While hospitals, payers, and private equity firms have long been competing to acquire independent physician groups, theCOVID pandemic spurred a marked acceleration of the physician employment trend, with non-hospital corporate entities leading the charge.
The graphic above uses data released by consulting firm Avalere Health and the nonprofit Physicians Advocacy Institute to show that nearly three quarters of American physicians were employed by a larger entity as of January 2022, up from 62 percent just three years prior.
While hospitals employ a majority of those physicians, corporate entities (a group that includes payers, private equity groups, and non-provider umbrella organizations) have been increasing their physician rolls at a much faster rate.
Corporate entities employed over 40 percent more physicians in 2022 than in 2019, and in the southern part of the country—a hotspot for growth of Medicare Advantage—corporate physician employment grew by over 50 percent.
We expect the move away from private practice, accelerated by the pandemic, will only continue as physicians seek financial returns, secure a path to retirement, and look to access capital for necessary investments to help grow and manage the increasing complexities of running a practice.
After rumors of a possible deal first surfaced in early January, CVS Health announced on Wednesday that it has entered into a definitive agreement to acquire value-based primary care provider Oak Street Health for $10.6B. The Chicago-based company will join CVS’s recently formed Health Care Delivery organization, bringing with it roughly 600 physicians and nurse practitioners working at 169 senior-focused clinics in 21 states. This move is the latest by CVS to expand its care offerings, following its $100M investment last month in primary and urgent care provider Carbon Health, and its $8B acquisition of in-home evaluation company Signify in September.
The Gist: If this deal goes through, CVS will have the key pieces of the national primary care physician network it needs for a value-based care platform focused on Medicare Advantage—although how they will combine Oak Street’s clinics with retail-based HealthHUBs and other primary care assets remains unclear.
The fact that CVS is paying about a 50 percent share price premium shows how competitive the market for large physician organizations has become, driving up bidding prices such that only cash-rich payers, pharmacies, and retailers can afford them as they seek to emulate UnitedHealth Group’s Optum strategy.
Of note, the same day CVS announced the deal, Aetna competitor and erstwhile investor in Oak Street, Humana announced a five-year network partnership with Oak Street competitor ChenMed.
We’ll be watching for whose strategy proves most effective as we enter the next phase of the physician arms race between vertically-integrated payers, and the emphasis shifts from how many providers are employed to how they’re integrated and deployed.
Given the economic situation most hospitals face today, it was only a matter of time before we started to hear comments like we heard recently from a system CEO.
“We’ve got to pump the brakes on physician employment this year,” she said. “This arms race with Optum and PE firms has gotten out of control, and we’re looking at almost $300K per year of loss per employed doc.”
Of course, that system (like most) has been calling that loss a “subsidy” or an “investment” for the past several years, justified by the ability to pursue an integrated model of care and to grow the overall system book of business.
But with non-hospital competitors unfettered by the requirement to pay “fair market value” for physicians, the bidding war for doctors has become unsustainable for many hospitals. Around half of physicians are now employed by hospitals, with many more employed in other corporate settings.
There’s a growing sense that the pendulum has swung too far in the direction of employment, and now the phrase “stopping the bleed”—commonplace in the post-PhyCor days of the early 2000s—has begun to ring out again.
One challenge: finding ways to talk openly about “pumping the brakes” with the board, given that most systems have key physician stakeholders as part of their governance structure. Twice in the last month we’ve had CEOs ask us about reconfiguring their boards so that there are fewer doctors involved in governance—a sharp about-face from the “integration” narrative of just a few years ago.
It’s a tricky balance to strike. We recently heard a fascinating statistic that we’re working to verify: a third of all hospital CEO turnover in the last year was driven by votes of no-confidence by the medical staff. True or not, there’s no doubt that running afoul of physicians can be a career-limiting move for hospital executives, so if we’re about to enter an era of dialing back physician employment strategies, it’ll be fascinating to see how the conversations unfold. We’ll continue to keep an eye on this shift in direction and would love to know what you’re hearing as well, and to discuss how we might be of assistance in navigating what are sure to be a series of difficult choices.
Recent conversations with executive teams about physician issues have made us feel like we’ve time-travelled back to 2006. Both health systems and large independent physician groups report having difficulties hiring physicians willing to take call, even among specialties where it has long been part of the job expectations.
