Private Equity Firms Increasingly Buying Physician Practices

Private equity firms acquired 355 physician practices from 2013 to 2016, and the number of acquisitions rose exponentially during the period, according to research published in JAMA.

The research letter from experts at the Oregon Health & Science University, Wharton School of the University of Pennsylvania, and Johns Hopkins University found that 1,426 sites and 5,714 physicians were acquired through deals with private equity firms during the three-year period, during which the number of acquisitions rose from 59 practices in 2013 to 136 practices in 2016.

Private equity firms are making a splash in healthcare, but the extent that the firms have infiltrated the industry has been difficult to quantify due to non-disclosure agreements and other business practices.

A team of researchers led by Jane M. Zhu, MD, MPP, MSHP, assistant professor of medicine at the Oregon Health and Sciences University used the Irving Levin Associates Health Care M&A data set to take a closer look at recent healthcare mergers and acquisitions.

After verifying purchasers, practice names, locations, specialties, and group practice status via Google searches, Zhu and team found that private equity acquisitions of physician practices increased across specialties from 2013 to 2016. But the acquisitions only impacted a small proportion of group physician practices in the US.

Of the physician practice acquisitions analyzed, acquired practices had a mean of approximately 4 sites, 16 physicians, and 6 affiliated physicians. The practices in this cohort were mostly anesthesiology (19 percent), multispecialty (19 percent), emergency medicine (12 percent) family practice (11 percent), and dermatology (10 percent).

During the last year of the period, researchers also observed an uptick in the number of acquired cardiology, ophthalmology, radiology, and obstetrics/gynecology practices.

Zhu and her team explained that their findings align with private equity’s typical investment strategy, which involves acquiring “platform” practices that have “large community footprints.” These acquisitions help the firm increase the value of their investments by recruiting more physicians, acquiring smaller groups, and increasing market reach.

“There’s money to be made,” Zhu told RevCycleIntelligence. “PE has been investing in the health care sector for some time, including with hospitals and nursing homes. There is some concern that some of the specialties identified in our research – for instance, anesthesiology and emergency medicine – are specialties that have been increasingly associated with out-of-network billing, which significant financial upsides for investors and is a particularly lucrative practice.”

Out-of-network bills – which can occur when patients seek care at a hospital or practice in their plan’s network but receive services from a physician outside of the network – impact about 1 in 5 privately insured patients receiving elective care. These surprise bills are most common among anesthesiologists, pathologists, radiologists, and assistant surgeons.

Private equity firms have been at the center of the surprise billing controversy that has taken the industry by storm as of late. Congress has homed in on the billing practices of physician groups that are owned by private equity firms, fearing that the firms may be behind the bulk of balance billing leading to unexpected, excessive medical bills for patients.

But policymakers and providers are also concerned that the recent uptick in physician practice acquisitions by private equity firms could impact other parts of healthcare, including quality and cost.

“There’s well-founded worry that the incentives for private equity firms are fundamentally misaligned with the goals of many doctors,” Zhu explained. “We don’t know what the longer-term effects of these acquisitions will be, in part because this is a relatively new phenomenon and empirical data is lacking.”

“Research looking at the impact of private equity acquisition on quality of nursing home care has been inconclusive, for instance,” she continued. “That being said, there may be unintended consequences from these acquisitions, and there have been many questions raised about how delivery and quality of care will be affected in the long-term.”

Private equity firms expected more than 20 percent annual returns on investments and practices may feel additional pressure to increase revenue streams, direct more referrals internally, and lean on lower-cost clinicians according to Zhu and team. This financial incentive may not align with the pressing need for longer-term investments not only in practice stability and physician recruitment, but also quality of care and patient safety.

However, private equity firms could be a lifeline for many physician practices.

“Some physicians may be skeptical about these investments, but others are clearly receptive as acquisitions appear to be increasing in pace and volume,” Zhu stated. “There also are a number of potential benefits that a physician practice may see with outside investment – for instance, billing and administrative efficiencies, IT adoption, practice efficiencies, market expansion, etc.”

The long-term impact of private equity firms on healthcare is still unclear. But what continues to be obvious is the fact that healthcare is being a lot more consolidated. From physician practice acquisitions by private equity firms to hospital mergers, providers are actively engaging in deals to improve their footprints and market reach in the name of care delivery improvements and affordability.

This trend and private equity’s role in it need to be studied further, Zhu stressed.

“It’s hard to know how these trajectories intersect, and there’s very little in terms of empirical data on this topic. But this is why it’s fundamental for these trends to be studied over time,” she concluded.