Acquisition Versus Independence: Will Hospitals Continue Acquiring Physician Practices?

As small and solo practices find better ways of coping with administrative burdens, a resurgence in physician independence is on the horizon.

Rising operational complexity and physician burnout are well-documented challenges in health care. An increasing administrative burden, evolving consumer demands, and ongoing IT initiatives are putting considerable strain on small and independent practices. Many outpatient facilities are grappling with shifting regulatory requirements and greater scrutiny of cost, quality, and patient experience under value-based care. These issues have prompted many physicians and medical groups to seek the shelter of hospital employment or ownership to avoid the mounting pressures of independent practice.

Recent Trends

A Physician Practice Benchmark Survey by the American Medical Association (AMA) marked 2016 as the first year in which fewer than half of practicing physicians (47.1 percent) owned their own practices. ^a Surgical subspecialties represented the percentage of physicians who were practice owners in 2016 (59.3 percent), followed by radiology (56.3 percent). Practice ownership was lowest among emergency medicine physicians (27.9 percent). Among those surveyed, younger physicians were more than three times as likely as older physicians to be employed by hospitals.

Research published by the Physicians Advocacy Institute (PAI) in 2017 noted a 49 percent increase in physician employment by hospitals between 2012 and 2015. ^b Hospital and health system ownership of physician practices grew 86 percent during the same period. More recently, however, the pace of medical practice acquisitions and direct physician employment by hospitals has shown signs of leveling off. A 2018 update to the PAI study cited just an 11 percent growth in physician employment and 5,000 practice acquisitions between July 2015 and July 2016. ^c

To understand what is influencing the ebb and flow of physician practice acquisitions, it’s important to understand both what is motivating physicians and what is fueling hospital and health system interest in medical practice ownership.

The Appeal of Acquisition

For many physicians today, the financial uncertainty of new payment models and increased costs related to ongoing technology adoption make being acquired the most viable option for remaining open. Although a majority of physicians still work in small practices—57.8 percent worked in practice settings with 10 or fewer physicians in 2016, according to the AMA—the long-term trend toward larger practice size continued over the period of 2012 to 2016.

The allure of shared resources associated with larger healthcare institutions is increasingly driving independent practices toward mergers with other medical groups or acquisition by organizations in the acute care space. Many of the present-day responsibilities faced by physician practice leaders require major staff and technology investments, including but not limited to electronic health record (EHR) implementation, clinical documentation support, virtual care expansion, chronic disease management, care coordination, patient engagement, and risk-based contracting

New value-based payment structures warrant, and require, up-front and ongoing investments, threatening the already tight profit margins of small and independent practices. Health care’s pivot to using preventive care to achieve the Triple Aim—improving patient experience and outcomes while spending less—likely will exacerbate practice problems related to insufficient funding and staff bandwidth.

A 2016 study found that physicians from family medicine, internal medicine, cardiology, and orthopedics spend nearly two hours in the EHR and on administrative work for every hour of direct patient care. ^d Advanced technology adoption could further hinder physician face time with patients. It is anticipated that practices will need to expand staff to support new preventive care and population health initiatives.

The acute-care win.  Meanwhile, the need to fill ambulatory service gaps in hospitals and health systems as more healthcare procedures migrate to the outpatient setting is feeding acute care market interest in practice acquisitions. Inpatient facilities benefit by locking in the flow of patients from primary care to more expensive specialty and inpatient care. Primary care physicians forfeit their leadership role in exchange for a secure paycheck without the headache of practice management.

Drawbacks.  Unfortunately, although the tilt toward hospital employment may relieve some provider burden, research suggests the shift offers no healthcare cost benefits. The physician-employment trend seems to have shifted care to higher-cost locations. The PAI’s analysis found that the 49 percent growth in hospital-employed physicians between 2012 and 2015 correlated to a $3.1 billion increase in Medicare costs related to four specific procedures in cardiology, orthopedics, and gastroenterology.

Opting for Practice Independence

On the other side of the employment-versus-independence debate are outpatient practice leaders eager to maintain autonomy. Among physicians responding to a 2015 Independent Physician Outlook Survey by ProCare Systems, 73 percent reported they would choose practice independence over acquisition if they could guarantee practice profitability and stability. ^e

Physicians with an independent streak often are hesitant to pivot from patient to employer allegiance. For many, schedule flexibility supersedes the first-year fiscal incentives hospitals and health systems frequently use to lure physician talent. Many view the dearth of primary care resources in the market as a good opportunity for physicians to find sustainable footing in independent practice.

Some physician groups have taken drastic measures to exit long-term hospital ownership scenarios. Carolinas-based Mecklenburg Medical Group recently sued Atrium Health to reclaim independence, citing concerns related to cuts in resources and regional price inflation. ^f Non-compete requirements commonly included in hospital employment packages are a point of contention for physicians who may wish to return to independent practice down the road. Seventy-two percent of ProCare survey participants agreed that physicians currently employed by acute care organizations eventually will transition back to independent practice.

Building Small Practice Success

About half of ProCare’s survey respondents believed adoption of innovative new business models would help independent practices retain freedom and compete with larger hospitals and health systems. Practice leaders can employ the following strategies to maintain independence.

Partner for support. In lieu of hospital or health system acquisition, many practices turn to accountable care organization (ACO), management services organization (MSO), or independent physician association (IPA) arrangements to secure support while maintaining practice independence. As an ACO or IPA member, practices can pool resources with other healthcare organizations or medical groups without relinquishing freedom. Many ACOs, IPAs, and similar networks offer shared technology resources and quality reporting assistance, along with collaborative care infrastructure to support value-based care goals.

