Amazon and several other major companies have made numerous attempts to “disrupt” health care over the years without much success. But new acquisitions in primary care, home health care, and more may allow them to more successfully expand into the industry, David Wainer writes for the Wall Street Journal.
Competition heats up in the health care industry
According to Wainer, the United States spends a greater proportion of its economy on medical services than any other developed nation, making health care “too big of an opportunity to ignore” for many companies, including those in technology, retail, and more.
For example, Amazon has launched several forays into health care in recent years, although not all of them have been successful. Some of these health care efforts include its now defunct partnership with Berkshire Hathaway and JPMorgan Chase, as well as Amazon Care, the company’s primary care service that will shut down at the end of the year.
Amazon has also acquired several smaller health care companies in an effort to expand its reach. In 2018, Amazon purchased PillPack for $1 billion as a way to expand its online pharmacy business. Similarly, Amazon in July reached an agreement to acquireOne Medical, a primary care company, for roughly $3.9 billion.
Several other companies, including retailers like Walmart and Walgreens and large insurers like UnitedHealth Group* (UHG) and CVS Health‘s Aetna, are also looking to expand their health care offerings. In fact, CVS announced last week that it had purchased home health care company Signify Health for roughly $8 billion—beating out several other competitors.
So far, “[s]hifting social attitudes and market conditions have helped fuel the wave” of health care acquisitions from major companies, Wainer writes, and more are likely to occur going forward.
What companies are targeting in health care
In contrast to the more traditional fee-for-service model, many health care startups are moving toward value-based care, which encourages providers to help prevent illnesses, rather than just treat them.
According to Wainer, UHG, which includes a pharmacy benefit manager, an insurance business, and 60,000 physicians, has made the most progress transitioning to value-based care so far. For example, many of the multi-specialty physician practices UHG has purchased through its medical provider arm Optum Care focus on proactively providing patients home, virtual, and on-site care to help them stay out of the hospital.
In addition, UHG and Walmart last week announced a partnership to provide services and “improve the patient experience” for certain Medicare Advantage enrollees. Through the partnership, UHG will use analytics to help Walmart clinics deliver value-based care to patients.
Aside from value-based care, many companies, including Amazon and CVS, are looking to expand their businesses into primary care. Currently, there is a nationwide shortage of primary care doctors, which has led to worse health outcomes for many Americans.
By providing primary care services directly to consumers, Amazon and other companies are hoping to use the relationship between patients and their providers to sell even more services, such as prescription drug deliveries and more.
Overall, “staying healthy probably will never be the sort of frictionless, one-click experience that Amazon pioneered,” Wainer writes, but the company’s current involvement in the health care industry “is a testament to the fact that there’s a lot of money to be made by fixing America’s broken system.” (Wainer, Wall Street Journal, 9/9)
*Advisory Board is a subsidiary of Optum, a division of UnitedHealth Group. All Advisory Board research, expert perspectives, and recommendations remain independent.
A recent JAMA study of 578 US dermatology, gastroenterology, and ophthalmology practices acquired by PE firms from 2016 to 2020 found a steady rise in spending in the two years after acquisition, indicating that the average charge per commercial claim increased 20 percent, and the average allowed amount per claim rose 11 percent. It also found that, compared to a large control group with similar patient risk scores, PE-acquired practices saw new patient visits increase by 38 percent and total visit volume increase by 16 percent.
The Gist: While the study’s authors note that these findings could be explained by changes in practice operations or management, they point out they could also be caused by an overutilization of profitable services not tied to an increase in value or benefit to the patient.
We think the latter is likely the case here, and that this study provides evidence of PE-induced overutilization aimed at meeting aggressive growth targets.
But this is just the latest wave of ownership-induced overutilization: 20 years ago the same spotlight was on physician-owned imaging, cardiac, and other outpatient diagnostics, with several studies then documenting higher utilization in these facilities. Nonetheless, this latest trend is an important one to document and quantify, as the number of physicians working in PE-backed organizations continues to rise.
