🏥 Is History Repeating Itself?
 Hey everyone! In case you missed it, I sent Hospitalogy’s first newsletter on Tuesday, but I think it was sent to spam for a lot of you. Dang deliverability issues. You can read it here.
Now onto today's content - what’s next for the physician practice? Are we repeating the mistakes of the 90’s era of physician practice management companies? After reading Jan-Felix Schneider’s excellent piece on the death of physician independence, I went down the rabbit hole researching physician employment dynamics, the current transaction space, and the 1990’s physician practice management crash to make a more educated opinion on where I think the physician practice is headed in the coming years. Let’s get after it! Was this email forwarded to you?  DEEP DIVE Private Equity, Care Platforms, and the Future of the Physician PracticeMore healthcare players than ever are crowding the physician M&A space to scale and gain market share. Corporate and hospital employment of physicians is accelerating like crazy, similar to the roll-ups of the late 90’s (shout out PhyCor). Employment of physicians has increased 19% over the last 3 years, accelerated by ‘Rona.
Current market dynamics are creating bidding wars for physician practices of all sizes, and an aging, retiring physician base is looking to cash out. These dynamics create a perfect storm of events for physician practice M&A to accelerate, which has definitely happened since the pandemic.  As a result of this acceleration, physician practices are, and have been, in red-hot demand. Hospitals and corporate interests are bidding up physician practice valuations. There are a lot of organizations trying to make a quick buck and grow as quickly as possible, which will lead to repeating the sins of PhyCor and MedPartners. On the other hand, many PPMs are much more sophisticated operators when compared to 90’s operators. Value-based care and capitation arrangements are not so new anymore, and population health strategies are now being encouraged and incentivized by CMS and others. My ThesisThere will be a reckoning for certain bad players in PPM land, but the best operators will survive and thrive by growing at responsible levels and being prudent in their M&A strategies. For the worst operators, physicians will grow increasingly difficult to manage. The inorganic growth unbound will lead to cultural clashes between employed physicians and their bosses among the operaters who can’t successfully integrate. The culture issues, always overlooked, will result in AT LEAST a partial unraveling of the physician practice roll-up and employment trend. Most importantly, players who fail to produce organic growth once M&A dries up will see their equity values crumble, leading to a physician exodus from the platform. My hypothesis above begs the question: what’s next for the physician practice? Because this rapid M&A dynamic is unsustainable, I’m predicting that the physician employment pendulum at least partially swings back toward independence. An opportunity will arise for new-age care platforms and startups who are building out resources to enable the independent physician practice once again.
Background of PE groups & Physician employmentHospitals, private equity firms, insurers, and new-age care platforms are snatching up physician practices across the nation. Since ‘Rona, over 83,000 physicians left their independent practices to join one of these entities.
 The Physician Acquisition PlaybookWhy physicians? Physician practices USED to be super fragmented with small independent groups scattered across the nation. Fragmentation meant that PE firms or other care platforms like Privia could acquire smaller practices (AKA, one or two man physician practices) for lower multiples, then add that practice to their larger platform, which is valued at a higher multiple. It’s a similar model in hospitals with downstream pick-up leading to higher patient revenue. Private Equity 101: The PE playbook tends to work something like this: Raise funds → use those funds to create a physician practice management platform → make a splashy first acquisition of a larger physician practice in that particular specialty → finance tuck-in acquisitions via debt → acquire smaller physician practices at lower multiples via a combination of cash and equity → practice earnings are immediately worth more because the scaled platform co. commands a higher multiple → adjust comp and improve the expense structure of all acquisitions → sell the platform business to another PE sponsor or strategic player.  On the physician and clinical side, physicians don’t want to deal with the hassle of back-office and administrative tasks. Practice management companies have an easy sell - “Let us do the heavy lifting for you. We’ll take a bite out of your collections off the top, but you’ll be able to focus on care and leave work with fewer headaches.” This thinking led to the creation of PhyCor, MedPartners, and other PPMs in the 90’s, and the same thing is happening today. It’s a great idea for a business model, but execution has to be strategically sound especially in any model involving physicians. At this point, Private equity players have created large practice management companies across a number of physician specialties. Private equity (PE) is now heavily involved in healthcare. Among all industries in 2021, healthcare investments represented about 14% of total PE transaction activity. What started as investments in high-margin specialties like dermatology, fertility, and ophthalmology has expanded into every type of physician practice - even including lowly primary care. Private equity-backed groups aren’t the only firms engaged in this strategy. As the ACA fueled industry consolidation, this trend is playing out across a number of healthcare services verticals. It’s just most apparent in physician practices right now, where employment is approaching full capacity.
