Primary care is at the top of the list for investors. Here are factors for physicians to consider when engaging with potential partners.
Interest remains robust for investment in the primary care space by private equity sponsors and other strategic partners. The proliferation of medical practice transactions involving a sale, merger, investment or other partnership overall has been increasing throughout the last decade, and the focus on primary care in particular is at the top of list for investors, especially in most recent years.
The importance of primary care professionals – to manage a patient’s overall health, to reduce complications and to provide preventive care – is underscored by many factors, including:
1. Accelerating attention to, momentum of investment in, and more recent evolution of, value-based care and reimbursement programs, such as risk-based initiatives, bundled payments and enhanced quality and outcome analyses, as payers, providers, employers and other participants in the health care industry have developed more enhanced value-based capabilities; and
2. Increasing financial incentives for implementing such programs to lower the overall cost of quality care, such as catching illnesses (e.g., cancer, hypertension, chronic obstructive pulmonary disease, diabetes) early and avoiding the need for inpatient and other expensive care, and emphasis on reducing hospital readmissions.
These factors position primary care physicians more than ever at the epicenter of the future of medicine. Additionally, the shortage of primary care professionals, which had been persistent in the industry for some time and has recently become even more pronounced, translates to an even higher demand for such primary care providers.
Physicians make the decision to engage with strategic partners for a variety of reasons, often due to the circumstances related to reduced reimbursement for a particular specialty, desire for growth, or due to competition. The most frequently cited reasons are the financial impacts of decreasing reimbursements and increasing costs of private medical practice (including staff costs, and costs of compliance with the multitude of privacy, security, billing and coding, notice, reporting and other regulations).
Perhaps one of the less publicized advantages for a primary care physician to enter into a strategic partnership is that many potential partners have seasoned, full-time executive management teams and trained personnel (e.g., human resources, IT, compliance, billing, and managed care executives) who can provide a C-suite infrastructure to practice most effectively, and to help guide the enterprise into the future while navigating future uncertainties (e.g., the next pandemic, recession, inflation, valued-based care, etc.)
Physicians should carefully consider their specific goals in entering into a strategic transaction and determine the ability of prospective partners to help achieve those goals. For example, if becoming part of a larger organization and gaining access to financial resources for growth are the primary goals, but preserving clinical independence at the local level is essential, then physicians will want to explore with their prospective partners how the practice is expected to evolve after closing a transaction.
The right strategic partner should be able to offer advantageous experience negotiating with payers, and also vendors and suppliers, and thus leverage economies of scale, and help providers better compete and attract new physicians. For so many patients, having a primary care provider who understands the patient’s overall health profile, particular needs, and even style and approach to managing illnesses or symptoms, is vital, perhaps more so than most other fields in health care. Therefore, optimal strategic partners for primary care physicians are likely those who can assist with effective community outreach and marketing, scheduling, and other services to support the unique primary care-patient relationship. The right strategic partner should also be able to increase the efficiency of delivering care, which would help to address the shortage of primary care providers and physician burn-out, whether through implementing technology to assist with repetitive or administrative tasks (while enabling the physician to spend less time in front of a monitor or handheld device), through physicians delegating aspects of operating the business of health care to a partner’s back office personnel, or assisting with the recruitment of new physicians and midlevel practitioners to fill current demand and future growth.
However, primary care physicians should assess not only the reasons causing them to consider a strategic partnership and their essential goals going into it, but also what life will be like once the transaction has closed. Key in the analysis of whether to undertake such a transaction is the ability of the strategic partner to execute on the business plan proposed in their preliminary discussions. Physicians should specifically look to a potential partner’s track record of past successes, the quality of the leadership team, and the resources that will be available for implementing said plan.
For primary care physicians in particular, due to the wide ranges in quality and availability across providers and regions, practitioners considering a strategic transaction should also consider the “bench” of other primary care providers that a potential partner has been able to assemble for the overall organization, in addition to the affiliation structure, as different models and types of partners have shown varying levels of success in the primary care setting. For example, some strategic partners will have implemented policies and procedures to emphasize an increase in quality of care, including peer review and performance or incentive-based compensation.
For primary care providers not yet immersed in value-based care, a strategic partner may be able to help educate the practice’s owners and staff as to the benefits of, and assist with implementing and operating within, the optimal models for your practice – including through the use of advanced technology (electronic medical records, data analytics, etc.), as well as the use of experienced care coordinators.
Primary care physicians now have their choice from among a greater number of different types of strategic partners to consider for a transaction, ranging from the more traditional practice settings such as larger multispecialty groups and hospital systems, to private equity-backed medical practice platforms, provider arms of insurance carriers, and the latest newcomers to the field, the retail-based organizations such as CVS, Amazon, Walmart and Walgreens. Each type of partner has its own pros and cons, with of course additional distinctions among the players within a given category.As such, providers should conduct their own due diligence of a potential partner before entering into any agreements.
Fortunately, there are capable advisers available to assist in vetting prospective partners as well as gauging the proposed business terms and legal features of competing partnership proposals – investment bankers, accountants, attorneys and consultants. We cannot stress enough how important it is to be well-educated and advised in entering into a once-in-a-lifetime sale of the valuable medical practice that you built over many years with your blood, sweat and tears.
While the cost of capital has increased in the last year, primarily due to rising interest rates, it has not yet had an overwhelming impact on the direction of the industry and the continuing consolidation in the health care space (and there are early indications of potential interest rate reductions later this year).
Gary W. Herschman and Conor F. Murphy are members of the firm in the health care and life sciences practice, in the Newark and New York offices of Epstein Becker & Green P.C. The 2024 Physician Transactions Conference takes place Feb. 15, 2024, in San Francisco, California, with additional information online.