Trends in Hospital Acquisition of Physician Practices

Surveys such as the Health Leaders Media survey, Physician Alignment: New Leadership Models for Integration, indicate that physician employment will continue to be a primary integration strategy for many hospitals and health systems. Where saturation of primary care and specialist practice acquisitions and employment has occurred, several markets have moved to a second or third tier, such as urgent care centers and related physician employment. It seems that some markets are only limited by the supply of viable targets.

Physician practices, however, are not created equal, and hospitals and health systems are becoming increasingly savvy in targeting groups for alignment that can demonstrate delivery of high-quality care. As the reimbursement model continues the shift from a volume-based to value-based system, physician participation in meeting quality and cost-saving targets will require a greater nexus to methods of physician compensation. In an increasingly competitive environment, it may be difficult to meet the need for quality care without a carefully selected and motivated physician network.

With recent highly publicized enforcement activity, hospital system leaders and their advisors recognize a need for balancing equitable physician compensation with profitability and regulatory compliance. While remaining within the boundaries of fair market value and commercial reasonableness, offering competitive compensation helps hospitals retain high-performing physicians, and retaining high-quality medical staff is an essential element in meeting the ACA’s goals of quality care. Additionally, more hospital systems are taking aggressive steps to improve quality and control costs by reducing clinical variation.

Physicians have concerns of their own when considering whether to remain in private practice or sell to a hospital or health system:

• Research shows that physicians often want to become part of a larger system because of lingering uncertainties surrounding the Affordable Care Act, such as payment and delivery reforms.
• Recruiting and retaining top physicians is a concern shared by hospitals and practices alike, as is the retention of quality physician talent, and physician groups sometimes find themselves competing with hospitals for top talent.
• Narrow networks have become a challenge for many independent practices. Some physicians benefit from hospital alignment when negotiating with narrow networks and find it difficult to compete independently.
• Increasing costs of supplies, salaries and technology are putting pressure on independent practices. Meaningful Use requirements are now increasingly important as incentives end and penalties begin in Medicare programs, but compliance requires precious working capital.
• Independent physicians are concerned about the impacts of an aging population, a projected physician shortage, and the demise of volume-based reimbursement, and hospital system capital is an attractive alternative.

In addition to the purchase of practices, many alternate alignment models are emerging. In cases in which physicians want to remain independent but align with a larger partner, hospitals and practices are creating collaborative arrangements.  The most prevalent trend may be the increasing variety of arrangements between hospital systems and physician practices. No single model can be considered “the solution.”

Among autonomous practices, mergers and other partnerships allow practices to retain their independence from the local hospital systems, but unite to take advantage of synergies and economies of scale and collectively position themselves as viable providers. However, the antitrust regulatory environment will continue to challenge practice leaders in successfully navigating this area of compliance.

While the foreseeable future doesn’t indicate a decline in hospital-physician activity, the forms of these affiliations differ among markets. Despite the means for collaboration, what remains is the need for individual and facility providers of care to improve the experience of care for individuals, improve population health, and reduce the cost of care. To do so within the current regulatory environment requires partnering with experienced healthcare legal counsel and advisors skilled in healthcare valuation, data analytics, and business combinations.