payment arrangements (up 17% from the second quarter of 2020, according to its 2021 Q2 earnings call); it plans to continue rapid growth in 2021, including potential additions of physician groups in target areas nationally.. Other examples include:

  • Humana’s CenterWell subsidiary, which recently expanded into the Atlanta market with six new senior-focused primary care centers.
  • Minneapolis-based Bright Health Group, which combines both care delivery and health plan arms and had an IPO earlier this year.
  • Altais, formed by its investor Blue Shield of California to provide flexible partnership and ownership options to independent physicians and physician practices, supported by its eNable™ integrated technology platform. Altais affiliated with Brown & Toland Physicians, an independent network of more than 2,700 physicians, in 2020.
  • Blue Cross and Blue Shield of North Carolina, which recently announced a joint venture with Deerfield Management Company, to strengthen independent physician practices and help them pursue growth under value-based care models.

Another common feature of these new physician practice models is that they are focused on achieving regional or national scale. If you have not seen them in your market yet, expect to do so soon. The aggressive growth plans of these disruptive innovators mean that the competitive dynamics might change—and change quickly—in many local markets.

How physician groups and health systems can respond

The basic formula for physician practice disruptors is clear: build a provider-focused culture, embrace risk, and provide more time and resources for patients to reduce the need for higher-acuity services. For primary care physicians aligned with these disruptors, these changes mean more time spent with patients and strong support from both care teams and digital tools that improve care coordination, alleviate administrative burdens, and reward performance based on patient outcomes.

Independent physician groups that remain tied to a fee-for-service model risk finding themselves commoditized or marginalized, limiting their attractiveness to potential sponsors or partners if local market conditions shift. These groups should consider opportunities for enhancing their risk-based capabilities, including through alignment with existing or emerging risk-focused innovators.

The challenge for hospital-based health systems is even greater, as these disruptive innovators pose a fundamental challenge to the existing business model of health systems that remain largely dependent on fee-for-service payments. While they are not competing against health systems for inpatient business, disruptive innovators are competing for provider and patient relationships.

Like independent physician groups, health systems too should be considering opportunities to enhance their risk-based capabilities, while modeling and planning for the impacts that a significant shift toward risk-based models would have in their market. The biggest impact may be a shift toward narrow networks by at-risk primary care providers. Although primary care providers under at-risk models are incentivized to keep patients out of emergency departments and hospitals, emergency and acute care cases still occur. Primary care providers will be looking for hospitals and health systems that are responsive to their needs and have a proven ability to manage the cost of these cases, and they will direct patient volumes accordingly.

Now is the time for hospitals and health systems to develop strategic partnerships with independent physician groups and build a track record of demonstrated support through improved digital systems, better support to alleviate administrative burdens on physicians, and a reconsidered balance between productivity and time spent with patients. Health systems with employed medical groups should also be identifying gaps in their current physician culture and where they might be vulnerable to losing physicians to a competitor that has, or is perceived to have, a more provider-focused culture.

The hard costs of these investments must be considered against the potential “soft” returns: happier patients, an enhanced reputation for the health system, and a stronger bond with physicians, who will be considering new options when a disruptive innovator comes to call.

Meet the Authors
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Matthew Bates Headshot

Matthew Bates

Managing Director and Physician Enterprise Service Line Lead
Matthew leads Kaufman Hall’s Physician Enterprise Service practice. He works with physician and administrative leaders to create financially sustainable great places for physicians to practice and patients to receive care.
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Kristofer-Blohm

Kristofer Blohm

Managing Director
Kris Blohm counsels executives and boards nationwide on a broad range of transactions, including mergers, acquisitions, divestitures, joint ventures, strategic investments, as well as other partnership and affiliation structures.
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Nora-Kelly

Nora Kelly

Managing Director
Nora Kelly advises healthcare leaders nationwide on strategic financial planning, capital allocation, debt-related financial management, and mergers and acquisitions.
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