Practice Consolidation: Forces Not of Nature, but of Government, Demographics, Economics, and Technology

The healthcare industry in the United States today is experiencing a trend toward consolidation that makes the technology equivalent of Moore’s law seem like watching grass grow. Assessing the factors that have created this disruptive reality paints an obvious conclusion: either strengthen an already established niche healthcare practice or determine how to maximize the benefits of consolidation for patients and equity partners. This article focuses on consolidation.

The major drivers affecting this rapid change of the healthcare delivery system are found in a number of arenas, including:

• Regulatory (compliance, Meaningful Use, ICD-10);

• Legislative (Affordable Care Act [ACA], Accountable Care Organizations [ACOs], tax law);

• Demographics (population and labor supply);

• Societal health habits (e.g., obesity epidemic);

• Finance (private and public equity appetite for healthcare investments);

• Economics (supply:demand imbalance); and

• Technology (IT connectivity and bandwidth, enterprise electronic medical record [EMR], interconnectivity for collaborative care).

Regulatory

What once was a free market economy driven by the desire to truly care for the ill has been transformed into a quagmire of regulatory requirements that are driving experienced providers to early retirement, causing younger providers to spend 20% to 30% of their time on nonpatient care efforts, and creating the need for a whole new level of nonproductive bureaucratic efforts on the part of support staff. Thus we observe the desire of many practitioners to seek relief by consolidating with sufficient critical mass to offload the regulatory tasks. These tasks include Meaningful Use documentation with EMRs, implementation of ICD-10 coding, Physician Quality Reporting System, and electronic prescribing, along with the daunting task of comprehensive compliance. Compliance covers a variety of patient care and business-related issues, including billing and coding, exclusion screening of providers and employees for the Office of Inspector General, privacy compliance, professional licensure and certification, fraud and abuse, and IT protection, just to name some. Something that might seem as simple as calculating provider production and compensation could have serious compliance issues that the average practice is unaware of and, consequently, is at risk for. A professionally managed compliance program is a necessity in today’s climate.

Legislative

Recent legislative activity affecting providers and their practices is already having a dramatic impact. Although it is reassuring that many more in the United States now have healthcare coverage, the shortage of primary care physicians (PCPs) creates significant challenges for most PCP practices to provide more care with flat to declining reimbursement. The Centers for Disease Control and Prevention (CDC) reports a decrease of 12.6 million in those under the age of 65 not covered by health insurance from 2010 to 2014,(1) thereby increasing the demand for services by reducing the financial barriers to accessing care. The U.S. Department of Health and Human Services estimated that the shortage of PCPs in the United States was 7,500 in 2010 and will increase to 20,400 by 2020, primarily due to the aging of the U.S. population and increased access to care resulting from the ACA.(2) Additionally, each PCP is trapped if unable to engage with an ACO panel.

Legislation also has an impact on each provider’s personal finances, although currently in a potentially positive manner. Should providers elect to join a larger entity as part of the consolidation trend, the opportunity exists to take advantage of the U.S. tax laws and convert what would have been subject to income tax at ordinary income rates into the lower long-term capital gains rates, because a portion of the transaction value for merging one’s practice is “ rolled over” into ownership shares in the larger consolidating entity.

Demographics

By now, most of us are aware of the aging of the U.S. population as the baby boomer generation makes the transition to senior citizens. Based on U.S. Census Bureau projections, the U.S. population aged 65 and older will have increased from 47.8 million in 2015 to 65.9 million in 2025.(3) With this growth of the population aged 65 and older comes a dramatic increase in age-related health issues. In my specialty of eye care alone, the growing prevalence of cataracts, glaucoma, and macular degeneration is completely transforming the patient flow algorithm needed to properly deliver the highest quality of care despite flat reimbursement rates and a static provider labor supply.

Demographic shifts also affect the prevalence of specific diseases in the United States. For example, as the percentage of the U.S. population of Hispanic ethnicity increases (as a percentage of the U.S. population, this group increased from 6.4% in 1980 to 12.5% in 2000 and is projected to be 19.0% by 2020(4,5)), the incidence of diabetes increases, further taxing provider capacity (Figure 1).

