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Rethinking the Healthcare Business Model to Stay Competitive


 

Across the healthcare industry, from large health systems to individual physician practices, healthcare players are looking for new ways to compete and survive in a challenging and ever-changing environment.

Since 2010, M&A activity has been playing an increasingly significant role in health system strategy. While reports from Q2 of this year show a slight decrease in the number of announced transactions compared to prior years, the total revenue of those transactions has increased dramatically, indicating consolidation among larger groups.

This points to another trend: an increase in the size of the seller by revenue in these transactions. Health systems with revenue ranging $750 million to $1 billion are looking aggressively beyond their local and traditional markets. They are expanding, via mergers, acquisitions, and/or partnerships, to serve entire counties or regions.

But what about individual physician practices -- how are they staying afloat in a market where the big players are getting bigger? The answer for an increasing number of those practices is private equity investment.

While joining a hospital can be attractive - especially if the hospital system's payor agreements offer higher reimbursement rates - many physicians fear they will completely lose their autonomy by joining a hospital. Against this backdrop, private equity firms have emerged with an alternative offer: join forces to combine the business acumen of private equity with the medical expertise, and deep network, of senior physicians who have remained independent to date. The result? Staggering growth in the volume and revenue of PE-backed platforms and affiliations.

But not unprecedented growth ... we have seen much of this before. In the 1990s, physician "roll-ups" grew spectacularly, only to fail just as spectacularly as a series of scandals revealed industry-wide failures of integration, leadership and financial mismanagement. Now, the smart PE firms are studying history and are trying to find the right business structure that will keep physicians happy while avoiding the mistakes of the past.

This has resulted in a number of options, new and old, available for physicians. True, almost every PE-backed platform will value a physician practice based on its total profit - or, more precisely, "EBITDA" - rather than just its raw collections. But the economic options, and culture, of PE groups vary substantially.

For specialty areas such as orthopedics, ophthalmology, dermatology and gastroenterology, for instance, the opportunity to use PE expertise and funding to build ancillary services and share in the revenue stream is exciting, especially for physicians with an entrepreneurial mindset.

For other practitioners, partnering with PE platforms that require less business input from partner physicians can be a welcome relief from the administrative headaches of practice ownership and can allow physicians to focus on providing excellent healthcare to their patients.

Decreased reimbursements, coupled with an increase in operational compliance costs, have caused many physicians to consider alternatives to the traditional practice model, and forward-looking, entrepreneurial physicians have recognized that the future of their practice needs to be drastically different than what it has been in the past to continue to compete.

Physician practice owners should start talking to advisors and lawyers early on to determine if they want to affiliate with private equity or hospital systems and whether either of these strategies would help them achieve the goals of their practice. Most advisors and lawyers welcome these conversations and will have them off the clock. There may be more options than physician practice owners even realize are on the table.


David Marks and Eric Scalzo are attorneys with Waller Lansden Dortch & Davis LLP. Marks' practice focuses on private equity M&A, and he has extensive experience in healthcare, consumer products and other industries. In recent years, he has played a key role in dozens of middle-market transactions of healthcare practices. Scalzo, a former general counsel at a leading dental services organization, represents founders, private equity companies and established businesses with physician practice management formation, growth and acquisitions. For more information, go online to wallerlaw.com

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Waller Landsden Dortch & Davis LLP

David Marks

 
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Tags:
David Marks, Healthcare Business Model, Healthcare M&A, Physician Practice Ownership, Private Equity Investment, Waller
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