Evaluating the future of hospital acquisitions of private practices

The last decade has seen a steady uptick in private physician groups selling to hospitals, for a variety of reasons. Hospitals continually seek to broaden service lines and increase their market share by adding key private physician groups. In turn, some physicians are eager to escape the regulations, reimbursement uncertainties and inequities in private practice.  

The attraction of acquisition

First, adding private physician practices allows hospitals to provide even highly specialized care to more patients, as well as improve overall access to care. Bringing more talent into the ranks also adds fuel to hospital marketing efforts, leading to increased revenue.

What’s in it for private groups?

For the practices, a prime motivator to sell to a hospital is higher Medicare reimbursements, along with greater compensation for physicians, in the hospital setting. This, combined with better negotiating power with payers and economies of scale, makes hospitals an appealing buyer for a practice. Fringe benefits such as health insurance and retirement plans (which are expensive for small business owners), along with lighter administrative and compliance duties, also make selling to hospitals an attractive option.

In addition, small practices often do not have hospitals’ capital for acquiring state-of-the-art technology, including that required to implement mandated electronic health record infrastructures. 

What are hospitals paying for?

In addition to adding expertise and increasing market share, hospitals often offer to purchase the revenue streams of the individual physicians when they acquire a private practice. Under these scenarios, higher-producing physicians do much better financially than lower producers, often receiving one- to three-year salary guarantees and substantial signing bonuses.

It should be noted that typically, hospitals also pay for the hard assets of the practice. But for many practices this does not amount to a significant cost.  

Hospitals are no longer willing to pay much, if anything, for goodwill and patient lists, but there are other ways private practices can achieve  favorable financial results from a sale.

For instance, hospitals will sometimes agree to purchase real estate, equipment or other assets from the practice. In other cases, a private group’s debt obligations can be resolved  as part of a sale to a hospital. These are important issues that require careful consideration in negotiating the sale of a physician practice. 

Acquisition trends changing

While hospitals can generate new revenue streams from physician services, and many doctors can earn more as hospital employees than in private practice, these acquisitions may be curtailed due to recent legislation. Congress has enacted Site-Neutral Reimbursement, which took effect January 1, 2017, and will end the practice of providing higher Medicare reimbursements for services performed in a hospital outpatient setting with certain limited exceptions.

Site-neutral payments will largely equalize reimbursements for certain patient services, whether they are performed in a hospital or non-hospital setting, such as a private medical practice.

 While physicians may still see benefits to joining a hospital system, the change in financial incentives may slow the trend of hospital acquisitions of private practices in the future.