When it comes to buying medical practices, hospitals and health systems aren’t the only ones writing checks. According to a JAMA article published earlier this week, the number of private equity firms looking to purchase practices has continued to increase.
Private equity firms are short-term owners of the physician practice groups. They pool money from investors and use it to buy physician practices, create value beyond the purchase price, then sell off the combined portfolio company and return the profits to the investors. Investors are looking to get their money back usually in 3-5 years. They typically get three to five times return on investment over that time. Ultimately these private equities sell the consolidated physician groups to larger buyers such as hospitals, health systems, and payers.
Medical Economics reported that according to the Medical Group Management Association (MGMA), there were $15 billion in deals in 2017, $22.3 billion in 2018 and well over $60 billion as of October 2019. Halee Fischer-Wright, MD, president and CEO of MGMA had noted that “I don’t see it slowing down….[In 2018], there were 200 private equity deals closed, and as we entered October [2019], we [were] looking at about 250 to 300 deals [in 2019].” This first wave of private equity investment has already hit specialties like orthopedics, dermatology, urology, anesthesiology, and gastroenterology, where profits are highest. A number of medical groups, particularly in dermatology and ophthalmology, are already on their second private equity owner, following a “liquidity event.”
Advocates say that private equity partners can help physician groups achieve an economies of scale in order to develop market leverage. Targeted ‘platform’ practices are bought with the plan to expand the foundation into a broader network which spans across the region and perhaps even nationally. The larger network would share management, billing procedures, staffing, credentialing, accounting, and other services. The economies of scale would also be useful for purchasing. For example, private equity-backed groups have more clout to negotiate better deals with payers (i.e. risk-based contracts). They can also invest in EHR upgrades and other technologies in order to compete more effectively in the modern health care of 2020.
There are many different models of these private equity owned physician groups, depending on the deal that is struck between the practice and private equity firm. In most cases, the equity firms focus on the business side of medicine and leave the clinical decisions to the doctors.
As investors have crowded sub-specialties such as dermatology and gastroenterology, they’re drifting into low-competition environments such as outpatient oncology that also promise lucrative gains.
Private equity partners can help oncology groups ready for new value-based payment models. Unlike heart failure and diabetes, the training wheels are not yet coming off of oncology when it comes to value based models. Many, many challenges remain in oncology in the move from value-based theory to practice. For example, the fragmented nature of oncology care has resulted in lack of data transparency in many cases, hindering participation in these value based models. VMG Health believes that roll-up and consolidation strategies in oncology will likely increase the use of technology and data management as well as reporting and tracking of Key Performance Indicators (KPIs).
Private equity partners can also help oncology groups become one-stop shops for all needed services as they can enable ownership of valuable practice assets such as ancillary services. For example, I wouldn’t be surprised if these practices build capabilities for in-house lab testing. According to the 2019 Genentech Oncology Trend Report, 38% of OPMs plan to conduct majority of their next generation sequencing (NGS) testing in-house by 2021 (up from 16% in 2018) in order to bring down cost and speed up the turn-around time for test results). NGS is of particular interest to oncology practices considering there are already over 100 FDA-approved targeted therapies in oncology and they remain the focus of much anticancer drug development.
Overall, whether oncologists belong to a larger entity (i.e. IDN) or are part of a private equity owned physician group, there is no mistake of the shift from the traditional “brute force” approach of extensive product promotion and individual physician engagement to a value-driven approach that yields financial return and improved quality.
Value propositions and messages must align with the positioning of these private equity owned oncology groups. Successful market access teams embrace an outside-in approach. They understand what constitutes value in the eyes of these customers’ external stakeholders (i.e. patients and payers) and then work inward to understand how this translates into value requirements of key internal stakeholders such as P&T decision makers and clinical influencers. This helps to build trust and achieve the common goal of helping patients.
Additionally, an opportunity for business-to-business relationships is something to consider. For example, manufacturers like Amgen are making a place for themselves at table through value-based partnerships.
Our healthcare system is continuing to evolve along with the changing technology and need for more accessible care. That’s why it’s important, as it is interesting, to keep up with the trends.
It’s time to make big strides and turn heads–let’s go.
