The Death of Doctors' Independence
A discussion on how doctors can avoid being gobbled up by hospitals, PE groups, and payers
Consolidation of independent doctor practices has been going on for quite a while, and COVID has accelerated this trend. Doctor's independence is a hot topic for practice owners, patients, and policymakers alike. That’s why, I want to try a bit of a different post: I will give some context and provide my views on doctors' independence. You can then send in your reply to my thoughts, share your experiences, or take your stab at the question, and I will publish the most thoughtful answers in my next post!
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So let's get into the topic:
How can independent doctors stay independent? And should they?
Let's first look at some facts. In the last 20 years, more and more doctors have given up their private practice and sold their businesses:
According to the Physicians Advocacy Institute, almost 70% of all physicians are employed by hospitals or corporate entities. Corporate entities include investor/private-equity-backed organizations as well as payer organizations.
This trend has been going on for a while - with every year about 2% of all doctors (!) switching from small practices to being employed by hospitals or corporate entities. The COVID pandemic only accelerated this trend.
In 2020 the AMA provided an interesting breakdown of independent physicians by specialty, and one can see that there are quite some differences.
There are also some regional differences. The Southern US has a greater proportion of independent doctors than the Midwest or North-East. However, the South has seen the fastest acceleration in the consolidation of private practices.
It is striking how fast the landscape of private practice ownership is changing. Several factors are driving the growth of hospital and corporate employed physicians.
Reasons why doctors shift from private to corporate
New market entrants
Post pandemic, there are more employment opportunities for doctors than ever before. It is not just private practices vs. hospital systems. Doctors can now work for publicly-traded primary care chains (Oak Street, Iora, etc.), choose one of the many retail clinics like MinuteClinic from CVS or Walmart or work from home doing telehealth. All these organizations compete for doctors, which is even more challenging during a time when medical professionals are very hard to hire. Many newly graduated doctors may find these settings more attractive than the traditional private practice route.
Another big driver of the shift away from private practice ownwership is the pace at which hospitals & corporate entities are aggressively making acquisition offers. Often, this is not a hard sell - here are a few (anecdotal) reasons why private practice owners are ready to give up their independence:
Increasing overhead: The overhead of running a private practice has increased by 40% over the last 20 years. One great example is the burden utilization management for certain drugs put on doctors' offices. You can read more about it here. Billing insurance has become more complex, and there is more and more admin work involved with prior authorization requirements, claims billing, and claims follow-up management. Additionally, practice management technology is quite expensive. An Epic implementation can cost $350k (unverified number from Twitter) for a small practice. Managing these non-clinical activities and expenditures often pushed doctors to hand these responsbilities off to a third party - they may take a pay cut but they will be able to focus more on clinical work vs. admin.
Patient flow is drying up: The lifeblood of every doctor's office is patients coming in for visits and procedures. The primary patient acquisition channels for doctors are direct marketing and referrals from other doctors. In recent years, especially the latter channel has changed quite a lot. 1) Hospitals have been actively buying up independent practices to steer members to the hospital facilities, and they implemented sophisticated referral management solutions to keep the patients in their system. 2) Insurers have been more aggressive in their network design, and "narrow networks" have become very common. Smaller practices might have a more challenging time becoming part of them. 3) Retail clinics and new upstart care providers (virtual and hybrid) can potentially provide a better patient experience. They allow patients to combine a grocery store visit with their annual wellness exam (Walmart, CVS) or even come to the patient's house (Amazon Care). You have to contrast these trends with the fact that there are still long wait times for some specialty doctors and primary care doctors. Let me know which factors I am missing here...
Tempting buyout offers: Doctors sell their practice because it can often be a really good deal. If you've run a business for 30 years, would like to take a step back, and don't have someone to hand over your practice (and patients) to, why say no to a $2-5 million buyout offer? It could be the ticket for early retirement or at least a life as a (worse-paid but less stressed) employee.
Who is buying & Why?
Acquestition decisions are not only driven by doctor preferences, but there are even stronger incentives for the buyers to make the private practice part of their own organization. They can offer these high pay-out offers because they think they can create even higher economic benefits from the deal. Three main buyer groups exist.
Value-based care is seen as an effective way to reduce the total cost of care, as it aligns incentives between the physician and the payer. However, value-based care arrangements are complicated: benchmarks have to be calculated, providers have to be convinced that they can realize savings, and new technology has to be rolled out.
So why go through all that hassle if you could make them part of one organization? That is what the large payers are focusing on these days. Optum (United Health Group's vehicle for everything non-insurance related) now employs 50,000 physicians, which is 5% of all doctors in the US. And they are planning to add 10,000 more to their organization. Check out Kevin & Ryan's take on the UHG acquisition strategy (paywalled).
It is an interesting approach, as payers can become an integrated delivery network like Intermountain or Kaiser, the poster-children for cost-efficient health care. On the one hand, it reduces the number of intermediaries. It aligns incentives, but I am also afraid of the market power that the big payer groups exhibit already, and the efficiency gains might not be distributed to the premium payers but to the stock holders.
