Wolf Richter: Private Equity Scrambles to Buy Primary Care Doctors, “Leverage” Their Patients

Yves here. We’ve been warning for some time that primary care practices were being targeted by hospitals, and (for reasons we won’t belabor here) that was being accelerated by Obamacare. The result of these takeovers is to subject patients to “corporatized” care. From a 2013 post:

Dr. David Edelberg, describes a recent presentation by a large insurance company. They’ve apparently been hosting similar sessions with physicians in the Chicago area in large medical practices. Here are the key bits (emphasis original):

The speaker at these evenings is always a physician employed by the insurance company. His/her title is medical director (I begin to think there must be dozens and dozens on their payroll) and he always begins by reassuring the audience that he was in clinical practice himself so he understands something of what physicians–especially primary care physicians–are facing. I view this physician more as a “Judas steer,” the animal that leads an innocent but doomed herd of cattle through the slaughterhouse corridors to the killing floor.

The health industry hopes that individual medical practices and small medical groups will ultimately disappear from the landscape by being financially absorbed into larger groups owned by hospital systems.

And here’s what to expect:

Physicians are expected to spend a limited amount of time with each patient, and are encouraged to see as many patients as possible during a workday. The insurance companies, sometimes with the token cooperation of a few physician-employees, create vast books of patient-care guidelines to which they believe their physicians must be “accountable” (remember this word, it will crop up again). These guidelines might mean documented Pap smear and mammogram frequency, weight management and exercise, colonoscopies for patients over 50, and getting that evil LDL (bad cholesterol) below 99 by any means possible…

If the chart audit system discovers that a physician, for whatever reason, is an “outlier”–that she’s either not following the guidelines exactly or not getting the results anticipated for her patient population—she’ll be financially penalized. A quick example of what might occur: if your LDL is 115, you may be on the receiving end of a statin sales pitch from your doctor, not because bringing it down to 99 will improve your longevity, but because your refusal to do so will impact her financial bottom line.

And as we pointed out in April, private equity has started targeting primary care practices:

…a small but growing number of investments that private-equity firms are making in primary-care physician practices that are ahead of the curve in offering new care delivery and payment models. Investors see an opportunity in being early participants in value-based care, even as the business case is still unclear given mixed results in Medicare’s payment and delivery reform demonstrations so far.

…Furthermore, primary care practices owned by private equity are likely to end up heavily indebted and subject to strict cost cutting measures that may decrease care quality, decrease access, increase patients’ out of pocket costs, and demoralize providers.  Practices acquired by private equity may be broken up and sold as separate pieces.  Should the debt be too high, and the cost cutting not be sufficient, such practices could end up bankrupt and possible completely defunct.

Wolf Richter provides an update on this trend. Private equity is now in the midst of a fad of buying primary care practices, particularly ones that focus on Medicare, even though Medicare practices don’t have great profit margins to begin with. As Wolf insinuates, this sounds like a prescription for disaster, and not just for the funds’ limited partners.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

For PE firms, the fracking boom was nirvana. An eternal-growth industry. A big part of the money they poured into the scrappy oil & gas companies is now going up in smoke. Other industries are mired in a no-growth or shrinking environment. Chaos keeps breaking out in the international markets, most recently over Greece and China.

So, healthcare, which accounts for nearly one-fifth of US GDP, “is really the growth opportunity,” Tom Banning, CEO of the Texas Academy of Family Physicians, told The Texas Tribune:

“The forces are aligned to force consolidation, and frankly, how those independent doctors are able to compete against well-heeled, deep-pocketed systems or networks is going to be a problem,” Banning said. “To me the question becomes, if a for-profit, publicly traded or privately held venture-capital fund owns these doctors, what’s their fiduciary duty to the patients?”

Think of the possibilities! The Texas Tribune: “Sensing a new vein of potential profits to be mined in the multibillion-dollar health care industry, a small but growing number of private equity firms is seeking to buy into primary care practices, interviews with doctors and financial analysts suggest.”