“We stopped paying for call fifteen years ago,” one CMO shared. “But now, even though we’ve started paying again, it’s hard to get takers.” While procedural specialties seem to be the hardest to cover, with orthopedics, urology, and GI cited most frequently, we’re also hearing challenges with medical specialty coverage. One hospital CEO (who lamented that call coverage had once again risen to a CEO-level problem) shared that cardiologist candidates were looking for positions without call obligations.
The knee-jerk reaction of older executives is to blame a younger generation of doctors seeking more work-life balance. Surely this contributes, but as one astute medical group CEO pointed out, the only way doctors can draw this line in the sand with health systems is if there are alternatives that don’t require call.
He referenced the growing number of investor-backed specialty practices focused squarely on outpatient growth and even offering doctors no-call positions straight out of training. In his market, he felt these doctors were discouraged from taking call: “When 80 percent of the procedures are done in a surgery center, an orthopod doesn’t need referrals from call to fill his schedule with new patients. And the patients they encounter in our ED are more likely to be uninsured or government pay, so they don’t want them anyway.”
Beyond simply paying for call, a few other solutions are gaining traction. Some hospitals are expanding the number of in-house, hospitalist-like positions for other specialties. Others are deploying virtual consult services with some success, even in procedural specialties. As one orthopedic surgeon told us, the virtual call coverage does a decent job with triage and can often save the doctor from having to come in overnight.
Ultimately, as the number of investor-owned specialty groups expands, health systems must develop collaborative relationships to solve care delivery challenges across the continuum.
Urgent care centers have become increasingly popular among patients in recent years. And while the facilities may be a more convenient care option than others, experts have voiced concerns about potential downsides, Nathaniel Meyersohn writes for CNN.
What is driving the urgent care ‘boom’?
Urgent care centers have been in the United States since the 1970s, but they were widely regarded as “docs in a box,” with slow growth in their early years. Then, during the COVID-19 pandemic, demand for tests and treatments drove an increase in patients at urgent care sites around the country. According to the Urgent Care Association (UCA), patient volume at urgent care centers has increased by 60% since 2019.
As patient volumes and demand increased, growth for new urgent care centers surged. Currently, there are a record 11,150 urgent care centers in the United States, with around 7% growth annually, UCA said. Notably, this figure excludes clinics inside retail stores and freestanding EDs.
According to estimates from IBISWorld, the urgent care market will reach roughly $48 billion in revenue in 2023, a 21% increase from 2019.
“Urgent care has grown rapidly because of convenience, gaps in primary care, high costs of emergency room visits, and increased investment by health systems and private-equity groups,” Meyersohn writes.
Urgent care center growth also “highlights the crisis in the US primary care system,” Meyersohn writes, noting that the Association of American Medical Colleges said it expects a shortage of up to 55,000 primary care physicians in the next decade.
In addition, it can be difficult to book an immediate visit with a primary care provider. Urgent care sites have longer hours during the week and are open on weekends, making it easier to get an appointment. According to UCA, roughly 80% of the U.S. population is within a 10-minute drive of an urgent care center.
“There’s a need to keep up with society’s demand for quick turnaround, on-demand services that can’t be supported by underfunded primary care,” said Susan Kressly, a retired pediatrician and fellow at the American Academy of Pediatrics.
Meanwhile, health insurers and hospitals have also prioritized keeping people out of the ED. In the early 2000s, they started opening their own urgent care sites and implementing strategies to deter ED visits.
The passage of the Affordable Care Act also triggered an increase in urgent care providers, with millions of newly insured Americans accessing healthcare.
In addition, data from PitchBook suggests that private-equity and venture capital funds invested billions into deals for urgent care centers.
“If they can make it a more convenient option, there’s a lot of revenue here,” said Ateev Mehrotra, a professor of healthcare policy and medicine at Harvard Medical School who has researched urgent care clinics. “It’s not where the big bucks are in health care, but there’s a substantial number of patients.”
The increase in urgent care sites may present challenges
Many doctors, healthcare advocates, and researchers have voiced concerns at the increase in urgent care sites, noting that there are potential downsides.