The Stark Law & Anti-kickback statute prevents any provider from sending Medicare beneficiaries to a provider they have a financial relationship with. The idea behind these laws is that doctors should not follow financial interests but what is best for their patients when making a referral. However, hospitals found a simple way to circumvent these laws: Instead of painfully convincing providers to send their patients, make them part of your organization by buying their practice. Then make sure they only refer within the hospital system. Over the last years, health systems across the US have bought primary care and specialty care practices and instructed the new employees to refer their patients only to hospital-owned facilities.
Besides gaining access to referrals, hospital systems gained more negotiating power when setting rates with insurance companies by increasing their market share. In many markets, plans are forced to contract with large health systems to get adequate coverage for complex care (like oncology or trauma care). However, they would also need to accept other hospital-owned providers to be in-network.
Investor-backed provider groups (Private Equity and others)
Investor-backed provider groups are on the rise as well. The motivation from investors (public and private equity-backed) firms to acquire practices and create practice chains is similar to the hospitals' - get negotiating power for better rates with insurance through a larger footprint. However, there are also some additional motivations:
Efficiency gains: A lot of processes in health care a broken (mainly on the admin side), and through applying the right process frameworks, technology stack, and use of data, corporate chains can offer better patient experience, better patient outcomes, and more cost-efficient care. The rise of outpatient surgery centers is a great example. In general, they offer significantly lower prices for standard surgical procedures. Another example are investor-backed value-based care organizations, which are promising to better care for chronically ill patients, such as Oak Street or Cano.
Consolidated Overhead: A lot of the overhead for doctor practices can be centralized and thus made cheaper per patient, for example, implement a modern billing and payment stack, improve patient marketing strategies or invest in a centralized patient communication platform.
Utilization: However, there is also a darker side to investor-backed provider groups, who may put profit over patient and payer interest. There are several examples where PE-backed companies pressured doctors to steer patients to higher-cost procedures and drugs (i.e., in oncology). Also costs cutting might go to far and get to a level where patient safety can no longer be guaranteed.
To learn more about private equity moving into private practices, definitely check out Olivia's takes on PE and Ambulances and PE and Fertility Care and this Bloomberg article about Dermatology.
So, how can independent physicians stay independent? And should they?
Let’s first look at what are the actionable steps an independent doctors needs to take to stay competitive:
Learn from investor-backed provider groups, but stay ethical: The last part of this sentence is probably not necessary because one of the main arguments for many doctors to NOT sell their practice is that they care about their patients and don't want their quality of care go down. However, there are many things that practices can learn from the PE playbook. Adopt modern technology for more efficient processes on the admin side, invest in the proper marketing and patient acquisition channels, and modernize the patient engagement stack.
Find new channels to acquire patients: If old referral paths change, practices need to react. Some are finding new interesting ways to stay afloat. One example are direct primary care provider and cash-pay specialists. Avoiding health insurance can dramatically reduce overhead as no billing staff or certified (= expensive) EHR systems are required. Other practices join ACOs to reap the benefits of value-based care arrangements. Here are a few examples of companies offering solutions. Another way for practices to find new patients is to partner with digital care companies - they often need in-person services, and I think there is potential for fruitful collaborations. Last but not least, digital channels for acquiring patients are becoming more critical. Setting up a good experience for patients to find a doctor online and get in touch is expected these days.
Opportunity for new products to enable independent practice owners: I think there is a lot of white space in helping independent doctors with the challenges of running a practice business. However, changing systems and processes is not easy, and I am wondering how many independents will give in and accept a buyout offer. Nevertheless, I predict we will see several new entrants in this space over the next 1-2 years that will offer better, cheaper, and more modern technology solutions. If you hear of any innovative and exciting companies in this space, please let me know. I might cover the modern independent practice tech stack in a future post.
I will not go into the “should they?” question for now. I think there is a lot to be said about the effects of market consolidation on overall health care costs and long-term quality. Also, I heard many doctors are unhappy about their decision selling their practice. But I will leave room here for other people to share their experiences and thoughts. I am looking forward to your replies & publishing them in a next article!
Interesting piece. For all of its benefits, PP-ACA has made operations of medical practice so expensive that many physicians sold their practice to relieve themselves of these admin tasks. Although their initial goal was to give up paperwork to focus on patients, many physicians have also also given up their practice autonomy. In many cases, their new owners/partners seek to systematize practice and please all customers to the point that physicians have now lost autonomy to insurers, PE groups, and non-MD hospital staff that must be kept happy for their new owner to keep their contract.
Really liked this piece, JF - one thing that drives the dynamic is the outsized economics of bringing these physicians under a hospital's umbrella given facility fees. Seems that the hospitals have a bit of an unfair hand when thinking about a "fair price" - imagine there is real regulatory risk given rising criticism of facility fees.