Mergers and acquisitions are at an all-time record in the US. In the second quarter alone, US targeted deals reached $635 billion, the highest quarterly total ever. These deals are driven by corporate buyers. Armed with cheap debt and their overpriced shares, they’re out-bidding PE firms and pushing them aside [read… “Everyone Is Wondering When the Volcano Will Erupt”].

Consolidation in the healthcare sector is running rampant, from the M&A activity among the largest health insurers, such as Aetna’s acquisition of Humana, to hospital systems buying physician practices.

“They’re finding that they have to be bigger, stronger, integrated organizations in order to be viable in the marketplace,” Texas state Rep. John Zerwas explained. Backed by PR firm Welsh, Carson, Anderson and Stowe, his Greater Houston Anesthesiology practice merged in 2012 with Anesthesia Partners. The group now employs over 1,000 anesthesia providers. Big is good.

A report by Bain and Company found that last year, healthcare buyouts by PE firms – not corporate M&A – in North America soared nearly 60% year-over-year, to a new record of $15.6 billion, across 80 mostly smaller deals, with only two deals above $1 billion.

The new thing is that PE firms are targeting primary care groups.

“It’s a land-grab right now,” Todd Spaanstra, a partner at Crowe Horwath, an accounting and consulting firm, told Modern Healthcare in April. Part of the reason why they’re chasing after primary care practices is because specialty practices have become targets of publicly traded corporate entities that have been driving up prices beyond what PE firms are willing to pay.

Hospital systems too are buying primary care groups to get ready for the next big thing, which is a shift in Medicare and other public programs.

Medicare is transitioning from a fee-for-service payment system, which pays doctors for services they provide, to a value-based model that pays doctors for providing cost-effective treatments. The idea is to keep their enrolled populations healthy rather than just treat them for specific illnesses. The White House hopes that by 2018, half of the payments Medicare makes will be for value-based care. Primary care is going to play an essential role in this, and PE firms hear the siren call of government money.

But this buyout binge of primary care doctors leaves some people scratching their heads. Michael Gorback, M.D., in Houston, Texas (and a WOLF STREET contributor) explained it to me this way:

Other than pediatrics and perhaps psychiatry, I can’t think of a specialty with lower profit margins.

There was a wave of this in the 90s. Big economies of scale, increased efficiency, blah, blah, blah. Almost every one of these fell flat on its face.

I remember being jealous because my colleagues were getting incredible offers for their practices and I wasn’t. It turned out that the purchases were paid in restricted stock and by the time the doctors could sell, the shares were worthless.

This time, it’s different. Though not everyone believes it.

The Texas Tribune cites Doug Curran’s family medical practice in the small town of Athens, Texas, whose 14 doctors “pride themselves on an intimate knowledge of their community.” He got a call earlier this year from Florida-based United MSO of America:

The would-be investors said they could help the family medicine group save money by trying “new models of care” to pocket greater payments from insurers, said Curran, who declined to specify the dollar amounts discussed.

But they were “big numbers,” he said. “Our feeling was the only way you could get those numbers back out of our practice would be to do some things with our patients and to our patients that would not be appropriate.”

He wasn’t the only one. The Texas Tribune:

Representatives for several independent practices in Texas, who asked not to be identified for reasons of financial privacy, said investors have approached them aggressively, in some cases as often as twice per month.

Doctors like Curran worry that selling the family practice would cost them independence and could mean less personalized care or higher costs for their patients.

But is there more to it? Derron DeRouin, COO at United MSO of America, put it this way:

“There’s been this enormous uptick in hedge funds and even bond funds as well as private equities not interested in acquiring physicians’ practices but having control over their patient base.”

“It’s kind of an ideal model because it allows physicians to maintain their autonomy – keep their practice, essentially – but to be capitalized and grouped together to leverage these numbers and leverage these patients to the independent provider’s advantage.”

Get control over their patient base and leverage these patients?!? You get the drift.

So will primary care be nirvana for PE firms? Or just another fracking boom? Dr. Gorback, who doesn’t have a crystal ball either but knows a thing or two about doctors, mused:

Managing doctors is like herding cats. These deals almost always lead to a culture clash between the spreadsheet people and the doctors, resulting in disillusionment on both sides and parting of ways, usually with a lot of bitterness.

