Joe Parise and Dana Dombey, McDermott Will & Emery LLP11.01.23
In recent years, the dynamics between physician practice management companies (PPMs), ambulatory surgery centers (ASCs), and health systems have been shifting significantly. By necessity—and opportunity—the industry is adapting to the medium- and long-term impacts of the COVID-19 pandemic and today’s economic and employment landscape. The expansion of telehealth and other innovative care delivery models have created new patient expectations and preferences. At the same time, economic and operational pressures in the healthcare sector, including rising inflation and ongoing labor shortages, are driving increased demand for new, innovative strategies to efficiently and effectively deliver care.
The effects of these broader forces were made clear in 2022, as healthcare private equity (HPE) markets and merger and acquisition activity saw dramatic shifts between H1 and H2, and have continued apace into 2023. According to Bain & Company’s 2023 Global Healthcare Private Equity and M&A Report, the first half of 2022 featured the same powerful drivers that led to 2021’s record-setting HPE performance. Then the combination of Russia’s invasion of Ukraine, rising interest rates, and tightening credit markets put a freeze on activity. Buyout volume fell by more than 35% between the first and second halves of the year, and the fourth quarter registered the lowest HPE deal activity in five years.
Although the broader U.S. economy appears to be stabilizing, these forces have created an environment in which physicians, health systems, and other stakeholders are collaborating to meet the healthcare market’s demands and achieve shared business goals.
Beyond reimbursement, physicians are actively seeking to leverage the management experience and operational efficiencies that come with PPM and ASC/health system partnerships. Shifting back-office and administrative responsibilities to entities for which these areas are a primary focus can provide significant advantages for physicians and patients alike and is another way these collaborations can allow physicians to focus more on delivering clinical care.
By integrating ASCs and specialty clinics into their overall strategies, health systems gain a competitive edge in adapting to and meeting local patient demand, providing services from within the system rather than referring to outside providers, and attracting and retaining top talent. This move also enables health systems to provide physicians with greater control over their practice environment, which further contributes to job satisfaction and loyalty.
Similarly, a Harvard Business Review analysis highlighted two key benefits to collaboration. First, due to sharing performance metrics with each other, individual healthcare entities can see where they stand relative to their peers and identify high and low performers internally. Second, the improvement agenda can be set by those delivering care, increasing the buy-in—and that buy-in value—of physicians and hospitals. This further enables health systems to take ownership of solutions at the local level.
Physician consolidation also supports recruitment efforts, a significant industry concern as the physician population ages and burnout drives some practitioners into other roles. Experienced physicians are increasingly looking for assistance with recruitment to ensure their own smooth transitions into retirement. According to the Advisory Board, the United States is facing a wave of physician retirements over the next decade, driven in part by COVID-19-related burnout, but primarily due to demographics: as the baby-boom generation ages, the physician population is likewise skewing older.
By partnering with entities that can facilitate buyouts for senior physicians and relieve younger physicians from the burden of managing operations or assuming significant debt, physicians can focus on their core responsibilities—providing exceptional care to patients—while also preparing the way for the next generation of practice leaders, especially in regions where specialized medical services are scarce. By establishing larger practices with multiple locations, healthcare providers can expand their geographic footprint and service broader patient populations.
For example, certificate of need (CON) programs mandate that healthcare providers obtain approval from state regulatory authorities before establishing new healthcare facilities or expanding existing ones. The process of acquiring CON approval is often lengthy and resource-intensive, which may discourage health systems from venturing into the outpatient setting. In states with active CON programs, a more effective strategy may involve acquiring existing ASCs and other specialty care clinics rather than developing new ones, simultaneously streamlining the expansion process and reducing financial risk. Experienced legal counsel is essential to navigate the complex state-by-state CON laws and mitigate enforcement risk when expanding operations or acquiring a new physician group.
In addition, certain state regulatory agencies have introduced additional regulatory filings and approval requirements in advance of the closing of healthcare transactions. Certain state requirements are more extensive regarding health system transactions. These requirements exemplify a growing emphasis on ensuring transparency and accountability in the evolving landscape of outpatient healthcare expansion but may also cause delays or require disclosing confidential information that could discourage health systems from executing transactions.
Joe Parise is a partner at McDermott Will & Emery LLP, where works with healthcare clients on a wide range of transactional and regulatory matters across the United States, including mergers, acquisitions, joint ventures, affiliations and divestitures. He also works with clients to navigate the complex strategic and regulatory issues associated with those transactions.
Dana Dombey is a partner and PPM practice area leader at McDermott Will & Emery, where she represents private equity funds, strategic investors, ambulatory surgery centers, and physician practices in a variety of transactional and regulatory matters.
The effects of these broader forces were made clear in 2022, as healthcare private equity (HPE) markets and merger and acquisition activity saw dramatic shifts between H1 and H2, and have continued apace into 2023. According to Bain & Company’s 2023 Global Healthcare Private Equity and M&A Report, the first half of 2022 featured the same powerful drivers that led to 2021’s record-setting HPE performance. Then the combination of Russia’s invasion of Ukraine, rising interest rates, and tightening credit markets put a freeze on activity. Buyout volume fell by more than 35% between the first and second halves of the year, and the fourth quarter registered the lowest HPE deal activity in five years.