Health Habits

The increasing prevalence of chronic health conditions is well documented by a variety of sources. The CDC reports that the incidence of diagnosed diabetes more than doubled from 1980 to 2013 among age groups between 18 and 64, and in the age group of 65 to 79 years, it increased by 52%. Likewise, the CDC’s 2014 National Health and Nutrition Examination Survey reports increases in obesity, hypercholesterolemia, and hypertension from 2002 to 2012. CDC data indicate that the rate of obesity in adults 20 years of age and older increased from 22.3% in 1994 to 35.1% in 2012.(6) The combination of an aging population, a growing population, and higher chronic disease prevalence means that the U.S. healthcare delivery system must change. Consolidation of providers and practice groups with private equity capital investments is a compelling solution.

Finance

Numerous reports have indicated that the fastest growing segment of the U.S. economy is healthcare. U.S. healthcare spending grew by 3.6% in 2013, reaching $2.9 trillion, or $9255 per person. As a share of the nation’s GDP, health spending accounted for 17.4%, and it is expected to rise to 19.6% of GDP by 2024.(7) In response, the appetite in the financial community has been voracious, and investing in the gamut of healthcare concerns has become extremely popular. Investments have included mergers and acquisitions in multinational pharmaceutical firms, hospital groups, health insurance companies, and, now, consolidated healthcare provider groups. Articles abound in the financial publications (e.g., Forbes, The Wall Street Journal), and the consolidation of provider practices addressed here is covered regularly by private equity firms and the financial industry press.

Interestingly, the healthcare consolidation trend and private equity investment are not limited to the U.S. market but also are occurring in Europe and Asia. The Bain report reveals that private equity healthcare investments totaled $29.6 billion across the globe, with $15.6 billion of it in the United States.(8) There is every indication that these trends will continue for many years to come.

Economics

The most compelling indications for consolidation are the basic macro- and microeconomic factors affecting the delivery of healthcare. These factors include the overall demand for services driven by the aging and less healthy population, a labor supply (of providers) growing much more slowly than the overall demand, and productivity solutions that require larger group practices to better leverage capital investments.

Basic laws of economics clearly demonstrate that, in a free market economy, increasing demand for goods and services with a limited supply of the goods and services results in higher prices and more suppliers entering the market. However, the U.S. healthcare industry is anything but a free market economy. A large share of pricing is regulated by the federal government (e.g., Medicare, Medicaid, TRICARE), with the balance controlled by a rapidly consolidating group of payers closing in on antitrust concerns by the U.S. Department of Justice. A Google search of “health insurance and antitrust concerns” yields 408,000 results. Recent major deals include those between Aetna and Humana and between Anthem and Cigna, both requiring regulatory approval.

The supply of services (i.e., the providers) is relatively inflexible. Significant barriers to entry are posed by the need for 8 to 12 years of education and training, and substantial direct costs and opportunity costs (i.e., delay in gainful paid employment). The per capita supply of physicians in all fields is expected to lag behind demand for at least the next decade, and the projected per capita supply of medical and surgical subspecialties that would address the chronic conditions mentioned earlier declined from 2010 to 2015.(2)

Numerous anecdotal reports indicate that providers in the millennial generation have a very different life–work balance approach, which affects the supply of full-time provider equivalents. It was not unusual for the practitioners who are now near the end of their professional careers to work 50 to 60 hours per week, while many of today’s doctors might be more than content working just 36 to 40 hours per week.

Technology

Readers of this journal are all too familiar with their practice connectivity, electronic practice management, EMRs, and ability to interface diagnostic and imaging equipment with EMRs. Additionally, connections to off-site servers (e.g., the “cloud”) and payers for eligibility verification and authorizations are not only common but, typically, mandatory. These functions usually flow seamlessly, allowing for a very functional patient flow.

