Hospital systems also have been purchasing physician groups at a rapid clip to build their provider networks and prepare for the time when they will be paid based on their effectiveness in keeping their enrolled populations healthy. Robust primary care will be central to that mandate, and fragmented healthcare markets around the country have been consolidating.
On the provider side, DaVita made one of the largest bets on value-based healthcare in 2012 when it paid $4.4 billion to buy HealthCare Partners, a multispecialty, multistate medical group with deep experience working with capitated contracts, Medicare Advantage plans and other risk-based contracts. But DaVita's investment has underperformed investors' financial expectations, as DaVita leaders say they have struggled with internal operational issues in the medical group.
But large health systems are still buying medical practices. In the greater Chicago area, for example, Alexian Brothers Health System, which operates 375-bed Alexian Brothers Medical Center in Elk Grove Village, Ill., in February bought the Medical Care Group, a six-site primary-care practice in suburban Chicago, for an undisclosed price. Alexian itself merged with Adventist Midwest Health earlier this year.
One of the key benefits of acquiring the Medical Care Group, Alexian Brothers said, was its experience in managed-care contracting with public and private insurers. The practice operates an independent physician association that manages care for about 3,000 individuals, giving it significant training in managing the health of its covered population. “Their experience will provide a lot of value to us,” said Kimberly Zimmermann, chief operating officer of Alexian Brothers Medical Group, in a news release announcing the deal.
Still, many systems have yet to see a return on their investment in buying physician practices. Employing physicians means they need to pay hefty salaries and benefits, as well as the overhead costs associated with office-based practices. Many health systems acquiring physician practices have adopted productivity-based compensation models, to avoid the costly mistakes they made in the 1990s, when they last rushed to buy physician groups.
Hospital systems that receive a significant portion of their payments from capitated contracts also have reported that their revenue has decreased because the end goal of those contracts is to reduce utilization.
Those realities have led some for-profit companies, particularly publicly traded hospital chains, to take a wait-and-see approach to population health management. But other investors see opportunities in being early adopters. “For the people who are well-prepared and understand how those payments will work, there's a tremendous competitive advantage and clearly a lot of money to be made,” said Jeff Swearingen, a managing director at Edgemont Capital Partners, who specializes in deals involving physician groups.
Many states have moved to Medicaid managed care to control costs, and the number of people enrolling in Medicaid plans is growing rapidly, said Hosler of Sterling Partners. Medical groups skilled in population health management could fetch a premium price from insurers looking to win Medicaid managed-care contracts from states.
“That is a newly increasing population,” Hosler said. But working with Medicaid patients often requires a different approach than physicians might use with commercially insured patients. “The best providers are the ones who can manage complex medical needs,” he added.
Physician groups that specialize in capitated payments benefit when they can keep their overhead costs low. Partnering with a private-equity firm provides a growth opportunity that allows them to spread their costs over a wider base. “It's scale,” said Mark Claster, a partner at Carl Marks Advisors. “People get paid for being more efficient. If you're able to take many of the central costs out of that business, you can do that very well.”
Insurers such as Cigna Corp. and Centene Corp. also have been buying medical groups that specialize in chronic disease management. In September 2013, Cigna purchased Chicago-based Alegis Care from Triton Pacific Capital Partners. Alegis coordinates care for homebound Medicare and Medicaid beneficiaries. In December 2013, Centene purchased a $200 million majority stake in Troy, Mich.-based U.S. Medical Management, which also provides home health services for high-risk patients.
Value-based payment models will create challenges for insurers and providers, but some investors are hoping that there will be a first-mover advantage. Healthcare providers that excel at managing population health will make up the lost revenue from lower utilization with more volume and greater market share.
“This is an area where there are winners and losers,” said Dr. Andrei Gonzales, director for value-based reimbursement initiatives at McKesson Health Solutions. “It's everyone trying to get a slice of the pie that's getting smaller.”