Herding hospital docs: Staffing firms buy MD groups

Dr. Brian Fengler and the other 29 doctors of Middle Tennessee Emergency Physicians in Nashville have a big decision to make next month.

They will evaluate whether to give up a slice of their business independence to an outside company with the time and skill to negotiate contracts with insurers and improve business practices.

The group has been brought to this point by price pressures from insurers, the federal push to bundle services, new regulations and barriers to expanding beyond the two St. Thomas Health hospitals where the group currently practices emergency medicine.

“In healthcare you have to get bigger to survive,” Fengler said.

Nationwide, hospital-based physicians across clinical specialties are facing similar challenges and gut-wrenching decisions. Consolidation is well underway, and accelerating among emergency department physicians, hospitalists, radiologists and lately, anesthesiologists—and shows no signs of abating.

To be sure, the nation's 5,000 or so hospitals remain predominantly staffed by independent physicians and groups that vigilantly guard their prerogatives, both clinical and corporate.

But Jeff Swearingen, co-founder and managing director of Edgemont Capital Partners, said the healthcare investment-banking firm has counted 62 acquisitions of hospital physician practices this year, after a similarly active 2014. And the ample institutional capital available for purchases is coinciding with a growing desire among physicians to belong to bigger groups.

Many younger doctors prefer the stability and work hours of being in an owned physician group rather than operating and building their practices independently. Also, physicians have seen consolidation among insurers and hospitals, and believe the best way to counter price pressures is to join bigger organizations themselves.

“When an Aetna and a Cigna say they are not big enough (without merging), that's a sign to all providers that scale matters,” Swearingen said.

Amsurg Corp., an investor-owned company known mostly for rolling up and developing ambulatory surgery centers, has been aggressively diversifying into physician services at hospitals since buying Sheridan Healthcare about a year ago.

The Nashville-based company went so far as to make an unsolicited $5.3 billion buyout offer in October for TeamHealth Holdings, a leader in physician staffing. The deal was rejected and Amsurg withdrew its bid in November.

But Amsurg CEO Chris Holden told investors last month he sees organic revenue growth in Amsurg's physician staffing business of 5% to 7% versus 2% to 4% in its developing ambulatory surgery center business.

TeamHealth CEO Mike Snow said in an interview that his company liked its growth prospects without Amsurg, and wanted to concentrate on absorbing a big recent acquisition of its own. In November, the Knoxville, Tenn.-based company paid $1.6 billion to acquire another leading provider of outsourced physician staffing, IPC Healthcare.

With that acquisition, TeamHealth now has about 15,000 physicians deployed at hospitals and skilled-nursing facilities across the country. Snow said TeamHealth likely will slow its acquisition pace in 2016 to fully integrate IPC.

But that's not the inclination of other big investor-owned players in the space.

Amsurg and Mednax are out raising new money, signaling that the acquisitions fever is not over.

Amsurg is planning a secondary offering of common shares to raise as much as $516 million for acquisitions and to retire some debt. The company has $500 million in potential acquisitions in its pipeline. Just last week Amsurg bought Premier Emergency Medical Specialists, a 49-physician group that's the exclusive provider of emergency services at two Dignity Health hospitals in Phoenix.

Mednax, a leader in pediatrician and hospitalist staffing, is targeting a $500 million debt offering for acquisitions and other debt retirement, the company said in a regulatory filing.

Physician groups are interested in selling for a host of reasons, many of them related to the fast-changing business environment under new payment models and federal quality initiatives.

Capitol Emergency Associates, an emergency physician staffing practice in Austin, Texas, sold its 120-physician practice to TeamHealth in February at the urging of St. David's Medical Center, said Dr. Neil Mendelson, TeamHealth's regional medical director.

St. David's, a 50/50 joint venture with Nashville-based hospital chain HCA, was intent on following the new HCA model of integrating the ED with internal medicine at its hospitals, and TeamHealth was chosen as the staffing contractor to make that happen.

In part, Mendelson said, the integration was a response to bundled payments and other value-based reimbursement models, which put providers at risk for preventing readmissions and duplicative care and tests by tying payments to successful treatment and follow-up care.

He said communication between emergency physicians and internists has improved, and they no longer have an incentive to fight over who should get paid for specific care and diagnostics.

Dr. Robert Frantz said the handwriting was on the wall in 2010 when the group he then belonged to, Morningstar Emergency Physicians in Oklahoma City sold its ED staffing practice to TeamHealth.

Before TeamHealth, the 110-physician group tried to expand beyond its strong presence inside the hospitals of Oklahoma City-based Integris Health, Frantz said. But the group found it difficult to absorb the initial costs of obtaining new contracts when that meant waiting 90 to 180 days to start getting paid for its services.

Those physician receivables for an ED seeing 60,000 patients a month could total $1 million to $1.5 million, an amount even the group's hospital partners were reluctant to help carry, said Frantz, now president of TeamHealth Emergency Medicine's West Group in Moore, Okla.

A variety of other factors also helped nudge Morningstar into the TeamHealth stable: the leverage that a company like TeamHealth can bring to negotiating prices with insurers; competitive malpractice insurance rates from TeamHealth's captive insurance company; and the daily war that physician groups must wage to defend contracts against aggressive rivals.

“Medicine is transforming right now, and you don't have a lot of time for a learning curve,” Frantz said.

Middle Tennessee Emergency Physicians is pondering an investment from Emergency Physician Partners, a new Nashville-based company founded by industry veteran Chris Kelly and backed by $25 million in available capital from Claritas Capital Equity Group.

Fengler said Emergency Physician Partners has offered to buy 20% of the group's revenue, rather than 100% of the business—a model that rewards physicians and gives them access to modern information technology and business practices without threatening their autonomy or future compensation.

The group, which staffs the EDs at St. Thomas Midtown Hospital in Nashville and St. Thomas Rutherford Hospital in nearby Murfreesboro, Tenn., could vote on the deal early next year.

“Physicians are best off focusing on patient care and things they are good at, while leaving business operations to people who have more experience in that realm,” Fengler said.