“Frequent visits to urgent care sites may weaken established relationships with primary care doctors,” Meyersohn writes. “They can also lead to more fragmented care and increase overall health care spending, research shows.”
In addition, some experts have questioned the quality of care at urgent care centers, particularly how well they serve low-income communities.
In a 2018 study by Pew Charitable Trusts and CDC, researchers found that urgent care centers overprescribe antibiotics, especially those used to treat common colds, the flu, and bronchitis.
“It’s a reasonable solution for people with minor conditions that can’t wait for primary care providers,” said Vivian Ho, a health economist at Rice University. “When you need constant management of a chronic illness, you should not go there.”
Some doctors and researchers also expressed concern that patients are visiting urgent care centers instead of a primary care provider altogether.
“What you don’t want to see is people seeking a lot [of] care outside their pediatrician and decreasing their visits to their primary care provider,” said Rebecca Burns, the urgent care medical director at the Lurie Children’s Hospital of Chicago.
“There are also concerns about the oversaturation of urgent care centers in higher-income areas that have more consumers with private health care and limited access in medically underserved areas,” Meyersohn writes.
A 2016 study from the University of California at San Francisco found thaturgent care centers typically do not serve rural areas, areas that have a high concentration of low-income patients, or areas that have a low concentration of privately-insured patients.
According to the researchers, this “uneven distribution may potentially exacerbate health disparities.”
Running a health system recently has proven to be a very hard job. Mounting losses in the face of higher operating expenses, softer than expected volumes, deferred capex, and strained C-suite succession planning are just a few of the immediate issues with which CEOs and boards must deal.
But frankly, none of those are the biggest strategic issue facing health systems. The biggest strategic issue is the reorganization of the American healthcare landscape into an ambulatory care business that emphasizes competing for covered lives at scale in lower cost and convenient settings of care. This shift in business model has significant ramifications, if you own and operate acute care hospitals.
Village MD and Optum are two of the organizations driving the business model shift. They are owned by large publicly traded companies (Walgreens and UnitedHealth Group, respectively). Both Optum and Village MD have had a string of announced major patient care acquisitions over the past few years, none of which is in the acute care space.
The future of American healthcare will likely be dominated by large well-organized and well-run multi-specialty physician groups with a very strong primary care component. These physician service companies will be payer agnostic and focused on value-based care, though will still be prepared to operate in markets where fee-for-service dominates. They will deliver highly coordinated care in lower cost settings than hospital outpatient departments. And these companies will be armed with tools and analytics that permit them to manage the care for populations of patients, in order to deliver both better health outcomes and lower costs.
At the same time this is happening, we are experiencing steady growth in Medicare Advantage. And along with it, a stream of primary care groups who operate purpose-built clinics to take full risk on Medicare Advantage populations. These companies include ChenMed, Cano Health and Oak Street, among others. These organizations use strong culture, training, and analytics to better manage care, significantly reduce utilization, and produce better health outcomes and lower costs.
Public and private equity capital are pouring into the non-acute care sectors, fueling this growth. As of the start of 2022, nearly three quarters of all physicians in the US were employed by either corporate entities (such as private equity, insurance companies, and pharmacy companies), or employed by health systems. And this employment trend has accelerated since the start of the pandemic. The corporate entities, rather than health systems, are driving this increasing trend. Corporate purchases of physician practices increased by 86% from 2019 to 2021.
What can health systems do? To succeed in the future, you must be the nexus of care for the covered lives in your community. But that does not mean the health system must own all the healthcare assets or employ all of the physicians. The health system can be the platform to convene these assets and services in the community. In some respects, it is similar to an Apple iPhone. They are the platform that convenes the apps. Some of those apps are developed and owned by Apple. But many more apps are developed by people outside of Apple, and the iPhone is simply the platform to provide access.
Creating this platform requires a change in mindset. And it requires capital. There are many opportunities for health systems to partner with outside capital providers, such as private equity, to position for the future – from both a capital and a mindset point of view.
The change in mindset, and the access to flexible capital, is necessary as the future becomes more and more about reorganizing into an ambulatory care business that emphasizes competing for covered lives at scale in lower cost and convenient settings of care.
