Beyond the Byline: Private equity investors target primary care

Modern Healthcare Insurance Reporter Nona Tepper and Finance Reporter Tara Bannow talk about primary-care practice mergers and acquisitions and why private equity firms are investing in the sector.

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• Modern Healthcare (@modrnhealthcr)
• Nona Tepper (@ntepper90)
• Tara Bannow (@TaraBannow )

Music Credit: Coffee by Cambo

Nona Tepper:    Hello, and welcome to Modern Healthcare's Beyond the Byline where we offer a behind the scenes look into our reporting. I'm Nona Tepper, I write about health insurance here. Today, I'm talking with Finance reporter Tara Bannow about investor interest in physician practices. Thanks for joining me, Tara.

Tara Bannow:    Thanks for having me, Nona.

Nona Tepper:    So Tara, I know you've covered a few big deals this year. One in particular is Keno Health's $600 million acquisition of University Health Care. I feel like some of your recent reporting has pointed to maybe deals like these are broadly indicative of where the industry is heading, with changes in physician group ownership. Can you walk us through what a few of your recent stories have found?

Tara Bannow:    For sure. There's a lot happening in this area. The American Medical Association does this Biennial Survey in which they ask all kinds of questions about practice ownership. Back in May, they said that for the first time most physicians worked outside of independent physician owned practices last year. They said 49% of docs worked in physician owned practices down from 60% in 2012. So it's not clear what proportion of docs work for health insurers, like UnitedHealth Group's Optum. There is this other category, but it's only 2%, which doesn't seem like enough. I think one caveat is that AMA survey only included 3,500 docs that were surveyed. So it's a relatively small sample size. Then, last month we got a much bigger report from this consulting firm called Avalere Health, and that covered hundreds of thousands of doctors. Its results were actually very interestingly pretty different from the AMA's, because they found that almost 70% of doctors are now employed by hospitals or corporations.
    

That report didn't say how many of the remaining 30%, how that broke down, whether it was physician owned practices. But obviously 30% is less than AMA's 49% that were employed by physician owned firms. So we're getting some conflicting information there. But Avalere did find that the pandemic accelerated the trend toward physicians becoming employed by hospitals and corporations, like private equity, like Optum. The number of docs employed by private equity and health insurers grew 31% between 2019 and the beginning of this year, that's now 20% of docs. So 20% are employed by health insurers and private equity. Hospital is still the biggest employment category, it's 49% according to Avalere, but it did grow 5% during the study period. So it's growing a little slower than PE and health insurers.

Nona Tepper:    That's fascinating, and that is such an interesting trend to think about. Do you think hospitals are growing slower than PE and ensures when it comes to snapping up these physicians? Just because there's more room for health insurers and PE to grow and hospitals are fully staff.

Tara Bannow:    That could absolutely be the case. I mean, it seems to me like they just have more money, private equity, they've got a lot of money, health insurers. Yeah. I mean, you write about in UnitedHealth Group, how much money they have. Meanwhile, a lot of these health systems that would traditionally employees and these doctors, they're hit and miss. Some of them are losing quite a bit of money, I mean, we know how Sutter Health is doing. Hospitals and health systems are not all super profitable right now, unless you're essential.

Nona Tepper:    Got you. Thanks for explaining that to me. I'm still just scratching my head though, because primary care has traditionally not been a high margin business. Why are investors suddenly interested in picking up these practices?

Tara Bannow:    Well, you're right. I mean, speaking about PE specifically, I mean, private equity, mostly likes to buy providers that offer big ticket procedures, with bonus points if they are not covered by health insurance. So you think about things like dermatology, you're here for your skin cancer check, but how about some Botox? Or ophthalmology, we'll fix your cataracts but then, how about some LASIK? So those are still big targets, but obviously those markets can be tapped out, but primary care is increasingly interesting to private equity. I think it's just because of the aging population, the resulting jump in Medicare Advantage membership. This year, 42% of Medicare beneficiaries have a Medicare Advantage plan, and that's up from 17% in 2000. As you well know, from covering health insurance, there's tons of interest in this among health insurers and especially these new startups that want to focus specifically on Medicare Advantage.
    