Although the broader U.S. economy appears to be stabilizing, these forces have created an environment in which physicians, health systems, and other stakeholders are collaborating to meet the healthcare market’s demands and achieve shared business goals.
Physician Partnerships Address New Challenges
Providers are increasingly moving toward value-based care arrangements, as these models offer increasing opportunity for efficient and coordinated care delivery and the potential for economic growth. Physicians are seeking partnerships with ASC operators or health systems to create operational efficiencies that can also offer access to additional payor networks and opportunities. This enables physicians to focus on the mission-driven elements of their work—providing effective care to their patients—while receiving reimbursement that is aligned with the modern way of providing care.Beyond reimbursement, physicians are actively seeking to leverage the management experience and operational efficiencies that come with PPM and ASC/health system partnerships. Shifting back-office and administrative responsibilities to entities for which these areas are a primary focus can provide significant advantages for physicians and patients alike and is another way these collaborations can allow physicians to focus more on delivering clinical care.
Health Systems Respond to Market Changes
In recent years, leading health systems also have adopted proactive approaches to combat volume losses from traditional hospital settings. Embracing change, health system partners are now encouraging employed physicians to invest in ASCs and other specialty practices.By integrating ASCs and specialty clinics into their overall strategies, health systems gain a competitive edge in adapting to and meeting local patient demand, providing services from within the system rather than referring to outside providers, and attracting and retaining top talent. This move also enables health systems to provide physicians with greater control over their practice environment, which further contributes to job satisfaction and loyalty.
Physician Consolidation as an Avenue to Profitability, Stability
Physician consolidation offers significant advantages for healthcare providers, creating value through several channels. A study published in the American Public Health Association journal Medical Care found that practice consolidation in the United States—including vertical consolidation (hospital and health system practice acquisition) and two types of horizontal consolidation (medical group membership and practice-practice mergers)—had positive effects on the strength and stability of practice-based physician shared patient networks. Consolidations also contributed to organizational effectiveness.Similarly, a Harvard Business Review analysis highlighted two key benefits to collaboration. First, due to sharing performance metrics with each other, individual healthcare entities can see where they stand relative to their peers and identify high and low performers internally. Second, the improvement agenda can be set by those delivering care, increasing the buy-in—and that buy-in value—of physicians and hospitals. This further enables health systems to take ownership of solutions at the local level.
Physician consolidation also supports recruitment efforts, a significant industry concern as the physician population ages and burnout drives some practitioners into other roles. Experienced physicians are increasingly looking for assistance with recruitment to ensure their own smooth transitions into retirement. According to the Advisory Board, the United States is facing a wave of physician retirements over the next decade, driven in part by COVID-19-related burnout, but primarily due to demographics: as the baby-boom generation ages, the physician population is likewise skewing older.
By partnering with entities that can facilitate buyouts for senior physicians and relieve younger physicians from the burden of managing operations or assuming significant debt, physicians can focus on their core responsibilities—providing exceptional care to patients—while also preparing the way for the next generation of practice leaders, especially in regions where specialized medical services are scarce. By establishing larger practices with multiple locations, healthcare providers can expand their geographic footprint and service broader patient populations.
Key Challenge in Outpatient Expansion
While collaboration between health systems and ASCs presents numerous benefits, regulatory approval processes can pose challenges and barriers to entry.For example, certificate of need (CON) programs mandate that healthcare providers obtain approval from state regulatory authorities before establishing new healthcare facilities or expanding existing ones. The process of acquiring CON approval is often lengthy and resource-intensive, which may discourage health systems from venturing into the outpatient setting. In states with active CON programs, a more effective strategy may involve acquiring existing ASCs and other specialty care clinics rather than developing new ones, simultaneously streamlining the expansion process and reducing financial risk. Experienced legal counsel is essential to navigate the complex state-by-state CON laws and mitigate enforcement risk when expanding operations or acquiring a new physician group.
In addition, certain state regulatory agencies have introduced additional regulatory filings and approval requirements in advance of the closing of healthcare transactions. Certain state requirements are more extensive regarding health system transactions. These requirements exemplify a growing emphasis on ensuring transparency and accountability in the evolving landscape of outpatient healthcare expansion but may also cause delays or require disclosing confidential information that could discourage health systems from executing transactions.
Conclusion
As the healthcare industry continues to transform, PPMs, ASCs, and health systems must adapt to remain competitive. Collaborations between these entities offer unique opportunities to optimize patient care, drive growth, and expand geographic and service-line footprints. Additionally, by addressing physician priorities such as financially favorable partnerships, having a strong voice in improvement initiatives, recruitment support, and efficient management, stakeholders can foster sustainable growth and innovation in the healthcare marketplace.Joe Parise is a partner at McDermott Will & Emery LLP, where works with healthcare clients on a wide range of transactional and regulatory matters across the United States, including mergers, acquisitions, joint ventures, affiliations and divestitures. He also works with clients to navigate the complex strategic and regulatory issues associated with those transactions.
Dana Dombey is a partner and PPM practice area leader at McDermott Will & Emery, where she represents private equity funds, strategic investors, ambulatory surgery centers, and physician practices in a variety of transactional and regulatory matters.