The PE strategy of slash and burn is particularly unsuitable for this type of arrangement. I can see the PE guys acquiring practices with magic beans, loading up the company with debt, taking it to IPO, and burning whoever touches it.

That’s what happened to the intrepid souls who bought the PE firms’ prior hot product, the energy IPOs in 2013 and 2014.

>Millennium Health – biggest drug-testing lab in the US and biggest recipient of Medicare drug-testing payments – is Exhibit A of how a credit bubble allows companies and banks to put yield-desperate investors, blinded by a zero-interest-rate policy, through the wringer. JP Morgan did this one. Read… “Leveraged Loan” Time Bomb Goes Off

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  1. diptherio

    Two words: Provider Co-ops. We’ve got a good model here in MT at the Family Birth Center, a midwife-owned birthing center.

    By connecting (for instance) with people at the Freelancers Union, Cooperative Development Institute, Northwest Cooperative Development Center, local Credit Union networks and Cooperative Development Associations, a small practice could work out (conceivably) a direct arrangement with members of those organizations (and members of member orgs). It would take a lot of work up-front, for sure, but it could be an alternative model that provides better care and working conditions than the PE-Capitalist model. The Freelancers Union specializes in innovative healthcare solutions for its members and would probably be the people to figure out how to do something like this.

    Any physicians interested should definitely give them a jingle (or an e-jingle). There are lots of resources out there for co-ops at the moment, so if you organize your practice as a co-op, you can get a lot of help. The NYC council just upped their commitment to 2.5M for worker co-op development, for instance. This could be a perfect opportunity to give a big f-u to the bigs and try something different.

    1. Arizona Slim

      The Freelancers Union? Are you freakin’ kidding me?

      The FU (yes, that’s what it calls itself) is next to worthless. As the precariat grows like wildfire, what are they doing to help? Oh, yes, They invite you to take a survey via their website. Like taking a survey is really going to be useful.

      As for that innovative health care? Yeah, right. If you’re in NYC, you might get to experience it at their clinic. But what’s it doing for the rest of the country? Nothing. Zero. Zip. Nada.

      For more on this topic, I leave you with this link: http://www.dissentmagazine.org/article/the-i-in-union

      1. diptherio

        Thanks for the link. They’ve gotten a lot of play recently and have been working with people who generally tend to do good things, but I’m always up for hearing the negative side.

        Still, the point that physicians can either figure out alternative arrangements or submit themselves to corporate domination stands. The FU might not be the best bet (just a suggestion), but somebody like VAWC might be.

        1. Arizona Slim

          Yup, that’s the FU, all right. Very good at getting a lot of play.

          But, as for helping those of us who are getting played while trying to make a living as a freelancer, forget it. The FU will tell you to participate in their survey.

  2. John Ganeff

    I am an educator who has watched the no child left behind policy transform education over the last fourteen years. It takes the decision making out of the hands of teachers and parents and forces everyone to try to get to a certain test score. It seems that the same transformation may be happening in medical care. Where top down directives about care take the decision making away from doctors and patients.

    1. Paul Hirschman

      The process described here is the same as what is happening to local public school districts around the country. Pearson and other education-product multinationals, together with hedge fund investors and some prominent billionaires like Bill Gates, have gone a long way already to creating a national market for their products and for other investment opportunities (real estate and for-profit private schools, for example) in a $500 billion dollar annual tax stream that supports public education around the country. Local public education is being subsumed within state education, which is being subsumed under these corporations and investors. Teachers and other educators, like their primary care doctor neighbors, are being subjected to accountability systems that have little to do with kids’ education and learning, and much to do with getting into this rent-seeking stream of revenue. That students will henceforth be taught in economics that multinational corporations are the same as mom-and-pop small businesses in highly competitive markets is just one wonderful curriculum change sure to take place! Welcome to the Common Core and accountability in K-12 education.

  3. Airbag Moments

    This kind of “corporatization” is not all bad. In some ways it works like the simple but life-saving checklists now employed in many operating rooms.

