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Who is Buying Physician Practices?

By February 26, 2020February 28th, 2020Commentary

A research letter in the Journal of the American Medical Association reports that private equity firms are buying physician practices.   (JAMA Article)    Nothing shocking about this, there is a lot of capital floating around in the United States and it is always looking for a home.  Health care is 20% of the economy and doctors control a lot of that spending. The authors looked at the years 2013 to 2016 using a data set on physician practice ownership changes.  Out of about 18,000 group medical practices, 355 were acquired by private equity firms (which probably includes venture capital as well) in this time period.  These acquisitions included 1426 sites and 5714 doctors.  The number of practices acquired increased each year.  About 40% of the acquisitions occurred in the south.  About 20% of the purchases were for anesthesiology groups, 20% for multispecialty practices, 12% for ER doctors, 11% for family practice and 10% for dermatology.  In addition to the acquisition activity reported in the research letter, financial firms are funding a number of physician practice startups, particularly in primary care.  These startups are growing rapidly and account for an increasing proportion of all physicians.  But activity by financial buyers is dwarfed by health system acquisitions.

Changes have been going on in the ownership and control of physician practices for decades.  Staff model HMOs, in which the health plan employs the physicians, were the earliest form of health plan.  In the 1980s, practice management companies were funded by financial buyers to in essence acquire physician practices and most failed.  Hospitals have been on a buying spree for the last 15 years.  To the extent that ownership and control are linked, a valid concern is whether the physician’s judgment on how to best care for a patient is being compromised.  If the provision of external capital allows the acquisition of greater resources to support a physician practice, that can be a good thing.  External owners may also facilitate better and more efficient management practices and may support dissemination and adoption of best practices.  But external owners, whether they are hospitals, insurers, or financial owners, definitely are looking for a return on their investment, and that inevitably, and I do mean inevitably, leads to higher prices and/or more spending for the buyers of physician services.  Study after study shows that health systems raise the prices charged by acquired practices.  Hospital owners may also increase spending by getting more referrals to other parts of their health system.  Insurers who own physician practices simply embed the cost of those services into their premiums, and if the cost of owning the physician practice is lower than that of contracting with independent doctors, they will likely just keep most of the difference as profits for themselves, since the health plan market isn’t all that competitive either.  Financial buyers are looking for an ultimate exit, which depends on the profitability and revenue growth of the practices they have acquired.  Raising prices is obviously a way to boost profits, and if you can buy enough practices to have some market power, so much the better for raising prices.  I don’t think financial buyers owning physician practices is necessarily any worse than hospitals or insurers buying them, but we should be concerned about the effect on unit prices.

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