Radio Advisory’s Rachel Woods sat down with Advisory Board’s Sarah Hostetter and Vidal Seegobin to discuss the good and bad elements of private equity and what leaders can do to make it a valuable partner to their practices.
Private equity (PE) tends to get a bad rap when it comes to health care. Some see it as a disruptive force that prioritizes profits over the patient experience, and that it’s hurting the industry by creating a more consolidated marketplace. Others, however, see it as an opportunity for innovation, growth, and more movement towards value-based care.
Radio Advisory’s Rachel Woods sat down with Advisory Board‘s Sarah Hostetter and Vidal Seegobin to discuss the good and bad elements of PE and what leaders can do to make it be a valuable partner to their practices.
Rachel Woods: Clearly there are a lot of feelings about private equity. I’m frankly not that surprised, because the more we see PE get involved in the health care space, we hear more negative feelings about what that means for health care.
Frankly, this bad guy persona is even seen in mainstream media. I can think of several cable medical dramas that have made private equity, or maybe it’s specific investors, as the literal enemy, right? The enemy of the docs that are the saviors of their hospital or ER or medical practice. Is that the right way we should be thinking about private equity? Are they the bad guy?
Sarah Hostetter: The short answer is no. I think private equity is a scapegoat for a lot of the other problems we’re seeing in the industry. So the influx of money and where it’s going and the influence that that has on health care. I think private equity is a prime example of that.
I also think the horror stories all get lumped together. So we don’t think about who the PE firm is or what is being invested in. We put together physician practices and health systems and SNPs, and we lump every story all together, as opposed to considering those on their individual merits.
Woods: And feeds to this bad guy kind of persona that’s out there.
Hostetter: Yeah. And like you said, the media doesn’t help, right? If the average consumer is watching and seeing different portrayals or lumped portrayals, it’s not helping.
Vidal Seegobin: Private equity, as all actors in our complex ecosystem, is not a monolith, and no one has the monopoly on great decisions in health care, nor do they have a monopoly on the bad decisions in health care. And so if you attribute a bad case to private equity, then you also have to attribute the positive returns done from a private equity investment as well.
Hostetter: Agree with what Vidal’s saying, but bottom line is that every stakeholder is not going to have the same outcomes or ripple effects from a private equity deal. It really depends on the deal itself, the market, and the vantage points that you take.
Woods: I want to actually play out a scenario with the two of you and I want you to talk about the positive and the potentially negative consequences for different sectors or different stakeholders.
So let’s take the newest manifestation that Sarah, you talked to us through. Let’s say that there is a PE packed multi-specialty practice heavily in value-based care. That practice starts to get bigger. They acquire other practices, including maybe even some big practices in a market and they start employing all of the unaffiliated or loosely affiliated practices in the market.
I am guessing that every health system leader listening to this episode is already starting to sweat. What does this mean for the incumbent health system?
Seegobin: So I think one thing that’s going to be pretty clear is that size does confer clear advantages and health care is part and parcel that kind of benefit. What I think is challenging is when we’re entering into a moment where access to capital is challenging for health systems in particular and we’re going to need to scale up investments, health systems could see themselves falling further and further behind as private equity makes smart investments into these practices to both capture and retain volume. And as a consequence of that, reduces the amount of inpatient demand or the demand to their bread and butter services.
Hostetter: And I think it’s really important that you phrase the question, Rae, as health system. Because we so often equate health system and hospital.
But a health system includes lots of hospitals, it includes ambulatory facilities, a range of services. And so I think for systems to equate health system and hospital, it’s really hard when any type of super practice or large backed practice comes into the market.
Whether we are talking about a plan backed practice, a PE backed practice, or just a really large independent group. There are pressures on health systems who think of their job or their primary service as the hospital. And there is a moment where the power dynamics can shift in markets away from the health system, if they aren’t able to pivot their strategy beyond just the hospital.