    Docs are subjected to “clinical reminders” to make sure they discuss things like smoking cessation with patients. This is called population health, and is a good idea.

    The devil, though, is in the details. Too many and too trivial reminders defeat the purpose.

  4. Local to Oakland

    Thanks for reporting this trend.

    It is ironic that the trend to shrink patient appointment lengths and time with doctors is pushed by low compensation from insurers, including medicare. One of the best ways to save health care dollars overall is to compensate sufficiently for primary care appointments that doctors take the time to learn precisely what the problem is. That leads to targeted testing, and precise effective treatment rather than the shotgun approach that happens when doctors are rushed.

    Likewise, hospitals are being punished for readmissions, but the pressure is on for patients to leave as quickly as possible, so patients bounce back with worse problems than if they had been allowed to stay a little longer.

    For a very interesting view of what health care has been and could be, read Dr Sweet’s book about Laguna Honda hospital, God’s Hotel.

  5. grayslady

    Where I live, the PE groups would have to compete with the hospital groups, and, as far as I can tell, the hospitals have already scooped up almost every small group practice, regardless of specialty. It isn’t that PCPs need hospital privileges, but the hospitals need the referral service revenues that come from PCPs. For example, a year ago I needed an MRI. I chose an independent facility nearby that charged me $600, all of which was picked up by Medicare. The hospital that my doctor is affiliated with wanted $2700 for the MRI, and that particular hospital is notorious for going after every unreimbursed nickel.

  6. Beans

    It is fantastic to see NC covering the economic upheaval going on within the healthcare industry. Dentistry has been under the private equity assault for the past 10 years, as well. Small Smiles, a chain of pediatric dental offices owned by private equity investors, has been investigated multiple times for fraudulent Medicaid billing as well as for patient abuse – and has recently declared bankruptcy, stiffing the feds for unpaid settlements of prior Medicaid fraud investigations. Small Smiles is far from alone in using patient to make big profits. There are quite a few private equity owned dental businesses that employ similar tactics.
    With dentistry, the ownership of a dental office by a non-dentist is illegal in most states. I believe the same thing is true for medical offices. The widespread failure to enforce state laws and stop private equity owned dental clinics from their rapid growth has been blamed on a number of things by those with a job description that includes protecting the public and enforcing the laws of the state. Instead, private equity dental owners have formed a trade association, hire lobbyists and work to ensure that they can continue to own, operate and profit from dental offices, despite the fact that they operate in violation of the law.

  7. Anon

    Based only on anecdotal evidence, at least in California I think that what is happening is that most of the private health insurers are going to cannibalize each other with decline in the quality of care available, and that Kaiser Permanente, which has been offering a relatively high quality closed HMO (a huge number of their patients swear by them and I just joined) for decades, is going to grow by leaps and bounds. I predict that the inherent dysfunction of most health insurers in SoCal will lead to de facto single payer over the course of the next decade or so here, as the whole of the population opts for one of the few competent health insurance providers.

    I realize that for most of the country, however, there is no competent option — and that cannibalization of healthcare is going to present a very sorry prospect indeed.

    1. Yves Smith Post author

      I have to tell you, I have heard from people who have insider connections that Kaiser is under financial stress and expects to be acquired. Management views its position as not tenable in the long term.

  8. Eric Patton

    If private equity gets its hooks in deeply enough, wouldn’t surprise me if they fought to increase the number of doctors in the US — either through importation (H1-B visas), expanded med school admissions, or both. The only reason the AMA exists is to protect doctors’ salaries by limiting the supply of doctors (thereby driving up the price).

    Doctors who oppose single payer because they don’t want to take a pay cut may end up taking a pay cut anyway.

    1. Beans

      H1B visas are already being used for corporate employment of foreign doctors – who will lose their visa if they question their employer’s patient care practices.
      There are also a growing number of for-profit medical and dental schools generating lots of new (highly indebted) doctors and dentists – who often become corporate employees willing to do whatever is requested to keep their job.
      Both are recipes for over treatment and fraud. Doctor pay is not a simple supply demand thing – many other factors influence medical price tags – flooding the market with indebted young docs risks driving up the incidence of fraud, over treatment and creative billing. Bringing down medical costs will require elimination of many layers of rent seekers in the healthcare biz as well as placing the control of healthcare decisions in the hands of patients instead of a 3rd party payer.