Things Fall Apart?Here’s where my thesis comes in to play: the physician tuck-in playbook is starting to fray as a multiple arbitrage opportunity, and the late 90’s PPM crash may (partially) repeat itself. We’re already starting to see some groups dissolve, just like PhyCor in ‘99. PE-backed provider groups, Optum and other managed care orgs, and new-age care platforms like Privia have joined the physician practice M&A black hole, driving up tuck-in multiples. As a result, the historical market dynamics for physician M&A have shifted:
So you can see why overpaying for a physician practice could be problematic. As multiples expand ever upward into the sky, PE portfolio companies and VBC players will have to operate more efficiently OR negotiate higher reimbursement to justify higher platform-level multiples. Platform multiples will start to creep up into the ‘too expensive’ realm...17x, 18x, 19x. In my mind, the days of getting by on inorganic growth through M&A seem to be coming to an end, and it’s pretty hard to grow a physician practice organically. Private valuations are artificially high, and I’m of the opinion that this trend is unsustainable. If multiples don’t expand, ROI will decay and PE margins will shrink.
Based on the trends outlined, I’m expecting to see the following consequences:
Madden's Musings: the current boom of physician practice management is approaching its tail end as physician employment nears full capacity. Physician Practice Management players to watch: Oncology roll-ups like GenesisCare, OneOncology (Link) U.S. Radiology. U.S. Anesthesia Partners, Ophthalmology roll-ups like AEG Vision, Retina Consultants of America, American Vision Partners, etc. Finally, other specialties like gastroenterology and GI Alliance, fertility, dermatology, or urology. PE-backed firms already publicly traded include The Oncology Institute, ATI Physical Therapy, and Mednax. Without really even needing to look, I can tell you that their stock prices are performing incredibly poorly since going public. Bottom Line: The physician practice roll-up trend will lose its runway over the coming years, creating an opportunity for new enablers of independent physician practices. While there may not be a crash landing, I’m definitely expecting some money to be lost. Thanks for reading, and feel free to reach out with any hot takes, vehement disagreements, or reinforcement of the above. Resources:
 HOSPITALOGY TOP READS
 MISCELLANEOUS MADDENINGS
 JOBS Here are some jobs that I’m curating for the healthcare industry. Use this link to submit your role to be featured if you’re looking to hire (yes, it says Healthcare Huddle - but you're in the right place)! Internal Medicine Physician, Nurx Propel Physicians, working with Nurx, is looking for Physicians eager to be at the forefront of a new model of care delivery that leverages telemedicine to challenge the status quo in healthcare and achieve outcomes not possible with conventional office-based practice. Clinical Impact Assessment Manager, Teladoc As a manager, you’ll be responsible for the day-to-day management of the Impact team including quality, operational efficiency, and ensuring the efficient, accurate analysis and costing of all cases sent to Impact. Clinical Care Navigator, Lyra Health As a Care Navigator, you’ll be doing the important, meaningful work of managing crises, providing in-the-moment telephone support to clients with complex behavioral health issues, ensuring client safety, and connecting clients to high-quality, evidence-based providers and facilities.  Thanks for the read! Let me know what you thought by replying back to this email. See you Tuesday morning! Hopefully we'll get past spam this time, — Blake   Loving this newsletter? Get in front of 2,800 executives and healthcare decision-makers by clicking below: |
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