Woods: Which is exactly why health systems see this scenario as, let’s just say it, threatening. Sarah, then how do the physicians feel? Do they have the opposite feelings as the incumbent health systems?
Hostetter: There’s a huge range. Private equity is incredibly polarizing in the physician practice world, the same way that it is in other parts of the industry. So I think there is a hope from some practices that private equity is a type of investor that is aligned with them.
Physicians who go into private practice historically tend to be more entrepreneurial. They are shareholders in their own practice, so there are some natural synergies between private equity, business minded folks, and these physicians.
Also, even though I go into a small business, it takes a lot to run a small business, so there are potentially welcome synergies and help that you can get from a PE firm. On the flip side of that, there are groups who would never in a million years consider taking a private equity investment and are unwilling to have these conversations.
Woods: There is a tendency, especially in the conversation that we’re having, for folks to think about private equity as being something that primarily impacts the provider space, at least when it comes to health care. But I’m not sure that that’s actually true. So what consequences, good or bad, might the payers feel? Might the life sciences companies feel?
Seegobin: So one common refrain when talking about private equity and their acquisition or partnering with traditional health care businesses like physician practices is that they are immediately focused on cutting costs. So they are going to consolidate all of the purchasing contracts, they are going to make pretty aggressive decisions about real estate, all the types of cost components that run the business.
Now, if you are a kind of life sciences or a diagnostic business for whom you would depend on being an incumbent in those contracting decisions, you’re worried that the private equity is either going to direct you to a lower cost provider, or in many cases, another business that the private equity firm owns as well, right?
They would love to keep synergies within the portfolio of businesses that they’ve acquired and they partner. So if you were relying on incumbent or historical purchasing practices with these physician practices, it can be disrupted, depending on the arrangement.
Hostetter: And then I think there’s a range of potential implications for payers. So you have some payers who themselves are aggregating independent practices, and they’re targeting the same type of practices that the PE firms that are betting on value-based care are targeting. They are targeting primary care groups who are big in Medicare Advantage. So there’s some inherent competition potentially for the physician practice landscape there.
Woods: Well, and I think they’re trying to offer the same thing, right? They’re trying to offer capital. They’re trying to do that with the promise of autonomy. And they’re coming up against a competitive partner that is saying, “I can do both of those things and I can do it better and faster.”
Hostetter: Yeah. And both of them are saying we can do it better and faster than hospitals. That’s the other thing, right?
Woods: Which, that part is probably true.
Hostetter: Yeah. Their goals are aligned and they believe they can get there different ways. And I think autonomy is a big sticking point here for me or a big bellwether for me, because I think whoever can get to value-based care while preserving autonomy is going to win. You have to have some level of standardization to do value-based care well. You can’t just let everyone do whatever they want. You need high quality results for lower cost. That inherently requires standardization. So who can thread the needle of getting that standardization while preserving a degree of autonomy?
It’s fascinating, as we’ve had this call, it was suggested multiple times that payers actually might be the end of the line for some of these PE deals. That there’s a lot of alignment between what payers are trying to do with their aggregation and what PE firms who are investing in primary care do, and hey, payers have a lot of money too. So could we actually see some of these PE deals end with a payer acquisition? Because they’re trying to achieve similar things, just differently.
Rural communities with struggling hospitals often turn to outside investors willing to take over their health care centers. Some are willing to sell the hospitals for next to nothing to companies that promise to keep them running.
ERIN, Tenn. — Kyle Kopec gets a kick out of leading tours through the run-down hospitals his boss is buying, pointing out what he calls relics of poor management left by a revolving door of operators.
For instance, at a hospital in this town of 1,700 about a 90-minute drive northwest from Nashville, the X-ray machine is beyond repair.
“This system is so old, it’s been using a floppy disk,” said Kopec, 23, marveling at the bendy black square that hardly has enough memory to hold a single digital photo. “I’ve never actually seen a floppy disk in use. I’ve seen them in the Smithsonian.”
