On May 3, 2018, Michael Barry, Esq. of Arnall Golden Gregory LLP, Tynan Kugler, CVA, of PYA, P.C., and Rob Stone, Esq., of Alston & Bird, LLP presented “Trends in Physician Alignment” at the Georgia Academy of Healthcare Attorneys Annual Meeting and Health Law Update. The panel provided the following insights on current activity involving hospitals and health systems, payor consolidations, private equity firms, independent and other practice groups, and alternative delivery models and affiliations:
- Hospitals and Health Systems. The percentage of physicians who are employed by hospitals continues to increase. A study by Jackson Healthcare shows that more physicians are choosing hospital employment over private practice than in recent years, driven largely by the administrative burden of operating an independent practice and the increasing capital needs of operating an independent practice. At the same time, health systems continue to develop close affiliations with medical practices because it is beneficial to the systems’ long-term strategic plans, allows the systems to expand their service areas, helps them satisfy a community need, and because of general marketplace demands. Health systems are affiliating with medical groups in a variety of ways from medical directorships to management services and employment arrangements. Prior to considering an affiliation, it is important for a health system to have a long term plan that outlines the organization’s near term and long term goals. Counsel must be ready to address regulatory/compliance issues that come up in diligence such as Stark compliance, post-closing compensation issues, and commercial reasonableness determinations. Compensation models including quality incentives are becoming commonplace in physician employment agreements. Health systems differ on what metrics to use and how to measure quality.
- Payor Consolidation. Physician employment by, and affiliation with, payors continues to grow. For example, OptumCare was noted to employ or affiliate with approximately 30,000 physicians. Payor consolidation allows the payor to control costs through the negotiation of rates and the ability to cut expenses that have limited impact, but also gives the payor more power to address cost control measures.
- Private Equity Firms. There is significant continued growth in the acquisition of physician practices by private equity firms, specifically in the orthopedic, ophthalmology, pain, and anesthesiology specialties, where markets are fragmented and there are opportunities for roll-ups, efficiencies, and economies of scale. One acquisition method involves private equity firms identifying and acquiring a “foundation” practices and then rolling-up smaller practices. There are often state specific corporate practice of medicine issues that must be resolved as well as unique Stark Law compliance concerns. Regulatory diligence often involves a good deal of client education as some private equity clients may not have prior experience in the health care space, and some medical practices are not adequately prepared for the deeper due diligence review (and possible subsequent price adjustments). Multiple valuation issues arise in such transactions associated with EBITDA multiples; roll over equity; and purchase price and compensation trade-offs. These transactions not only involve significant operational due diligence, but also some pre-deal soul searching as physicians decide whether to sell to a private equity firm or to a health system or remain independent. A sale is not always the best (most financially beneficial) path for a well-run, well positioned medical practice.
- Independent and Other Practice Groups. It is expected that there will continue to be some independent physician groups because not every group is an attractive target and some groups do not want or need to be an acquisition target. However, hospitals will continue to develop mutually beneficial affiliation strategies for these independent groups. Hospitals can assist these groups to remain successful through Accountable Care Organization (ACO) participation, population health involvement, Stark-compliant recruitment arrangements, and administrative leadership affiliations. To help ensure their viability, independent practices must balance flexibility, autonomy, and entrepreneurship against the need to operate in a cost-efficient and institutional manner in a highly regulated industry.
- Alternative Models and Affiliations. ACOs were developed to incentivize high-quality care between physicians and hospitals, but these entities must balance the expenses of formation and operation. The successes of ACOs, Clinically Integrated Networks, and bundled payment models can be irregular and tend to provide greater rewards to those willing to take more risk. There is also an increased presence of bundled payment and continuing evolution of various gainsharing models. Recognizing that both of these models are focused on quality control, bundled payments models may focus more on payment reduction while gainsharing may focus more on cost control, with the possibility for faster results from a gainsharing program.
The panel closed the presentation with a recommendation that legal counsel advising health care clients or investors work to understand their client’s long term goals. The evaluation of a variety of models will allow health systems to align themselves with providers, but given the need to navigate a highly regulated environment, it is important to have a clear picture at the outset of the organization’s needs, goals, and aspirations.