Physician Alignment: Watch Out for Corporate Competitors

Strategic Planning, Provider Planning & Workforce

Driven by new payment models and better health outcomes, hospitals for years have been buying medical practices as a key part of their physician alignment strategy. With more corporate buyers now emerging – often from outside the healthcare industry – is it time for a re-think?

When the Physicians Advocacy Institute (PAI) released its recent report on employment trends in the medical industry, most headlines focused on the demise of independent, physician-owned practices.

But I’d argue that’s old news. Employed physicians first outnumbered self-employed physicians in 2018, according to the AMA. At the time, health systems were the biggest buyers of medical practices, driven by emerging payment systems that reward better coordination across the continuum of care.

The “new news” in the 2022 PAI study is that corporate-owned physician practices outnumber hospital-owned physician practices for the first time ever (68,500 vs. 66,700). Between January 2019 and January 2021, corporate entities snapped up 31,300 physician practices, for a growth rate of 84%. Hospitals acquired just 4,800 practices in the same time period.

“Corporate entities” may sound fairly benign until you take a closer look at who’s writing the checks:

• Private equity
• Venture capital
• Large employers
• Health plans

Physicians are at the very center of the healthcare industry, but notice that most of these buyers aren’t even part of the industry. Imagine if McDonald’s started buying up food banks or if Jeff Bezos launched a takeover bid for your county school district. Do we really want private entities to monetize the public good? Do we want physicians to be just another asset class like real estate or pork bellies?

The numbers can be staggering. Optum, a division of insurance giant UnitedHealth Group, employed some 53,000 physicians at 1,450 neighborhood clinics even before its pending acquisition of Boston’s Atrius Health. Earlier this year, Amazon, the largest of large employers, announced it would buy tech-enabled primary care group One Medical for $3.9 billion in cash. And private equity/venture capital deals for physician practices are almost too many to track – a combined $60 billion in 2019 alone, according to the American Hospital Association.

Note that hospitals are still the largest employer of individual physicians while corporate entities are the largest owner of physician practices. But the corporate buying spree is starting to tilt the balance at the individual level, too: During the three-year study period, hospital-employed physicians grew by 11% while corporate-employed physicians grew by 43%.

For purposes of this study, “hospital-owned” practices are those owned by an Integrated Delivery Network (IDN). To be classified as an IDN, a parent organization must include at least one acute care hospital and at least one non-acute entity (e.g., clinic, rehabilitation facility). Likewise, “hospital-employed” physicians are physicians in the IQVIA OneKey database indicated as employed by an IDN-owned practice.

Four Troubling Implications for Hospitals

All of this competition for physician talent is bad news for nonprofit hospitals. The Kaisers and Ascensions of the world may be able to keep up in what Modern Healthcare dubbed a “physicians arms race,” but independent hospitals and smaller nonprofit systems are at a major disadvantage. That poses at least four big dangers:

The most immediate danger is the higher cost of physician recruitment and retention. Salaries are already rising at an unsustainable rate, but this flood of corporate money threatens a full-blown crisis. Smaller providers may find it impossible to compete for talent on purely financial terms – particularly in rural areas, where shortages are already acute.

Second, there’s a danger to operating revenue. Employed or affiliated physicians offer a somewhat predictable source of inpatient admissions and surgeries – and that’s crucial for planning and investment. Corporate-owned physicians have no institutional loyalty, so it’s easy for them to send patients to a competitor.

The third danger is also related to revenue, but it’s about payment models rather than predictability. Hospitals in general are moving more quickly toward value-based payments, while physicians tend to prefer fee for service. New payment models work best when everyone is pulling in the same direction, so hospitals could face greater financial risk if they depend on physicians who are mis-aligned in terms of reimbursement.

Finally, and probably most importantly, there’s a danger to health outcomes. Every time a patient is “handed off” to an outside provider, there’s a risk that some important detail will fall through the cracks. A comprehensive, integrated delivery system helps to smooth care transitions – and aligned physicians are a key part of any such system.

What’s Next for Physician Alignment?

At some point, policymakers might just wake up to the dangers of corporate-owned physician practices – but the situation is likely to get worse before it gets better. Because healthcare is generally viewed as a defensive or counter-cyclical investment, I predict that private investors are now pouring even more money into physician practices due to the current bear market on Wall Street.

So, what does that mean for healthcare strategy? Facing billions of dollars in new competition, hospitals and health systems need to play both offense and defense. Rather than a one-size-fits-all approach, our healthcare consulting firm recommends a segmented strategy for physician alignment:

• For employed physicians: Don’t take your team for granted. Corporate buyers may already be trying to lure your physicians away with all sorts of financial promises, so it’s good to know where you stand. From autonomy to personal time, hospitals can likely offer non-financial benefits that corporate entities can’t match. Take the time to understand what really motivates your providers, and look for ways to deliver.
• For independent physician groups: Lock in contracts while you can. Ask yourself which groups are most important to your operating margins, then negotiate for longer contracts or new affiliation models, such as clinical integration. The costs might be marginally higher now, but you’re essentially hedging against sharply higher expenses in the event of a corporate takeover.
• For corporate-owned physician groups: Look for joint venture opportunities. Corporate owners often are focused on data and technology – two of the areas where hospitals sometimes need the most help. Through joint ventures with progressive, corporate-owned physician groups, hospitals may be able to advance more quickly on population health or value-based care than they could on their own.

Conclusion

Smaller health systems and independent hospitals can’t afford to ignore the trends in physician alignment. A whole new class of competition has emerged with deep pockets and entirely different motives for employing physicians.

If your strategy is older than 2021 – the year corporations overtook hospitals as the largest owner of physician practices – then it’s probably time to take another look at your physician alignment. Please contact us if we can help.