Independent practices should seek out collaboration opportunities with healthcare partners that have an equally vested interest in improving patient outcomes and experience. Many payers, for example, are arming their physician networks with technology solutions that support data-driven care management and population health management initiatives.

Leverage small practice incentives. The Centers for Medicare & Medicaid Services (CMS) introduced several leniencies and incentives that practices with 15 or fewer clinicians can take advantage of when reporting under MACRA’s Quality Payment Program (QPP). ^g Such small practices are eligible for bonus points and reporting exemptions imed at reducing participation burdens for practices with limited staff and budget. CMS provisioned $100 million in funds to support small practice QPP reporting efforts.

For the 2018 reporting period, practices with 10 or fewer clinicians also can report QPP data via a virtual group. As with ACOs and IPAs, virtual groups allow independent practices to band together, regardless of location or specialty, on QPP reporting efforts.

Fill knowledge gaps.  Beyond securing support related to regulatory reporting and compliance, practices also are wise to increase analytics resources. Analytics expertise will play an increasingly important role in practice success with population health management and risk-based contract negotiations with payers.

With responsibilities like patient financial planning, insurance eligibility verification, and prior-authorization migrating to the front office, staff that can quickly adapt to new workflows will play an equally vital role in supporting small practices. Practice leaders should focus on retention of well-trained, nonclinical staff to support the long-term success of the practice.

Outsource routine tasks.  As payment shifts from fee-for-service to less predictable fee-for-value models, it is critical that practices implement efficient revenue cycle management practices that protect existing revenue streams. Practices can and should take advantage of new chronic disease management codes in billing. Many practices benefit by turning to outside partners to support these coding, billing, and other revenue cycle management functions. Such partners also can help practices manage payer relationships and ensure payments are prompt and accurate.

EHR optimization is another area where independent practices can benefit from outsourced assistance. The latest Black Book survey of ambulatory EHR products finds small practices are the most dissatisfied with EHR applications: Among practices with six or fewer practitioners, 88 percent have yet to optimize EHRs even though doing so can yield workflow efficiencies that support increased patient engagement and throughput and reduce staff frustration. ^h

Embrace consumerism. Physician practices should meet the rise of consumer choice in health care with a cultural shift in practice mentality. To be competitive, practices must offer patients the same conveniences they’re accustomed to in other industries, including digital engagement. Online communication options, appointment scheduling, and patient portals make it easier for patients to interact with practices.

Engagement efforts that give patients a better billing experience represent another way practices can build loyalty with consumers. Practice offerings should include longer payment terms, up-front billing transparency, and digital, self-service payment options. Public perception of a practice’s willingness to adapt will influence traction with both patients and potential healthcare partners.

The Path Back to Independence

Several factors support the recent dip in practice acquisitions by hospitals and health systems cited in PAI’s 2018 survey update. As independent practices find footing with new strategies for better workflow efficiency, the viability of solo practice is resurfacing. Meanwhile, hospitals and health systems acquiring practices are feeling the fiscal and operational pinch of adapting to an influx of new patients and clinical teams.

A 2017 analysis by the Medicare Payment Advisory Commission (MedPAC) of CMS’s inpatient and outpatient claims and enrollment data found that Medicare payments for outpatient Medicare Part B beneficiaries increased 47.4 percent since 2006 while inpatient Part A beneficiary payments declined 19.5 percent during the same period. ⁱ Recent legislation aims to limit Medicare payment for services provided in hospital outpatient departments to the same amounts physician practices would receive.

This development presents an opportunity for independent practices to capture some of the business that hospital outpatient departments now may find are not as cost-effective to deliver as they once were. Small, physician-owned practices are well poised to provide more personalized and responsive care to patient populations than are their larger facility counterparts. Practices that continue to prioritize workflow efficiency and patient engagement will cultivate loyalty and referrals among patient populations, which can help small and solo practices compete under value-based payment and draw in payer and provider partners that can further support these practices’ long-term goals.

Footnotes

a. Kane, C.K., Policy Research Perspectives , white paper, American Medical Association, 2017.\
b. Avalere Health, LLC, Implications of Hospital Employment of Physicians on Medicare & Beneficiaries , Physicians Advocacy Institute, November 2017.
c. Physicians Advocacy Institute, Updated Physician Practice Acquisition Study: National and Regional Changes in Physician Employment , March 2018.
d. Sinsky, C., Colligan, L., Li, L., et al., “ Allocation of Physician Time in Ambulatory Practice: A Time and Motion Study in Specialties,” Annals of Internal Medicine, Dec. 6, 2016.
e. 2015 Independent Physician Outlook Survey: Physician Migratory Patterns, Threats to Independence and Implications for the Future, ProCare Pain Solutions, 2014.
f. Kacik, A., “ Atrium Health’s largest Physician Group Sues to Practice Independently,” Modern Healthcare, April 2, 2018.
g. Quality Payment Program, Support for Small, Underserved, and Rural Practices , Centers for Medicare & Medicaid Services, 2018.
h. Black Book Market Research, “ New Spike in EHR Replacement Activity Jars Larger Physician Practice Market, 2018 Black Book Survey,” press release, April 16, 2018.

i. MedPAC, Report to the Congress: Medicare Payment Policy , March 2017.