There’s a point to exposing these rural hospitals’ state of disrepair — the company Kopec works for, Braden Health, is buying buildings worth millions of dollars for next to nothing with a promise to keep running them as health centers serving their communities. Braden for its part, thinks it can run them more effectively than the previous owners and turn a profit.
The hospitals Braden Health is taking over sit in one of the worst spots in one of the worst states for rural hospital closures. Tennessee has experienced 16 closures since 2010 — second only to the far more populous state of Texas, which has had at least 21 closures.
The local governments that own these facilities are finding that remarkably few companies — with any level of experience — are interested in buying them. And those that are willing don’t want to pay much, if anything.
Braden Health’s Kyle Kopec holds up a sample of diagnostic images left behind at an abandoned hospital they’re taking over. They have to figure out what to do with old medical records stacked in boxes.
“When you’re on the ropes or even got your head under water, it’s really difficult to negotiate with any terms of strength,” said Michael Topchik, director of the Chartis Center for Rural Health, which tracks distressed rural hospitals closely. “And so you, oftentimes, are choosing whoever is willing to choose you.”
At this point, large health systems have already acquired or affiliated with the hospitals that have the fewest problems, Topchik said. The hospitals that are left are those that other potential buyers passed on. Turning a profit on a small rural hospital with mostly older or low-income patients can be challenging. Some operators who take over rural hospitals have gotten in trouble with insurers and even law enforcement for shady billing practices.
“You can make it profitable,” Topchik said. “But it takes an awful lot to get there.”
Dr. Beau Braden, who runs Braden Health, used his savings and some inherited wealth to get into the hospital-buying business in 2020. An emergency room doctor and addiction specialist, he previously tried to build a hospital in southwestern Florida, where he owns the large rural clinic in Ave Maria. After running into regulatory roadblocks, he saw more opportunity in reopening hospitals — which brought him to Tennessee.
“A lot of people aren’t willing to put in the time, effort, energy, and work for a small hospital with less than 25 beds. But it needs just as much time, energy, and effort as a hospital with 300 beds,” Braden said. “I just see there’s a huge need in rural hospitals and not a lot of people who can focus their time doing it.”
Braden Health’s corporate headquarters has 40 employees, according to Kopec, who is Braden’s second in command as the company’s chief compliance officer. He had limited work experience in hospitals before helping lead a hospital-buying spree at Braden Health.
Braden Health is a limited liability company and privately held, so it doesn’t have to publicly share much about its financial figures. But in filings for a certificate of need that outlines why a health care facility should be allowed to operate, Braden revealed $2 million in monthly revenue from the one hospital it ran in Lexington, Tennessee, and its balance sheet showed more than $7.5 million cash on hand.
Dr. Beau Braden (left) and Kyle Kopec talk to staffers gathered at the nurse’s station inside Houston County Community Hospital in Erin, Tennessee. Braden Health bought the facility for $20,000 ― a price that is mostly paying for the one piece of medical equipment deemed to have any value, a 2016 ambulance with 180,000 miles.
Since buying that Lexington hospital in 2020, Braden Health has signed deals for three other failing or failed hospitals and has looked at acquiring at least 10 others, mostly in Tennessee and North Carolina. Braden Health’s strategy is to build mini-networks to share staff and supplies.
At the hospital in Erin, much of the facility’s equipment is older than Kopec. And he said using outdated technology has caused Medicare to penalize the hospital with reduced payments.
The attic houses a ham radio system that seemingly never got much use, Kopec said on his way out to the roof. He wanted to show how the giant HVAC system can be controlled only from a rusty side panel accessible by a ladder. Down below, an emergency room has never been used. During a recent renovation that predated Braden Health’s ownership, its doors were built too narrow for a gurney, among other design flaws.
An old operating room is temporarily housing the ER while Braden Health starts work on new renovations. The Tennessee attorney general, who must approve any sale of a public hospital to private investors, signed off in July.