Last Thursday, the Federal Trade Commission (FTC) released a proposed rule that would ban employers from imposing noncompete agreements on their employees. Noncompetes affect roughly 20 percent of the American workforce, and healthcare providers would be particularly impacted by this change, as far greater shares of physicians—at least 45 percent of primary care physicians, according to one oft-cited study—are bound by such agreements.
The rulemaking process is expected to be contentious, as the US Chamber of Commerce has declared the proposal “blatantly unlawful”. While it is unclear whether the rule would apply to not-for-profit entities, the American Hospital Association has released a statement siding with the Chamber of Commerce and urging that the issue continue to be left to states to determine.
The Gist: Should this sweeping rule go into effect, it would significantly shift bargaining power in the healthcare sector in favor of doctors, allowing them the opportunity to move away from their current employers while retaining local patient relationships.
The competitive landscape for physician talent would change dramatically, particularly for revenue-driving specialists, who would have far greater flexibility to move from one organization to another, and to push aggressively for higher compensation and other benefits.
Given that the FTC cited suppressed competition in healthcare as an outcome of current noncomplete agreements, the burden will be on organizations that employ physicians—including health systems and insurers, as well as private equity-backed corporate entities—to prove that physician noncompetes areessential to their operations and do not raise prices, as the FTC has suggested.
The December issue of Health Affairs included an intriguing study that sought to explain the recent trend toward more high-intensity billing in emergency departments (EDs). Using ED visit data for “treat-and-release” visits (i.e. ED patients who were not admitted to the hospital), the study found that visits deemed high-intensity, as defined by certain high-complexity or critical care billing codes, rose from around 5 percent of visits in 2006 to 19 percent in 2019.
The authors conclude that while about half of this increase can be explained by changes in patient case mix and available care services that were visible in claims data, the other half is due to the adoption of sophisticated revenue cycle management programs, and industry-wide changes to billing practices that include upcoding.
The Gist: At first blush, an increase in high-intensity ED billing may not be a bad thing, if it means that greater numbers of people with low-acuity needs are going to urgent care centers, and avoiding EDs for needs that can be managed elsewhere. But the study finds thattreat-and-release rates are going up for high-intensity patients.
Though the authors list many potential reasons for this—including the changed role of the ED as a diagnostic referral center used by primary care physicians for quick workups of complex patients, the growing number of multimorbid seniors, and value-based care’s pressure to reduce hospital admission rates in favor of more resource-intensive ED visits—we have a strong suspicion that good old-fashioned upcoding also plays a role, especially as the percentage of emergency medicine practices managed by private equity companies increased from four percent to over eleven percent across the same time period as the study.
We expect 2023 to be a pivotal year for the industry, as the accelerated acceptance of virtual care and demographic trends, such as an aging population, increasing chronic illnesses and healthcare worker shortages, sustain demand for medtech-enabled solutions.
The combination of rapid developments in novel healthcare technology and heightened demand for integrated tech-enabled care has continued to fuel innovation in the medtech industry. At the same time, medtech innovators – whether in digital health, wearables and AI-driven offerings in healthcare, or diagnostics, telemedicine and health IT solutions – continue to face a patchwork of laws, rules and norms across the world. Life sciences and healthcare innovators and regulators are also looking to medtech to increase access to care and health equity. Here are ten global medtech themes we are tracking in the coming year:
Focus on digital tuck-in acquisitions in medtech M&A
Despite continued uncertainty in the overall financial market, medtech M&A activity continued at a steady pace in 2022. This year witnessed a rise in tuck-in acquisitions of smaller companies that can be easily integrated into buyers’ existing infrastructure and product offerings, as opposed to significantly sized takeovers of businesses that aren’t squarely aligned with buyers’ existing businesses lines. Medtech acquirers have been particularly focused on developing their digital capabilities to innovate and reach customers in new ways. As digitization continues to transform the industry, we expect acquirers to continue to prioritize the value of digital and data assets as they evaluate potential targets.
Continued interest by private equity and other financial sponsors
Private equity firms, healthcare-focused funds and other financial sponsors have continued to display a strong appetite for investing in Medtech companies, with top targets in subsectors such as diagnostics and healthcare IT solutions. Later-stage medtech companies in particular are gaining a larger share of venture capital funding, as later-stage investments allow financial sponsors to focus on businesses with higher yields, as well as less time to market and capital reimbursement. Demographic trends, including an aging population and the increasing prevalence of chronic diseases, coupled with healthcare technology advancements have created robust demand for medtech-enabled solutions. Additionally, medtech offerings have broad applications that can extend beyond stakeholders in a specific therapy area, product category or care setting, offering the ability to satisfy unmet needs with large patient bases.
