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Meet the Odd Couple: Private Equity and Medical Practice

Health policy experts have long recognized the increasing corporatization of medicine, as evidenced by many of the country’s largest independent physician practices being acquired by hospitals, health systems, or health insurers.

Over the past few years, a new entity has begun acquiring physician practices at a rapid pace.

I had considered writing a thought piece about this phenomenon, but Lawrence P. Casalino, MD, PhD, and colleagues’ outstanding article, “Private Equity Acquisition of Physician Practices,” beat me to it.

The gist of the article is as follows:

Unanticipated consequences are an inevitable byproduct of broad reform, and healthcare is no exception. Case in point: the profound effect a shift toward value-based purchasing (VBP) has had on independent physician practices.

Transitioning from fee-for-service to the VBP model requires physician practices to make sweeping changes (e.g., process and workflow redesign) and substantial financial investments (e.g., enhanced technology, additional clinical and non-clinical personnel); as a result, small to mid-size independent physician practices are struggling for survival, and many of the country’s largest practices have already been acquired by a hospital, health system, insurer, or private equity firm.

Private equity firms use capital provided by pension funds, sovereign wealth funds, high-net-worth individuals, and university endowments to invest in a variety of industries, including healthcare.

To achieve their investors’ anticipated average annual returns (20% or more), private equity firms focus on acquiring “platform practices” that are large, well-managed, and reputable in the communities they serve.

Once acquired, the firm adds value to a practice by recruiting additional clinicians, acquiring smaller practices to merge with the larger practice, increasing revenue (e.g., bringing pathology services in-house for a dermatology practice), and decreasing costs (e.g., substituting other clinical professionals for physicians where appropriate).

The private equity firms typically take 60%-80% ownership and aim to re-sell the practice in 3 to 7 years; physicians who retain partial ownership share in the growth objectives and in the profits from resale.

From the start, private equity firms have focused on specialty practices with high potential for additional income from elective procedures and ancillary services, such as dermatology, urology, ophthalmology, and gastroenterology.

Recently, some of these firms have begun to invest in primary care/multispecialty practices with the goal of profiting from risk contracts under which they manage care for Medicare Advantage patients.

For example, venture-backed Oak Street Health provides value-based primary care exclusively to older adults (80% to 85% of whom are Medicare Advantage or dual eligible) in underserved urban neighborhoods.

To date, there is very little peer-reviewed evidence examining the effect of private equity acquisitions on the quality and cost of patient care, physician professionalism, or the experience of patients, physicians, and staff.

However, metrics reported by Oak Street Health suggest that private equity-backed practices can take on the sickest patients, do a great job in managing care, and make money.

Even a city like Philadelphia with its five academic medical centers should be paying close attention to private equity-backed practices whose quality and cost outcomes may equal or surpass those of the top health care systems.

Maybe these new arrangements are not really that “odd” in the final analysis!