To prevent this hospital’s closure in 2013, Houston County bought it for $2.4 million and raised taxes locally to subsidize operations. “We had no business being in the hospital business,” Mayor James Bridges said. “The majority of county governments do not have the expertise and the education and knowledge that it takes to run health care facilities in 2022.”
Those with the most experience, like big corporate hospital chains based in Nashville, have been getting out of the small hospital business, too.
Communities have seen unqualified managers come and go. In Decatur County, where Braden Health is also taking over the local hospital, the previous CEO was indicted on theft charges that remain pending. And the Tennessee comptroller determined the hospital helped endanger the finances of the entire county.
“You’re looking to someone who supposedly knows what to do, who can supposedly solve the issue. And you trust them, then you’re disappointed,” said Lori Brasher, a member of Decatur County’s economic development board. “And not disappointed once, but disappointed multiple times.”
Brasher expressed much more confidence in Braden Health, which she said has concrete plans to reopen, though the timing has been delayed by an unresolved insurance claim from a burst water line that flooded a wing of the hospital.
Local residents still have trouble stomaching the sticker price: $100 for a property valued at $1.4 million by the local tax assessor. In addition to that low price, Braden Health won tax breaks for committing to invest $2 million into the building.
The Houston County hospital is valued at $4.1 million by the property assessor. But the final sale price was just $20,000 — and that wasn’t for the land or the building. Kopec said the amount was for a 2016 ambulance with 180,000 miles — deemed the only equipment with any remaining value.
An agreement with Braden Health to take over the shuttered hospital in Haywood County, Tennessee, valued at $4.6 million, was a similarly symbolic payment. All told, Braden Health is getting more than $10 million worth of real estate for less than the price of an appendectomy.
Kopec contends the value for each property is essentially negative given that the hospitals require so much investment to comply with health care standards and — according to the company’s purchase agreements — must be run as hospitals. If not, the hospitals revert to the counties.
Most of the funding for restoring these facilities comes directly from Braden, who thinks people overestimate the value of hospitals his company is taking over.
“If you look honestly at a lot of transactions that take place with rural hospitals and how many liabilities are tied up with them, there’s really not a lot of value there,” he said. Braden recently paid off a $2.3 million debt with Medicare for the Houston County hospital.
He said there’s no secret sauce, in his mind, except that small hospitals require just as much diligence as big medical centers — especially since their profit margins are so thin and patient volume so low. He wants to improve technology in ways that health plans reward hospitals, limit nurse staffing when business is slow, and watch medical supply inventories to cut waste.
It’s a tall order. Braden said he can understand any skepticism, even from the hospitals’ employees. They’ve heard turnaround promises before, and even they can be wary of the care they’d get at such run-down facilities.
Still, as Kopec bounced through the Erin hospital’s halls, he greeted nurses and clerical staff by name with a confidence that belies his age and experience. He tells anyone who will listen that rural hospitals require specialized knowledge.
“They’re not the most complicated things in the world,” Kopec said. “But if you don’t know exactly how to run them, you’re just going to run them straight into the ground.”
According to a Wall Street Journal report, CVS is expected to submit a bid to purchase Dallas-based Signify Health, which supports physicians, payers, and health systems with tools and technology to provide in-home care. Signify acquired accountable care organization manager Caravan Health earlier this year. Last week, the Journalreported that Signify, valued at more than $4B, was looking for buyers. While CVS is said to be interested, so are private equity firms and other managed care companies.
The Gist: CVS CEO Karen Lynch told investors during last week’s earnings call that the company plans to grow its primary care and home health offerings through mergers and acquisitions. The Signify bid, along with reports that CVS considered acquiring concierge primary care company One Medical, suggests that the retail pharmacy and insurance giant is charging ahead with its strategy of creating a vertically-integrated healthcare company.
As several newly public digital health and value-based care companies have seen share prices plummet and capital dry up in a cooling economy, they are becoming targets for large insurers and tech companies who have seen their own fortunes grow during the pandemic. Watch for more announcements from these “platform assemblers” in the months to come.
