As national health reform begins arriving at our door step, more and more physicians are taking down their shingles and joining hospitals or emerging national healthcare practice companies as employees.
A 2013 study conducted by Jackson Healthcare, LLC, Physician Practice Acquisitions — Tracking Which Practices Hospitals are Acquiring1 reported 56 percent of hospitals made acquisitions of physician practices in 2012, and 52 percent plan to do so in 2013. The top three specialties sought, in order, are: family practice — 54 percent, general internal medicine — 26 percent, obstetrics/gynecology — 24 percent.
Perhaps the most astonishing statistic is that it is the physicians who are seeking out the hospitals. Of the hospitals participating in the study, 70 percent said they were first approached by the physicians wanting to sell their practices. While hospitals are seeking to improve competitive positioning, the physicians are seeking a safe haven where they can practice, as employees, without having to directly deal with the coming changes in the healthcare industry.
Interestingly, hospitals rarely pay the physician practices for more than their tangible assets. Existing STARK regulations prohibit hospitals from paying more than Fair Market Value (as defined). FMV can consider revenue increases or cost savings to the practice that any hypothetical willing buyer would be able to influence, but not specific downstream referrals the practice drives to a health system. In general, professional goodwill is not considered. Physicians who depend heavily on referrals for patient volume are especially vulnerable and do not command high prices.
Physician medical group transactions grew to $4.4 billion in 2012 — an 846 percent increase over $467 million in 2011 (Source: Irving Levin Associates, Inc., The Health Care M&A Information Source2). Both price and volume increased. Those whose practices are based on large stable contracts with hospitals or payers may command greater value.
It is commonly said that those physicians who practice without the need of a patient waiting room are likely to be the most insulated from coming reform. For example, anesthesiologists occupy a unique place in healthcare delivery. They are essential to many medical procedures and, in fact, are ones who can best control operating room efficiency and patient satisfaction. No procedure can begin or end until the patient is properly sedated and pain free. Further, an anesthesiologist using a CRNA (Certified Registered Nurse Anesthetist) as a physician extender can manage multiple procedures at one time. It is in these specialty areas that public companies and private equity players are dominating over hospitals in part because they are not limited on what they can or will pay.
Nashville based VMG Health published a presentation General Trends in Hospital Acquisitions of Physician Practices (www.vmghealth.com) which noted that the two highest valued practice specialties were emergency room medicines and anesthesia, commanding 5 to 8 times EBIDTA multiples. These ranges are in line with what 2nd Generation Capital (2ndG) has seen in its investment banking practice.
In 2012, three of Tennessee’s largest anesthesia practices were sold to corporate acquirers in Nashville, Chattanooga, and Knoxville. Nashville’s Anesthesia Medical Group chose a private equity buyer3.
Chattanooga’s Anesthesiologist Associates (a 2ndG transaction4) and Knoxville’s Anesthesia Medical Alliance both elected to sell to public company MEDNAX (NYSE: “MD”). While the individual transaction values are confidential, public disclosures and industry insiders estimate that the three may have exceeded $200 million in total transaction value.
Dana Holmes, 2ndG’s COO and member, says, “2ndG has a long standing policy of only representing physician practices and not hospitals, private equity, or corporate buyers in these transactions. We understand physicians and help them assess their strategic options before embarking on a sales process.”
Mike Collins, 2ndG’s CEO and managing member adds: “We are currently representing several physician practices across the country, and we are seeing early signs that private equity and public buyers are considering other specialties that, while depending on referrals, show the ability to leverage the physicians’ time and are adaptable to meeting patient needs in much the same way as a retailer would.”
“One example is in OB/GYN. In Florida, Texas, and California we are witnessing the creation of multi-site OB/GYN practices with over 50 physicians. These large practices routinely offer weekend and extended hour services. Some have added a hospital based program where a “laborist” remains on site 24/7 to provide hospital coverage. Medical practices of this size are no longer simply physician practices; they are true healthcare service provider businesses. 2ndG predicts OB/GYN will emerge as the next specialty to become the foundation for a national practice company.”