What has changed on the provider services landscape over the past 20 years is the ability to electronically link multiple practices with enterprise-wide practice management and medical records systems. More importantly, for the rapid consolidation that is occurring today, the bandwidth to merge back-office functions is now a practical reality. This was not the case in the 1990s during the short-lived rise of physician practice management companies (PPMCs). The PPMCs were unable to streamline these functions, and the result was notable redundancy of services, resulting in diseconomies of scale. Today, back-office functions, including accounts payable, accounting, human resources, IT support, compliance programming, and revenue cycle management can all be run and managed remotely and efficiently, taking advantage of economies of scale that were not possible in the 1990s.

The U.S. healthcare industry is anything but a free market economy.

Collaboration of care between specialists and primary care practices is now possible seamlessly and electronically, catalyzing the growth of ACOs supporting value-based reimbursement methods. Consolidated enterprises are able to benefit not only from significant human resource economies and expertise but also from more efficient and productive capital investments in hardware, licensing fees, and physical space.

Consolidation Forces

Medical practice consolidation is likely to continue its rapid pace, and for good reason. Vertical and horizontal consolidation of healthcare specialties makes sense in terms of both economics and quality of life for today’s new practitioners, those midway into their professional careers, and the large demographic group of providers well into, and beyond, their 50s.

The market realities and forces highlighted in this article merely touch the surface of what we, as providers and managers, are dealing with every day. Opportunities abound to increase market share and size, diversify risk, and maximize returns on investment all the while, delivering high-quality patient care on a daily basis.

References

1. Cohen RA, Martinez ME. Health insurance coverage: early release of estimates from the National Health Interview Survey, 2014. National Center for Health Statistics. June 2015; www.cdc.gov/nchs/data/nhis/earlyrelease/insur201506.pdf . Accessed January 15, 2016.

2. US Department of Health and Human Services, Health Resources and Services Administration. Projecting the supply and demand for primary care practitioners through 2020. November 2013; http://bhpr.hrsa.gov/healthworkforce/supplydemand/usworkforce/primarycare .

3. Projections of the population by sex and selected age groups for the United States: 2015 to 2060, United States Census Bureau. www.Census.gov/population/projections/files/summary/NP2014-T3.xls, Accessed November 17, 2015.

4. Hobbs F, Stoops N. Demographic trends in the 20th century: United States Census Bureau. November 2002; www.census.gov/prod/2002pubs/censr-4.pdf .

5. Percent distribution of the projected population by Hispanic origin and race for the United States: 2015 to 2060. United States Census Bureau. www.Census.gov/population/projections/files/summary/NP2014-T11.xls. Accessed November 17, 2015.

6. National Center for Health Statistics. Health, United States, 2014: With Special Feature on Adults Aged 55–64. Hyattsville, MD. 2015; www.cdc.gov/nchs/data/hus/hus14.pdf . Accessed January 15, 2016.

7. Centers for Medicare and Medicaid Services. National health expenditure data. CMS.gov . www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData . Accessed November 17, 2015.

8. Murphy K, Weisbrod J, Jain N, Klingan F-R, Kapur V. Global healthcare private equity report. Bain Report. April 15, 2015; www.bain.com/publications/articles/global-healthcare-private-equity-report-2015.aspx . Accessed November 17, 2015.

Diabetes by Race/Ethnicity

The rates of diagnosed diabetes by race/ethnic background are:

• 7.6% of non-Hispanic whites

• 9.0% of Asian Americans

• 12.8% of Hispanics

• 13.2% of non-Hispanic blacks

• 15.9% of American Indians/Alaskan Natives

The breakdown among Asian Americans:

• 4.4% for Chinese

• 11.3% for Filipinos

• 13.0 for Asian Indians

• 8.8% for other Asian Americans.

The breakdown among Hispanic adults:

• 8.5% for Central and South Americans

• 9.3% for Cubans

• 13.9% for Mexican Americans

• 14.8% for Puerto Ricans.

See more at: www.diabetes.org/diabetes-basics/statistics/#sthash.IeHIZ4FB.dpuf .