Citi, The American Hospital Association (AHA) and the Healthcare Financial Management Association (HFMA) recently hosted the 22nd annual Not-for-Profit Healthcare Investor Conference. The event was in person, after being virtual in 2021 and canceled in 2020 due to the pandemic. Leaders from over 25 diverse health systems, as well as private equity and fund managers, presented in panel discussions and traditional formats. The following summary attempts to synthesize key themes and particularly interesting work by leading health systems. The conference title was “Refining the Now, Reshaping What’s Next.”
Is Healthcare Headed for Best of Times or Worst of Times?
Clearly the pandemic showed how essential and adaptive the US healthcare industry is, and especially how incredible healthcare workers continue to be. It also exposed and accelerated many underlying dynamics, such as impact of disparities, clinical labor shortages and supply chain challenges. On balance, at this year’s conference presenters remained quite optimistic about the future, and felt that despite enormous pain, the pandemic has helped to accelerate positive transformation across healthcare.
At the same time, almost all presenters referenced future headwinds from labor and supply inflation, concerns about increasing payment pressures, and the continued need to address disparities and social justice. That being said, there was not much disclosure at the conference about just how bad things could get in the future given accelerated operational and financial risks.
As usual at such a conference, there was much passion, creativity, sharing and celebration. While each organization and market differ somewhat, the following are common themes discussed.
Key Themes
Enormous Workforce Challenges – Every speaker referenced workforce as being THE key issue they are facing, specifically retirement, recruitment, retention, well-being and cost. We have talked for years about a future caregiver shortage, but this reality was accelerated by the pandemic. The majority of health systems saw single-digit turnover rates grow to 20-30%, and the cost of temporary labor such as traveling nurses, decimate operating margins. The many strategies discussed at the conference went beyond simply paying more to attract and retain staff. A key question is whether organization-specific strategies will be enough, or whether we need a broader societal and industry-wide collaborative effort to dramatically increase training slots for nurses and other allied health professionals.
Pandemic Stressed Organizations and Accelerated Transformation – At the 2021 virtual Citi/AHA/HFMA conference, many posited that the country was past the worst of the pandemic. (In fact this author’s summary of last year’s conference was titled “Sunrise After the Storm”). That was before the Omicron wave hit hard in Q1 2022. First-quarter 2022 operating margins were negative for most but not all healthcare systems due to cumulative impact of Omicron, temporary labor and supply costs, especially since the governmental support that partially offset those costs in 2020 ended. Organizations and their teams remain resilient, but highly stressed. Risks and challenges associated with future waves continue, as well as high reliance on foreign drug and supply manufacturing. While highly distracting and painful, many organizations discussed how the pandemic actually accelerated the pace of transformation. Necessity drives required action, and at least temporarily overcomes political and cultural barriers to change.
Growing Pursuit of Scale, Including through M&A and Partnerships – All health systems continue to be highly complex with multiple competing “big-dot” priorities. Multiple systems described their current M&A and growth strategies, pursuit of scale, as well as how these strategies were impacted by the pandemic. While the provider community remains highly unconsolidated on a national basis, mergers are more frequent, including between non-contiguous markets. Systems said that larger size, coupled with disciplined management, can reduce cost structure and improve quality and patient experience. While some pursue scale through organic growth initiatives or M&A, others described success in creating scale by leveraging partnerships with “best-in-class” niche organizations and other outside expertise.
Health Equity, Diversity and ESG as Core to Mission – Consistent with last year, most speakers discussed their efforts to address health equity, social justice, diversity, and Social Determinants of Health. Many health systems have developed robust strategies quickly as the pandemic spotlighted the impact of existing disparities. There is increasing interest in Environment, Social and Governance (ESG) initiatives, including environmental stewardship to improve the health of their communities and the world by reducing their carbon footprint and medical waste.