Strategic medtech collaborations as the new norm
Strategic medtech collaborations and partnerships have become the new norm in our increasingly connected digital healthcare ecosystem. In response to heightened consumer demand for tech-enabled care, pharmaceutical and medtech companies are collaborating to use digital technologies to engage with consumers, unlocking a vast range of treatments such as personalized medicine. Additionally, as the market rapidly evolves towards data-driven healthcare, we expect medtech companies to continue to work collaboratively to address existing barriers to data sharing and promote interoperability of healthcare data.
Continued scrutiny by antitrust and competition authorities
As expected, global antitrust and competition authorities continued to focus on the tech, life sciences and medtech sectors in 2022. The US, UK and EU authorities have stepped up efforts to investigate and challenge conduct by large pharma and technology companies pursuing mergers and acquisitions. We expect these authorities to assess similar concerns in the digital health context in an effort to account for the value of combined datasets and the interoperability of various offerings that could be derived from digital health mergers and acquisitions. Furthermore, geopolitical tensions have resulted in new and expanded foreign investment regimes to improve the resilience of domestic healthcare systems. Notably this year, the UK government implemented the National Security and Investment Act that allows it to restrict transactions that may threaten national security, including in the AI and data infrastructure sectors. Sensitive data continues to be a recurring theme for foreign investment review for Committee on Foreign Investment in the US and that of the EU as well.
Growing importance of data privacy and security
Increasing regulatory attention to sensitive health data and the escalating rise of ransomware attacks has made data privacy and security more important than ever for medtech innovators. The Federal Trade Commission has issued several statements about its willingness to “fully” enforce the law against the illegal use and sharing of highly sensitive data. Additionally, several state privacy laws coming into effect in 2023 create new categories of sensitive personal data, including health data, and impose novel obligations on innovators to obtain data-related consents. As ransomware continues to pose security-related threats, the US Department of Health and Human Services renewed calls for all covered entities and business associates to prioritize cybersecurity. New standards, such as cybersecurity label rating programs for connected devices, aim to address security risks. In the EU, medtech providers will need to consider how the launch of the European Health Data Space and newly proposed data regulation, such as the Data Act and AI Act, could impact their data use and sharing practices.
More active engagement with FDA/EMA/MHRA
We expect companies active in the medtech sector, particularly those that make use of AI and other advanced technologies, to continue their conversations with the U.S. Food and Drug Administration (“FDA”), the European Medicines Agency (“EMA”), the Medicines and Healthcare Products Regulatory Agency (“MHRA”) and other regulators as such companies grow their medtech business lines and establish their associated regulatory compliance infrastructure. Given the unique regulatory issues arising from the implementation of digital health technologies, we expect the FDA, EMA and MHRA to provide additional guidance on AI/ML-based software-as-a-medical device and the remote management of clinical trials. 2022 saw stakeholders in the life sciences and medtech industries collaborate with regulatory authorities to push forward the acceptance of digital endpoints that rely on sensor-generated data collected outside of a clinical setting. As the industry shifts to decentralized clinical trials, we expect both innovators and regulators to work together to evaluate the associated clinical, privacy and safety risks in the development and use of such digital endpoints.
Increasing medtech localization in the Asia Pacific region
2022 saw multinational companies (“MNCs”), including American pharma/device makers make an active effort to expand their medtech business lines in the Asia Pacific region. At the same time, government authorities in the region have been increasingly focused on incentivizing local innovation, approving government grants and prohibiting the importation of non-approved medical equipment. In light of MNCs’ market share of the medical device market in the Asia Pacific region, especially in China, we expect the emergence of the domestic medtech industry to prompt discussions among MNCs, local innovators and government authorities over the long-term development of the global market for medical technology.