    2. fds

      Docs are perpetually saved by Medicare capping funding for intern (slave) positions at a low number, even by 1997 standards–doesn’t matter how many visas they issue, if the trafficked foreign doctor can’t get a U.S. residency, he can’t work.

  9. MikeNY

    Deja vu all over again.

    I remember the wave of PE-sponsored LBOs on skilled nursing facilities in the 90s: that lead to systemic Medicare fraud (over-prescribing and bilking the government with inflated ancillary service fees) and led finally to a rash of bankruptcies when CMS finally caught on. Genesis Health and Sun Health were two huge cases, and there were more.

    Because healthcare for profit is SUCH a good idea…

  10. dante

    Billionaires Win Again: A $900 Million Payday Is The Reward For Crushing The Twinkie-Maker’s Labor Unions
    As Bloomberg reports, “Hostess is selling $1.23 billion of term loans. Of that, $905 million will be used to pay a dividend to its shareholders, according to Standard & Poor’s. That’s more than double what they paid for the business.”

    Translated: after investing $410 million in March 2013, two billionaires are about to make a $500 million return an investment they have held just over two years, with the blessing of a whole lot of debt investors. And all they had to do was pick up the carcass of a company which did nothing more than crush its unions.

    In short: we give Hostess about 1-2 years before it files Chapter 33: it third bankruptcy a first one in 2004 and the second one in 2012.

    Only this time there will be no unions left to blame: it will be all about the insurmountable leverage, and the rapacious greed of its PE sponsors to strip the company of all pledgeable assets and extract as much cash as possible in the shortest possible time, while layering what the IMF would clearly dub is insurmountable debt.


    never ends….

  11. peter

    Medicare would pay a self employed MD about $84 for a Level 4 (moderate) office visit. From this he paid his staff, rent and his own salary.

    Once owned by a hospital, the MD still bills the $84 via the hospital for that visit, but now the hospital can bill an additional $115 for the use of the “facility.” So, the hospital gets the MD at break even and adds more than the MD used to make when they practiced alone. The doctor gets a slight raise, loses the proprietor headaches and the hospitals make out like bandits.

  12. PQS

    Excellent post and excellent information. Although the whole idea of Wall Street types getting into my PCP’s practice makes me throw up in my mouth a little bit…is there nothing they won’t pollute with their love of money? Hopefully there will be some spectacular losses and they will find other victims, but not before they “leverage” some patients into, what, default swaps?

  13. Fool

    To be fair, when a PE guy says “leverage” that could mean anything from borrow to use. I don’t know, they love the word. Second, I’m not so sure about PE having suffered from downturns in fracking. Not from what I’ve heard on the street…

    1. Yves Smith Post author

      Huh? Go look at KKR’s recent financial statements. Their crappy 4Q return last year (they barely eked out a profit) was due to their oil & gas investments. Pretty much all the fracking plays are in trouble, and fracking was an insane investment for PE (most firms are levered, so they can’t lever them up that much more, plus it’s a capital-intenisve industry with volatile income due to uncertainty over oil prices). The PE firms may do OK because they do OK even if the investments go bust, but the investors have been taken for a great big ride.

      1. Fool

        I don’t know, really, it’s hard to gauge what goes on in oil & gas — especially as a lay person, as much of the action is in private markets — but that outcomes seem to congenitally defy forecast. That being said, I do know that some bad boys are raising distressed credit funds.

  14. LAS

    This is a really complicated topic … the changes going on in healthcare. Some of the changes have to be made because there are shortages of primary care physicians and other healthcare workforce that are going to get worse and costly beyond belief without creative solutions. The population is getting sicker (although it is seldom said so bluntly), with more chronic disease such as diabetes, and of course there’s the aging baby boomers.

