Dr. RollUp: PE Bets Big on Consolidating Medical Practices

private equity – not flashy technology – IS THE Next Frontier in American medicine

Pandemics hasten the inevitable. The sick, the weak, and the old fade more quickly. Workers work more remotely. Housebound consumers watch more web-fed movies and television. And hospital-averse patients cue up more for virtually administered telehealth. CDC data estimates that roughly 150% more patients accessed remotely-served medical care during Covid. Research confirmed that such pandemic-driven telemedicine offered reasonable patient and doctor satisfaction. 

Investors, not surprisingly, found pandemic-inspired telemedicine attractive. Remote medical platform Teladoc (TDOC) saw its enterprise value quadruple. And remote multiple sclerosis management firm BeCare announced a merger with French digital health firm, Innovhealth. 

“We’re not the only AI-based health startup to see fresh investment,“ says Larry Rubin, chief innovation officer at BeCare. “But Covid has made it much simpler for a great idea to find a niche.” (Full disclosure: This writer used BeCare’s technology in several financial services machine-learning tools he helped develop.)

However, doctors, administrators, investors and consultants all confirm that flashy new healthcare technologies like Teladoc will not be the most impactful pandemic-driven trend in medicine. Instead, Covid has dramatically accelerated the time-worn, mundane process of private investors consolidating medical practices.

“We’re pretty skeptical about automation in medicine,” says one consultant who manages the business affairs for medical practices. For him, Covid simply amplified the fundamental, generational shift that’s happening in the profession. Older doctors are getting out, he explains. Younger doctors are coming in. 

“The new doctors are just not interested in the lifestyle of owning their own businesses,” he says. “There is not going to be the magic bullet that is going to change the economics of healthcare.”

Changes Medicine Made Loud and Clear 

Medical practitioners and regulators have long tracked consolidation in medicine. The census of the medical industry, the AMA’s Physician Practice Benchmark Survey, confirms that since 2012, private practices have been steadily flowing into the hands of larger, more centrally-managed medical groups. 

The year 2020 was the first that fewer than half of all doctors worked in physician-owned practices. Indeed, 50% of all MDs now are directly employed by a medical group, hospital, or larger medical organization. And just roughly 18% of those doctor-owned businesses were traditional solo practices. Exact ownership rates vary by speciality: Radiology and anesthesiology had the most solo practitioners. Emergency medicine and psychiatry had the least. 

Regardless of specialty, the demographics of the shift away from doctor-owned medicine are dramatic. Estimates say women now make up more than half the population of practicing physicians. As of 2020, a full 70% of doctors under 40 were employed by others. 

Doctors spoke of exhaustion while practicing in the Covid age. Managers said hiring trained staff was challenging. Administrators complained about the complexity of medical payments and collecting fees. All spoke of the relentless drive to see more patients in less time.

“Doctors began to hear what other practices have been sold for,” says a consultant.  “And they see this as the time to get out.” 

More M.D. M&A 

Innovation is not the key to how private equity finds profit in medical practices. It’s that doctors, by and large, get into the field to help people. Their business acumen can be spectacularly poor. Even the most basic management improvements can yield real efficiencies in medicine.

First, investors pay a reasonable premium to purchase a mature medical practice, usually from its founding doctors. Valuations are almost never terribly high. Next, new ownership installs professional medical practice business managers. These teams work through a standard checklist of efficiency measures. Days receivables, which can often loom up to about 100 days, are tightened to 45 days or less. New billing systems are installed to speed insurance company payments. Though many tech companies, like Teledoc, claim to automate such billing, surprisingly few firms install them. Far more common are old-fashioned human medical scribes and well-thought-out data-entry forms on simple personal computers.

Next, these newly larger medical groups start brass-knuckle negotiations with insurance companies. Fees are increased. Services are stripped back to focus on the most profitable. The cost of supplies are negotiated at new, more favorable terms. Rent is cut. And most importantly, doctors and staff are driven to see more patients in less time. 

“Seeing a patient every 15 minutes is one thing. But when my newly sold practice was scrimping on toilet paper, I knew it was time to get out,” says one general care doctor. 

Diagnosis for Profit

The upside for medical practice investors goes deeper than just profits. Most medical practice purchases are far too small for regulators to notice. Investors have flexibility in what kind of disclosures or compliance are required. 

Medical spending has grown exponentially over the past century.

The addressable market for medical care is also well-understood. The Bureau of Economic Analysis has scrupulously collected data on the medical industry since 1929. The index for personal expenditures on physician services has basically jumped in orders of magnitude over the past century.

This bottomless well of demand has made it easier for investors to find the means to centralize and administer large medical groups. Some 72 percent of all providers are now part of a larger medical system. Expectations are, the deal-flow to centralize medicine even further is about to grow dramatically. The Journal of the American Medical Association, estimates there are 18,000 private medical practices in the U.S. Assuming each earns a median revenue of roughly $3 million, that grosses up to a $5.4 billion medical services market in the U.S. 

Covid has created a backlog of potential medical practice sales.

Covid has already created a significant backlog of deals. As of 2020, only 80 medical practices were transacted, down from about 125 in 2018. Expectations are that the number of transactions will grow dramatically, as both postponed deals are consummated and new capital flows into the market. Established private-equity firms like The Beekman Group and New York City-based Edgemont Partners make the on-ramp investing in the sector relatively simple.

The returns are attractive. Estimates are that most practices are bought for between .8 to 1.5 times current revenue. After restructuring and efficiencies, most practices can be sold for roughly 3-times revenue. Usually in less than 72 months, with some spectacular results. 

In 2017, private equity funded practice Surgical Care Affiliates sold its regional network of more than 200 care facilities to United Healthcare for $2.3 billion. 

Investors point out, these gains are captured with none of the risk usually found in biotech and emerging medical technologies. Bankruptcies are rare. Regulatory missteps are essentially unheard of. Intellectual property is non-existent. 

“In many ways, post-pandemic medicine will be like post World War II medicine,” said one consultant. “You’ll see doctors working in jammed offices, charging fees for seeing more patients, then making rounds in the morning. And getting home at 1:00 AM.”

What innovative new tools these doctors use – even something like a Teladoc – won’t make or break the coming changes in healthcare.