Long-term adoption of telehealth and remote patient monitoring technologies
The Covid-19 pandemic saw the rise of telehealth and remote patient monitoring technologies as key modes of healthcare delivery. The telehealth industry remains focused on enabling remote consultations and long-term patient management for patients with chronic conditions. Looking forward, we expect to see increased innovation in non-invasive technologies that can provide early diagnostics and ongoing disease management in a low-friction manner. At the same time, we anticipate telehealth companies to face increasing scrutiny from regulatory authorities around the world for fraud and abuse by patients and providers. Consumer and patient data privacy and security in connection with telehealth and remote patient monitoring continue to remain top of mind for regulators as well.
Women’s health and privacy concerns for medtech
We expect to see increased consumer health tech adoption for reproductive care, especially in light of the U.S. Supreme Court’s decision to overturn Roe v. Wade. Following the Dobbs decision, a number of states introduced or passed legislation that prohibits or restricts access to reproductive health services beyond abortion. In response, women’s health-focused companies are expanding their virtual fertility and pregnancy, telemedicine and other services to patients. At the same time, such companies need to assess the legal risks stemming from the collection and storage of their customers’ personal health information, which could then be used as evidence to prosecute customers for obtaining illegal reproductive health services. We expect companies active in this space to take steps to navigate the patchwork of data privacy and security laws across jurisdictions while establishing clear digital health governance mechanisms to safeguard their customers’ data privacy and security.
Addressing inequities in the implementation of digital healthcare technologies
Medtech innovators and regulators have been increasingly focused on addressing inequities in the healthcare system and the data used to train AI and ML-based digital healthcare technologies. In 2022, a number of medtech companies collaborated to provide technologies that result in improved patient outcomes across all populations, as well as boost participation of diverse populations in clinical trials. In parallel, we are seeing increased interest from regulators to reduce bias in digital health technologies and the accompanying datasets, as evidenced by the EU’s proposed AI Act and the UK’s health data strategy. In the US, which currently lacks comprehensive government regulation of AI in healthcare, there have been increasing calls for institutional commitments in the area of algorithmovigilance. Because of the inaccurate conclusions that may result from biased technologies and data, MedTech companies must prioritize health equity in the implementation of digital healthcare technologies so that everyone can benefit from the latest scientific advances.
In conclusion, the medtech industry has remained resilient amidst the challenging macroeconomic environment. We expect 2023 to be a pivotal year for the industry, as the accelerated acceptance of virtual care and demographic trends, such as an aging population, increasing chronic illnesses and healthcare worker shortages, sustain demand for medtech-enabled solutions. At the same time, the rapidly changing legal and regulatory landscape will continue to be a key issue for medtech innovators moving forward. Adopting a global, forward-thinking regulatory compliance strategy can help MedTech companies stay competitive and ultimately, achieve better outcomes for patients.
Private equity has piled into healthcare in recent years, but one company’s recent moves have some questioning whether it belongs in the industry.
Los Angeles-based Prospect Medical Holdings has come under fire for shuttering hospitals and service lines across multiple states after paying itself and shareholders $457 million from a $1.1 billion loan in 2018, CBS News reported Dec. 6. The company paid the loan by selling assets to a healthcare real estate trust.
Prospect Medical then turned around and leased the same assets from the trust, resulting in $35 million in annual rent charges.
The company began cutting services earlier in 2022 at the 168-bed Upper Darby, Pa.-based Delaware County Memorial, the report said. The hospital’s emergency department closed in November.
“What they’ve done is extremely evil, in my words,” emergency nurse Angela Neopolitano, who worked at Delaware County Memorial for 41 years, told CBS News. “To gain a dollar, you maybe destroyed lives, maybe even ended lives, because they can’t get the help they need.”
Paramedics in the hospital’s system at one point found that the credit cards used to refuel their ambulances had been disabled because Prospect Medical “didn’t pay their bill,” Ms. Neopolitano told CBS News.
Delaware County officials said Prospect Medical told them labor costs, inflation and strain from the pandemic all fed into its decision to cut services, the report said.
“I had the sense they were not giving us all the information,” county official Monica Taylor told CBS News.
The Pennsylvania Office of the Attorney General has filed a petition seeking to have Prospect Medical held in contempt and fined $100,000 per day for violating a court order prohibiting the hospital’s closure pending further order by the court.
Prospect Medical has said it plans to convert Delaware County Memorial into a 100-bed behavioral health facility, the report said.
HENRY KOTULA 