    Cautiously, I’d like to make the point that there is some merit in concentrating primary care physicians with others into a patient medical home, so that people with multiple chronic conditions can get coordinated care. Such medical home type practices can (theoretically) have a better EHR system and patient registries to drive population based preventive health interventions. Hospital systems are now building population health departments that are analytic. They’re collaborating with public health departments in various tests. There is an effort to include insurance companies (payers) in pilot programs of this kind, too. I’m a little cautious — because of mixed motives and corporate power — how it will shake out … but make no mistake, the country has to make changes in healthcare delivery or we’re sunk. There is a big role for analytics in all this because of being able to see things like, for instance, what proportion of diabetics have A1C under control across the different practices. From that one may be able to identify what factors enable practices to have better metrics; those factors can then be communicated and taught to other practices.

    What you attribute to ACA – these are national goals from HHS, CDC and CMS that pre-date ACA legislation – by at least 1-2 decades. ACA was probably about the third or fourth major piece of legislation to cement the strategies and by no means the first.

    Separately, Medicare patients are more lucrative than you perhaps suppose. Besides the primary care visit payment, there are other payment indices that rise with increasing number of Medicare recipients treated at a medical center, hospital or practice. For instance, Medicare actually pays for the training of most doctors. Hospitals don’t actually pay their residents; Medicare does. And under the system, a hospital gets more revenue for residents when the patient population includes more Medicare patients; the multiplier goes up for physician education reimbursements.

    How it all shakes out with PE involvement, I could not begin to predict … except I do see why PE wants to be involved. There are opportunities as well as downside risk. I just wish our capitalism had a little more social justice blended in to it.

    Yes, I’ve seen plenty enough of patient/population research where patients complain about doctors being rotated/leaving them. That and other unilateral corporate practice does not help patients be empowered. Still patients are likely going to need other partners than physicians to bond with on health issues, someone to help them learn to prevent or live with chronic conditions. Lots of things in our culture are ruining our health.

    1. fds

      just taking onne of your examples, obviously, the wealthier patients, for a variety of reasons, will have better A1Cs. Just like in public education analytics…

    2. tegnost

      This is a really complicated way of saying cautiously that there are huge piles of money to be made from forcing people to buy insurance for care they will still have to pay for…diabetes is a curious anomaly that has nothing to do with corn futures…my doctor left me (standing at the receptionists desk protected by a locked door that would only be opened with cash money, same as today) ? …patients need more partners?
      Empowerment…is there a definition for that word? I will tell you how it shakes out with PE involvement. There is money to be made; assets to be stripped, cash flow from medicare as stated clearly, wage control on doctors (they’ve already taken everyone else’s income, you’re next…) PE is going to save us from unilateral corporate control? Really?

    3. BEast

      I trust neither insurance companies nor doctors’ offices to keep track of basic information — let alone improve patients’ care with it.

      I’ve had too many personal experiences of doctors offices unable to cope with basic concepts, unable to fix errors in records, unable to keep track of faxes sent to them.

      Likewise, insurance companies perpetually believe I have conditions I don’t have (and never have had) or forget I have conditions I do have. I don’t trust either party to correctly keep track of my phone number, let alone my health needs.

      (To be clear: my doctor is good. My doctor’s office… not so much.)

  15. McWatt

    The hospitals have beat the hedgies to the punch here in Chicago but that’s not say they can’t be spun off.
    I have the same procedure done every year. Up until the ’90’s it cost $35.00 then it escalated over the years to
    $240.00 . Now that the hospital has bought the practice it’s $470.00 with the Doctors trying to get me to change to their downtown practice that they haven’t sold to a hospital yet. It’s a scam. It’s all a scam. We’ve lost all our government protections. Now we are nothing but a mark to be preyed upon by people who believe they are way more sophisticated than we are and so deserving of our money. If I haven’t had at least 8 attempts on scamming me a day I know it’s the weekend.

  16. MG

    This trend has picked up in earnest since Goldman Sachs made their $400M investment in Privia Health last year which was a mixture of cash and credit lines.


    Maybe this ends differently because of the shift to ‘value-based payments’ (warmed over pay for performance based almost entirely on various largely unvetted quality measures) but I doubt it. More likely it produces a lot of the same train wrecks that PPMCs did in the late 90s/early 00s.


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