That's just because it's a profitable line of business. You get paid to manage someone's healthcare and if you can keep the costs low, then you make money. Another thing I think about primary care is that private equity realizes it can apply the same roll up strategy that it does to other areas. Where you buy a number of clinics, you create a chain, you standardize the branding, same logo, same chairs, and then you cut expenses once you've gained efficiency in numbers, and you've got more leverage to negotiate higher rates with health insurers. Primary care might not be a high margin business, but I think the bigger the population that you're covering, especially under Medicare Advantage, the more risk you can take on doing that, the bigger the potential profit.

Nona Tepper:    You're right. There is definitely no shortage of insurtech's picking up these tiny primary care practices to try and control the costs, and provide more targeted care for their senior members in Medicare Advantage plans. I guess I'm wondering though, why would a physician want to be owned by a private equity firm? Wouldn't it be just more fun for lack of a better term to be independent?

Tara Bannow:    Well, I mean, you'd think that, but running a practice is super complicated. I mean, there's just a lot more federal regulations today than there were decades ago around billing, finance, privacy, insurance. I mean, there's your administrative work to consider, credentialing, of course, as you know, prior authorizations with insurance is a whole thing in itself. So in a small practice, a lot of that falls onto the doctors themselves. If you're employed by a private equity firm, or a health system, or even an Optum, they're going to have an electronic health records platform. They're going to have an insurance, prior auth folks, the legal team. They're going to have a lot of nurses and support staff, maybe even some scribes. Yeah. So if you're a smaller practice, just trying to do that on your own, you're probably responsible for a lot more than just caring for your patients.
  

 It's less likely that work-life balance is happening. So I feel like it's totally understandable why physicians would want to gravitate toward employment. But on the other hand, doctors are specific kinds of people, they want autonomy. My understanding is that hospital employment doesn't always offer that, there might be more control over how you provide care and what you have to do. It sounds like private equity tends to be a little bit more hands-off in some aspects of their operations. But sources have told me that these companies do, in some cases, pressure doctors to turn out more procedures. So they see higher volumes of patients. Younger doctors are especially likely to lean toward corporate employment or hospital employment. I mean, they might have $300,000 or more in student debt. So hanging up your shingle or joining a small practice with no money, it's super risky.

I think more and more people are gravitating toward the stability of a larger employer with all these resources I mentioned. It's interesting, some of my sources have said that they really think it's actually just that higher student debt burden that's driving a lot of this trend. So it's yeah, I'm sure it's a number of factors, but I really can't blame them. I think there are also some of these startups that you've written about, that we all write about. You covered Privia Health's IPO, there's Clover, there's all these one medical for... There's these companies that are kind of trying to change the model and give docs some more options. Giving them a little bit more autonomy and in control over their situation.

Nona Tepper:    More doctors are working for larger corporations as opposed to going the independent route, for the most part. I'm wondering, what does this mean? Is this good? Is this bad? What are the implications for the healthcare ecosystem?

Tara Bannow:    Well, I think the biggest impact is definitely on healthcare costs. Research has shown that when practices get bought by PE or by hospitals, those docs are going to order more stuff. I mean, there was a pair of health affairs studies that came out in May. One of them found that docs ordered more diagnostic tests and lab tests after their practices were acquired by hospitals. Also, that those physicians employed by hospitals were more likely to order inappropriate MRI tests. I think it's important to note that that wasn't a small bump either, the odds of getting an inappropriate MRI jumped 20% after an independent primary care group transitioned to hospital employment. Also, these health affairs studies covered 30 million imaging tests and 340 million lab tests. So it's hard to dispute that, that's a lot of tests. The studies also found that the individual tests themselves were more expensive, because the hospitals that have to tack on their facility fees that you wouldn't have at a traditional primary care practice.
    

