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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