Mergers, acquisitions, and partnerships with physician groups accelerated in 2018, topping the already-historically-high transaction numbers of 2017.1

Kaufman Hall expects physician groups to remain an active healthcare services sector in 2019 and beyond, with some important changes occurring to market dynamics as the healthcare industry evolves.

High-performing, organized primary care and multispecialty practices remain attractive platforms for value-based care strategies. Certain specialties are in high demand for both strategic and financial buyers, but the market has become more educated and the universe of potential partners and partnership structures has evolved. Details on players and arrangements follow.

Strong interest in partnering with physician groups continues.

The field of potential partners includes for-profit physician platforms, health plans, private equity firms, hospitals and health systems, and other large medical groups.

Active national “consolidators” have made a number of moves in the last two years. For example, Optum is acquiring DaVita Medical Group, thereby making the Optum unit of for-profit UnitedHealth Group one of the largest employers of physicians in the U.S.2 This health plan-provider acquisition, which is expected to close in the first half of 2019, effectively removes from the field one of the two national players that nearly all large physician groups considered for a strategic partnership regardless of location. We will be closely watching the effect of this acquisition on the valuation of physician groups.

Strategic players continue to seek primary care and multispecialty practices to build out a strong base of physicians and platforms for value-based care. Organizations with a national reach are able to execute partnerships with medical groups in both existing and new markets. Optum continues to lead the way and was very active in 2018, having closed transactions across coasts with Massachusetts-based Reliant Medical Group and Seattle-based Polyclinic.3

In some markets, health plans have been showing increased interest in partnering with physicians. Objectives vary depending on local market dynamics as well as a plan’s own strategic goals and appetite for capital and operating investment in provider networks.

Private equity interest in physician practices also remains strong, with high-growth, high-margin specialties firmly on the investment radar screen. Certain specialty practices that are scalable, for example, dermatology, ophthalmology, and radiology, among others, or that present other compelling growth opportunities as care shifts away from the inpatient setting, for example, outpatient surgical and proceduralist practices, continue to attract significant PE interest. PE comfort is growing with primary care practices as a platform for value-based care models, but caution prevails. The Ares Management investment in the multispecialty DuPage Medical Group remains exceptional, rather than common.

Health system acquisitions of, and partnerships with, physician groups continue as well, but deal structures are evolving as systems look to curb losses in their employed medical groups, as described further in the next section.

A number of large physician-owned IPAs and medical groups with significant scale and expertise can now offer physician groups an alternative to the traditional acquisition approach. For example, New Jersey-based Summit Health Management, which grew from a 125-physician multispecialty group to an 800-provider value-based clinic, recently partnered with Oregon-based Bend Memorial Clinic (BMC). Summit purchased BMC assets, but BMC, renamed as Summit Medical Group Oregon-Bend Memorial Clinic, remains physician-owned, with BMC physicians retaining a majority on the board.4

Despite increased acquisition/partnership activity during the last five years, many high-performing practices choose to remain independent and invest in market leader strategies.  Well-managed practices are closely monitoring recent market developments. In particular, they are looking to understand how the outcome of recent partnership activity can inform their thinking about if and how to include partnership initiatives among strategies going forward. For most practices, it remains the case that the status quo is not sufficient to maintain a growing and thriving independent organization.

Recent market activity has informed and educated this entire potential buyer/partner universe.

The result is an increasingly disciplined and selective approach to partnership arrangements.

Interest in partnerships with high-performing physician groups remains high. More-educated buyers/investors are increasingly thoughtful, however, about developing deal structures that appropriately balance investment and risk. Buyers that have done multiple deals during the last few years have incorporated actual experience into refined deal preferences and structures. A well-defined strategic plan and a clear path for profitability growth anchors such structures, whether achieved through geographic expansion, increased covered lives, performance improvement, or other strategic approaches.  

The design of an approach that will ensure continued physician retention, engagement, and performance is of critical concern.

Financial strategies include retention bonus pools, performance-based compensation models, and retained equity—either for a transitional period or in the form of a perpetual physician equity pool. Other often-equally important mechanisms include governance participation, management structures that emphasize physician leadership, and opportunities for governance/management participation in a larger organization.

While physician compensation models often are unchanged at the time of the transaction, many buyers approach partnerships with a strong interest in evolving compensation over time to have a greater focus on quality, access, productivity, and other key measures that create alignment with the strategic plan.

Health systems, in particular, are evolving their approach to physician practice investment.

Systems continue to acquire and employ solo physicians and those in small practices, albeit often with a greater focus on identifying physicians with good quality, access, and productivity. However, growing losses from acquired practices and the need for efficiencies under risk arrangements render hospital systems less willing to be fully at risk for physician compensation in large practices that are not willing to demonstrate a commitment to maintaining or improving performance. In some cases, health systems are moving away from acquisition structures and towards alternative arrangements that include capital support while preserving the independence of the professional entity.

Health plans are showing greater interest in partnering with providers, but in some cases are opting for contractual relationships to share risk through enhanced value-based payment models, as opposed to acquisition or direct investment. For example, Atrius Health and Blue Cross Blue Shield of Massachusetts recently announced a new seven-year agreement for advanced alternative payment models.5 Under this arrangement, Atrius will receive a global budget to care for 130,000 patients who are Blue Cross members with commercial PPO, HMO, and Medicare plans.

Independent physician groups are now having different conversations with health systems, large medical groups, managed care, and other non-traditional acquisition/partner options. Consideration of a broad range of options remains important, with inside and outside-the-box candidates identified based on the physician group’s objectives and profile. The strategic rationale and business case must be strong and convincing. Quantification and documentation of the potential synergies for accomplishing what the physician group could not do on its own are required.

Development of goals, objectives, and guiding principles, as described in our recent article,6 are more important than ever in achieving best-fit arrangements for physician groups. The group’s ability to maintain competitive performance is a critical factor. Strong valuations are dependent on being able to demonstrate a sound growth strategy, an ability to retain and recruit providers, and a commitment to maintaining and improving performance.

Across the field of partner options, high valuations are increasingly difficult to achieve unless the physicians retain some equity.

Creative structures that allow buyers to mitigate risk are increasing. Examples include:

  • Variations of the traditional acquisition model with greater emphasis on retained equity, either for a transitional period of time or in perpetuity
  • Jointly owned and/or operated management services organizations to serve as a platform for operating efficiencies, expansion into value-based care, and geographic growth
  • Minority investment structures that allow parties to address discrete strategic objectives while preserving culture and independence

Opportunities to develop creative purchase and partnership approaches remain strong, particularly for physician practices that offer platforms for value-based contracting and care delivery, important upstream customer engagement, and geographic market essentiality.

Among all market participants for physician groups, experience is yielding more educated and selective partners.

Thoughtful, informed identification and consideration by physician groups of all alternatives, both traditional players and nontraditional new entrants, can yield attractive, solid strategic-financial opportunities. These may occur through a sale or acquisition or through less-than-fully integrated affiliation models.


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