So this higher spending is adding up. It has big implications for what people pay for health insurance, what our employer pays to cover us, and what other employers pay to cover their workers, what states pay, we could go on, but it's definitely a troubling shift. But I would say what's even more troubling is how precious little information we have about what happens when practices get bought by private equity firms. The pandemic has gotten Congress more interested in regulating PE in health care, because of the higher rate of nursing home deaths. So I think there's been some momentum, increasing momentum now to get them to report financial data to the IRS, for example. But right now they don't have to report the size of transactions, they don't have to report what they pay. It's just a black hole. In my personal experience, reporting on private equity, they almost never do interviews, they don't give up any info. If you're a person whose job is to disseminate information, it can be a little frustrating.

Nona Tepper:    I can totally sympathize with you there. I have not had the pleasure of talking to any private equity investors recently. One piece of news that you wrote about though kind of caught my eye in that realm. It looks like workers from One Medical are attempting to form a union, it looks like. Can you talk a little bit more about what some of their grievances are there? Is it a union? Am I right? What is this?

Tara Bannow:    Yeah, that was interesting. They've identified up to 500 employees that are in this specific types of positions that could be eligible for this union. My understanding it was a lot of pharmacy workers. It was some different kinds of workers that just, they were taking on too much responsibility. They felt like their descriptions of their jobs before they took them, were not what they ended up getting into, and they just felt they were super overburdened. There were a number of, actually pretty wide ranging grievances in there. One Medical's response to all this was actually that these folks never brought it up to them, they never brought any of these grievances to the company specifically before putting it out in the media, which I thought was interesting.

Nona Tepper:    Definitely, and I look forward to your coverage in that area. That's always a question I have with these private equity companies. What does it actually like to work there? I find it so hard to find workers that will actually talk to me. But anyways, I'm wondering, what does the future look like for the independent physicians who remain independent? Who aren't corporate owned?

Tara Bannow:    Yeah, I mean, to me it seems like the factors that make, having an independent physician practice, the things that make it difficult are just getting bigger, they're growing. So, and even as some of these private equity firms and corporations like Optum health systems, they're getting bigger, more profitable. So I can imagine the idea of selling your practice to them is looking better and better, especially as the reimbursement world looks even more tenuous. But that said, maybe some will stay independent, I mean, as I mentioned earlier, there are some startup companies that are exploring new ways to employ or partner with docs. There's this strategy that's, they call physician enablement, where they don't necessarily buy the practice and employ the doctors. But they kind of form these affiliations where they hopefully absorb some of that administrative burden in exchange for, a cut of the profit.

So that whole pitch is supporting the doctors, improving their quality of life, and often it involves a lot of utilization of data and technology. You use our EHR platform, you use all this stuff from us, and then hopefully you'll have better quality of life, maybe you'll be able to go on vacation. But I think Privia Health, that you wrote about, that's an interesting company because they seem kind of payer agnostic. They've got commercial of Medicare, Medicare Advantage, but that's all kind of about using technology, and helping practices transition to value-based care. But then there's agilon health, Clover Health, but they have similar models, they're both very Medicare Advantage focused. They partner with the existing physician groups and kind of offer these different services. But then, also like we talked about there's these models, like One Medical and Forward where they do employ the physicians, and really try to focus on improving the patient experience through technology. I think there's a lot of creative stuff being tested, I mean, who knows what's going to really work. But I would probably say in the short term, the future probably looks like more employed physicians.

Nona Tepper:    Well, thank you all for listening. If you'd like to subscribe and support our work, there's a link in the show notes. You can subscribe to Beyond the Byline in Spotify or wherever you listen to your podcasts. You can stay connected with our work by following Tara and I at Modern Healthcare on Twitter and LinkedIn. We appreciate your support and thanks again for listening.