Tenet, Health Management Associates, HCA: For-profit hospitals expected to ramp up buys of physician groups in 2011
Source: Pharmawire – December 21, 2010
By: Jennifer C. Smith-Parker (Washington, DC) and Deborah Balshem (Florida)
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Cardiology practices said to be profitable and expected to be targeted
Long-term acute care and home health care important in long-term
Hospital chains such as Tenet Healthcare (NYSE:THC), Community Health Systems (NYSE:CYH), Health Management Associates (NYSE:HMA) and HCA are expected to accelerate their acquisitions of physician practices in 2011 and beyond, experts said. The impact of healthcare reform is pushing hospitals to cover their bottom lines, they added.
In particular, hospitals are seeking to acquire profitable cardiology practices, some experts said.
Hospitals in particular are concerned about “shared-savings programs” that the healthcare legislation stipulates must be established by 1 January 2012. These programs, known as accountable care organizations (ACOs), are likely to be physician-driven entities whose purpose is to have a continuum of care for Medicare beneficiaries. The goal of ACOs is to show cost-savings in patient care.
ACO guidelines are expected to be issued next month, several sources said.
ACOs are considered the linchpin to the healthcare reform law’s “integrated care” or “coordinated care” model. An ACO must have the participation of primary-care physicians - 5,000 at a minimum - so that large primary-care physician groups, as well as multi-specialty and certain specialty groups, are in demand.
Hospitals are concerned about the possible competitive effects ACOs may have, especially on purchasing power, noted Avalere Health president and CEO Daniel Mendelson. It therefore makes sense that hospitals will proactively leverage physician practices so as to have more influence, he said.
Both “vertical and horizontal integration” of hospitals and physicians can be expected, Mendelson said. In particular, cardiology practices are targeted in deals since they are important for profitable referrals, he added. He said he expects to see a “dramatic uptake in M&A in the cardiology space.”
An ACO also must have processes in place that promote evidence-based medicine and report on quality and costs, resulting in high IT costs for physician groups. They typically “cash-out” to owner physicians at the end of each year and have little access to large amounts of capital. As such, physicians have been flocking back to parent owners with strong balance sheets and administrative and IT expertise, sources said.
The IT infrastructure required to meet new reporting requirements makes it a “logical choice” for physicians to affiliate themselves with hospitals or to be acquired, noted Ron Wince, CEO of Guidon Performance Solutions.
Sources noted that for-profit hospitals, in particular, have been aggressively employing physicians and acquiring large group practices as a way to cement their position as the dominant local ACO. One national buyer of physician group practices said he has seen more competition in the last six to 12 months from hospitals vying for physician groups, driving prices up “dramatically.” Another source said he has seen cardiology groups valued as high as USD 1m per cardiologist.
There will be a “rapid, huge” proliferation of hospitals of “every type of description” buying medical groups in 2011 and beyond, said Steve Messinger, principal, ECG Consultants. He said physicians are eager to engage in such transactions due to Medicare physician cuts. Messinger agreed that cardiology practices are particularly attractive since their reimbursement rates have been “hard hit” since 2006. He said companies such as Tenet, HMA and HCA are thinking of buying and employing 5,000 physicians over the next five years.
There are few large or very integrated pure-play primary-care physician groups, so most primary care practitioners are being absorbed via straightforward employment agreements, several hospital executives agreed. However, the larger multi-specialty groups - which often consist of primary-care doctors and specialists, as well as the large Medicare-driven specialty groups - such as cardiology, endocrinology and even podiatry - are known as more traditional M&A targets, the sources said.
According to two New York-based hospital sources, multi-specialty groups ProHEALTH and Queens-Long Island Medical Group are both “well regarded for cost containment and managing care.” Neither source had any knowledge of any actual M&A and both were speaking generally. ProHealth has more than 200 physicians in 20 locations throughout Long Island. Queens-Long Island has more than 350 primary and specialty care physicians in 20 offices.
Another national buyer of physician practices named Massachusetts-based Atrius Health, South Florida-based MCCI and Texas-based WellMed as quality integrated groups. Atrius has more than 800 physicians; MCCI has 105 primary-care physicians and 200 affiliated specialists; WellMed has 60 primary-care physicians and 150 affiliates.
Kaiser Permanente is considered to be a good model for how an ACO should be constructed considering its integration of primary care, ambulatory care and insurance, Wince said. In addition to Tenet, HCA and the Catholic Health System, physicians groups such as Sutter Health are known as “serial acquirers,” he said.
The larger, more integrated ACOs will include home health, nursing home care, hospitalists, social services, pharmacy, transportation, renal care and hospice, among others, sources said. Physician groups with some or all of these attributes are considered even more attractive by most, they added.
Messinger said he expects hospitals to have interest in subcontracting or collaborating, more so than purchasing, long-term acute care (LTACs) or home health care (HHC) facilities because the ACO focus is on primary care. Still, hospitals are mindful of the role LTACs and HHC play in relation to overall reform, he said. He further stated that he could foresee M&A among LTACs and HHC facilities.
Large hospitals such as Community and Tenant, as well as community hospitals, are also looking to employ case managers, community health workers and dieticians so it makes sense to purchase practices that integrate these systems, said Mark Lutes, an attorney at Epstein Becker & Green.
Lutes agreed that cardiology practices are attractive acquisitions as they can bring patient volume into hospitals. LTACs and HHC are “lesser priorities” than primary care when it comes to acquisitions but still need to be considered in the long-term as the law has incentives to move patients out of acute care and into HHC and ambulatory care, Wince said.
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