Patient-Centric Care Transformation Continues as a Priority – The pandemic significantly accelerated the shift to telehealth and virtual care. Many health systems are increasing their efforts to design care around the patient instead of the traditional provider centric focus. While the need for inpatient care will always continue, more care is taking place in settings closer to or at home, with digital enablement. Expansion of personalized medicine, genetic testing and therapies, and drug discovery are transforming how healthcare is provided.
Affordability and Value-Based Care – US healthcare costs as a percentage of GDP increased from 18% in 2019 to almost 20% in 2020, mainly driven by the pandemic. There remains a dichotomy between reliance on fee-for-service payment and commitment to value-based care. Although only 11% of commercial payment is currently through two-sided risk arrangements, almost all presenting health systems discussed their strategies to continue moving to value-based care and to improve affordability. Some systems are leveraging their integrated health plans and/or expanding risk-based contracts. Many are trying to reduce unnecessary care through adoption of evidence-based models and to shift care to less costly settings.
Inflation and Accelerating Financial Pressures – Health systems are facing unprecedented increases in labor and supply costs, that are likely to continue into the foreseeable future. At the same time, commercial payment rate adjustments are “sticky low” as insurers and employers push back on rate increases. Governmental payment rate increases are less than cost inflation. In addition to current cuts like the re-implementation of sequestration, longer-term cuts to provider assessment programs, provider-based billing, disproportionate share and Medicaid expansion may severely impact many organizations over time. Benefits like 340b discounts are also experiencing pressure. Post-pandemic clinical-volume trends remain unclear, and additional governmental support associated with future pandemic waves is unlikely. Adding to these challenges, declines in stock and bond prices are negatively impacting currently strong balance sheets.
Conclusion: Best or Worst of Times in Healthcare?
Time will tell, in retrospect, if the next five years will be the best of times, worst of times, or both in healthcare. Optimists point to the resiliency of healthcare organizations; enormous opportunity to reduce unnecessary cost through adoption of evidence-based care and scale; pipeline of new cures and technology; and opportunities to address social and health equity. Pessimists point to likely unprecedented financial pressures and operational challenges due to endemic labor and supply shortages; high-cost inflation vs. constrained payment rates; and future uncertainty about the pandemic, the economy and investment markets.
The situation will undoubtedly vary by market and organization as reflected in conference presentations, but all systems will likely face substantial pressure. As one speaker noted “humans have a great ability to respond to pain,” so this may be the inflection point where more healthcare systems radically accelerate necessary change to improve health, make healthcare more equitable and affordable, with higher quality and better outcomes. Some health systems are clearly doing that, with pace, nimbleness and passion. Can the industry as a whole accomplish it successfully?
When Congress passed the “No Surprises Act” in 2021, credit rating agencies like Moody’s warned that the bill would hurt physician staffing firms, especially those that provide emergency department (ED) services, which result in a surprise bill in roughly one in five visits. A piece from investigative outlet The Lever highlights how one private equity-backed physician staffing firm, Nashville-based American Physician Partners, is responding to the resultant cash flow challenges by cutting ED physician pay, after already reducing staffing levels. As the article describes, this is possible in an otherwise tight labor market because, unlike many other specialties, there’s an oversupply of ED physicians, due to the rapid growth in emergency medicine residency programs over the last decade.
The Gist: With two-thirds of hospitals outsourcing at least some ED physician labor, the potential insolvency of large physician staffing firms could bring a crisis in access and coverage.
In addition to revenue cuts tied to the surprise billing ban, rising interest rates also mean that PE firms may soon find it more difficult to fund their aggressive growth strategies.
Health systems should proactively evaluate their partnerships with PE-backed physician staffing groups, with an eye toward anticipating potential staffing problems and service quality shortfalls.
The for-profit, 39-hospital Steward system manages 171K lives across the Medicare Advantage, Medicare shared savings, and Medicare direct contracting programs. This deal will allow Miami-based CareMax, a publicly-traded, value-based care company with 42 senior centers (mostly in Florida) and 34K lives under management, to expand across Steward’s footprint, which includes Texas and Arizona, states with rapidly growing Medicare populations.
