Who owns your doctor’s office? It might not be the doctor anymore.

Neel V -

Hi all! I had a great first week working on my project with CLA. I was introduced to the team and saw many familiar faces from the summer. I talked with three healthcare team members this week to get their insights on my project. 

I first met with Jenny, who leads the CLA healthcare thought leadership team from Madison, Wisconsin. I asked her about key focus areas when exploring acquisitions, mergers, and private equity (PE) involvement in healthcare and we talked about strategic motivations behind these moves for consolidation. Despite inflation and increased supply/labor costs during the pandemic, reimbursements—revenue paid to healthcare practices—had not increased to match. PE involvement acts as a solution by offering capital (money) to practices and giving them the benefits of a larger scale, such as standardized technology and platforms for their operations, reducing costs and increasing reliability. However, some legislators that are opposed say that the model of PE is to enter an industry, turn a profit, and exit after a few years while healthcare is rather a long term industry that should be focused on patients, not profit. This argument is not stopping doctors from selling because running private practices has become increasingly unsustainable for many. 

I then met with Paul, who works on both the buyer and seller side of corporate healthcare  transactions. He is in charge of making a quality of earnings analysis for organizations to normalize operations, meaning that he looks at expenses and revenues to ensure that business are running smoothly. He explained that centralization of offices and medical centers helps them achieve economies of scale, which are cost advantages from efficiency. He said that the private equity approach is generally in higher-margin specialties like dermatology because there is a better potential for profits. 

Finally, I met with Tom, who works in “CLA Intuition,” and he showed me the charts and projections that he makes for companies when they are thinking about consolidation. Most buyers want to acquire another practice because they have an excess amount of cash to spend. To make sure they purchase a company that they can generate profit from, they look at how costs can be lowered after acquisition. This may mean consolidation of staff and higher rates from insurance providers (larger clinics generally have better reimbursements). We also discussed the importance of a good payer mix, which would be a higher ratio of revenue from commercial insurance instead of government programs (Medicare/Medicaid). This is a “better” payer mix because it’s easier to negotiate with insurance providers for higher reimbursement rates, while government rates are fixed. Looking at the seller side of the transaction, organizations are sold so employees can keep their jobs. However in reality, there end up being duplicate jobs after consolidation—such as multiple front desk receptionists—which results in layoffs.

Today, I am independently looking for more information about consolidation trends from resources that Jenny recommended including Pitchbook, Commonwealth fund, KFF, and the Bureau of Labor Statistics. It has been a very informative first week here and I am eager to learn more about causes and effects of corporate healthcare transactions. 

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Comments:

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    Ms. Bennett
    Hi Neel, such an interesting post! How do offices achieve a "better" payer mix? Is this through marketing?
    brycewhite
    It makes me think that if govt rates are fixed, what (or who) would incur the variable cost increases?
    neel_v
    Yes a better payer mix can be achieved through marketing towards patients with private insurance! They can also look for referrals from commercial insurance by being in more provider networks.
    neel_v
    Thats a good question! Unfortunately, physicians are generally the ones who would see salary cuts first if healthcare systems need to implement cost cutting measures.

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