Private Equity Funds and Hospitals Targeting More Physician Practices

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After a brief – and mostly unsuccessful – debut in the 1990s, the trend of third parties (including hospitals and insurers) scooping up physician practices is back.

“That first wave collapsed,” said Kevin Fine, a director for the healthcare advisory services group at the Kaufman Rossin accounting and advisory firm. “Today’s wave is different.”

Practices have appeal for acquirers because healthcare is non-cyclical and the demand will never go away, he said. “Everyone is a patient sooner or later. The Affordable Care Act generated a lot of opportunity,” as more than 20 million in the US obtained health insurance. “And look at the age of the population: 10,000 people per day will become eligible for Medicare between now and 2029.”

“There is so much private equity money sitting on the sidelines now,” partially because interest rates are at historic lows, Mr. Fine said. “This isn’t going to end in a year or two. If there were more deals available, we’d be working 24 hours a day.”

Acquirers have also become more knowledgeable about what it takes to manage a practice and how best to leverage it, he added.

“Back in the ’90s, it was the Wild West, but now they need to assess the accounting and financial side of an acquisition correctly. The average hospital loses $100,000 each year on every physician it hires, but they gain it back downstream.”

It’s not just large medical groups and hospitals that want to acquire practices, he said. Insurance companies are also joining the fray. “That’s a big threat, because the payor provides a direct threat to the hospitals. Now, the payors are saying they don’t need hospitals.”

As healthcare shifts from volume-based (fee for service) to a value-based (the best care for the lowest cost across population) reimbursement model, “you have to reach out and manage population to maintain market share and grow,” he said. And though there are challenges in healthcare, including fluctuating reimbursement rates, “every problem is an opportunity,” Mr. Fine said. “If you’re not in the game right now, shame on you.”

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