The Gist:This deal is an example of the rise of venture-funded MSO (medical services organization) services that aim to subsume and scale value-based care functions from hospitals and medical groups. Steward wagers it can find greater success in managing risk in partnership with CareMax, moving a greater share of its Medicare population into risk, and outsourcing care management and patient engagement functions.
Many health systems have spent substantial resources building out accountable care organizations and risk-based Medicare businesses over the last decade. While selling these assets to a company like CareMax may be one way to generate a return, particularly for those frustrated by lower-than-anticipated gains from moving to value-based care, it also requires relinquishing control of functions likely central to the future health system business model.
At a recent health system physician leadership retreat, two cardiologists presented a fascinating update on the electrophysiology (EP) service line. Electrophysiologists use advanced heart mapping and ablation technologies to diagnose, pinpoint, and treat abnormal heart rhythms, and the field has made dramatic advances over the past decade. The success rate of interventions has risen, and procedures which used to take hours in a cath lab are now performed in a fraction of the time—with some patients even able to go home same-day.
This increased efficiency has expanded the EP program’s capacity, but the system still finds itself overwhelmed with demand. The system is located in a high-growth market, and demand is also fueled by shifting demographics, with more aging Baby Boomers seeking care. But a key driver of growthhas been the spread of “smart watches” like the Apple Watch and Fitbit, which tout the ability to detect abnormal heart rhythms like atrial fibrillation. With “half of the community walking around with an EKG on their wrist”, the number of patients seeking evaluations for “a-fib” has skyrocketed: at this system, over 50 percent growth in patient volume, leading to 25 jump in procedures during the pandemic.
While the doctors were excited about growth, they also stressed the need to rethink care pathways to make sure that electrophysiologists’ time was prioritized for the patients who needed it most. The system should look to develop care pathways and technology that enable other physicians to readily triage and manage routine atrial fibrillation.
But smartwatch-driven self-diagnosis raises larger questions about how doctors and hospitals must adapt when consumer technology outpaces the science evaluating its effectiveness, and the health system’s ability to meet new demand. With private equity firms now focused on acquiring cardiology practices, this massive spike of demand, coupled with the ability to move more heart rhythm procedures outpatient, is seen by investors as a significant profit opportunity—making it even more critical for doctors, researchers, and hospitals to ensure that sound clinical guidelines are developed to drive high-quality, appropriate management.
According to unnamed Axios sources, UnitedHealth Group’s Optum has signed a deal to acquire the independent 500-physician multispecialty group, which operates more than 30 clinic locations and one of the largest ambulatory surgery centers in Texas. With more than 41,000 enrollees, Kelsey-Seybold controls 8 percent of the lucrative Medicare Advantage market in the Houston metro area.
In January 2020, private equity firm TPG Capital made a minority investment in the 73-year-old group, valuing it at $1.3B, to help expand its footprint. Should the current deal come to fruition, Kelsey-Seybold’s physicians would join the ranks of over 60K physicians owned by, or exclusively affiliated with, Optum.
The Gist: Fresh off last year’s acquisition of 700-physician, Boston-based Atrius Health, Optum is continuing its buying spree of large physician groups with a history of managing risk. It will be interesting to see how quickly UnitedHealth Group can combine its Optum-owned physician assets with its commercial insurance platform to create a compelling, lower-cost option for employers and Medicare Advantage enrollees—building on the model of its Harmony network in Southern California.
Of note, Kelsey-Seybold and United Healthcare have offered a co-branded insurance product for years, and UHG executives have said they plan to roll out Harmony in Texas and Seattle next.
Kelsey-Seybold is one a dwindling number of very large, independent multispecialty groups, andits sale to Optum may have other groups wondering about their ability to remain independent in an increasingly concentrated healthcare market.
HENRY KOTULA 