“Health Care ‘Prime’” framework employed again to explain the future state of U.S. health care, as the industry continues to be profoundly shaped through mergers and acquisitions and innovation
Am Law 100 firm Polsinelli, widely recognized as one of the nation’s preeminent firms for health care law, today issued a white paper titled “Health Care ‘Prime’: The Emergence of ‘Supergroups’ Composed of Medical, Dental and Other Clinicians.” The report, issued by Polsinelli’s Health Care M+A Practice, provides an in-depth analysis of the growing number of combinations of physicians, dentists, vision-care specialists and other individually licensed health care providers emerging as a result of consumer and payor demands for greater value, supported by technological and other innovations.
“Our previous Health Care ‘Prime’ white paper began the examination of this remarkable period in the modern health care industry, where we are seeing significant changes in terms of how health care will be owned, organized, delivered and paid for,” said co-author of the initial white paper Jon Henderson, managing partner of Polsinelli’s Dallas office and chair of the firm’s national Corporate and Transactional Practice.
“Now, with these supergroup model practice organizations emerging, we anticipate that increasingly sophisticated supergroup structures that are owned, organized, operated and supported by private equity and other third parties will play an increasingly important role in the health care delivery ecosystem,” said Supergroups white paper co-author Bruce Johnson, a Polsinelli shareholder in the firm’s Health Care Alignment and Organizations Practice. “The result will be profound in its disruptive impacts on consumers, payors, practitioners and investors alike, and across the American health care system overall.”
The full white paper is available for download here. White paper co-authors also included Polsinelli associates Jake Krysiak and Kelly McGinnis.
Key findings, observations and predictions from the newly released report include:
Today’s formation and operation of clinician supergroups occurs in the context of broader consolidation trends in health care, and reflects both pressures to consolidate and clinicians’ desire to preserve some semblance of independence.
- Historically, the organizational model of physicians, dentists, vision-care specialists or other individually licensed health care clinicians involved highly decentralized, independent, solo or small group practices.
- In recent years, however, various pressures have led many clinicians to consolidate into larger groups and have driven physicians, in particular, into employed relationships with hospitals, health systems and payors.
- The pressures include:
- decreasing fee for service (FFS) reimbursement coupled with a movement to “value-based” payment systems
- capital demands to fund practice growth, technology and infrastructure
- increasing practice operating costs, and
- changing physician goals and preferences.
- Yet many individual physicians and other clinicians desire to remain independent of consolidation and employment models.
- Hence, the emergence of supergroups and their unique approach to addressing payment, ownership, organization and delivery related to clinician practices.
Seven predominant themes and outcomes reflect the intended goals of the trend towards clinician supergroup formation:
- Capitalizing on changing payment systems
- One key driver of supergroup formation is the change related to the payment for health care services, i.e., declining FFS reimbursement and the expansion of value-based payment
- Declining financial return under the FFS reimbursement model has driven traditional clinician practice models both to perform more procedures to capture returns, and to work to access additional revenue sources.
- Many clinician specialties have used the power of mergers and acquisitions to increase both FFS revenue and the type of FFS revenues sources or services under their control.
- For instance, recently U.S. Dermatology Partners acquired Trinity Dermatology in Texas and Apex Dermatology Group in Colorado, resulting in one of the largest physician-owned dermatology practices in the country, with more than 80 locations in the U.S.
- Aligning services and performance across the continuum of care
- Clinicians are also coming together to engage in value-based payment systems that reduce the cost of care, improve care quality and assume risk.
- Value-based payment models build on traditional FFS reimbursement systems, but profits are generated by controlling the cost and quality of care across a more integrated continuum of care.
- With greater influence or control over a broader range of care and services, the supergroup can profit through overall cost reductions coupled with increased market share for the supergroup’s range of services.
- In a value-based environment, supergroups may also generate profits through the assumption of performance-based and financial risk, for example, through “bundled payment” services in which a supergroup may receive a fixed payment for each surgical “episode of care.”
- An example of this is Stryker’s program to capitalize on Centers for Medicare & Medicaid Services (CMS) payments granted to its consumer hospitals tied to patient outcomes.
- Driving innovation through technology
- Today, information garnered through the use of electronic health record systems, coupled with the analysis of claims, cost and quality data through the use of emerging technology and data analysis techniques, places supergroups in a better position to succeed under all traditional and new payment models.
- For example, in 2018, Advance Dermatology and Cosmetic Surgery, one of the largest dermatology practices in the U.S., partnered with Modernizing Medicine, Inc., a health IT company, to use Modernizing Medicine’s electronic health record system and data analytic services, as well as Modernizing Medicine’s pathology module and lab services and its ePrescription feature.
- Meeting changing consumer preferences and demands
- The use of mergers and acquisitions has also increased the type of revenue sources and services under supergroups’ control, and by combining multiple services, helps address consumers’ preferences for convenience. This is particularly important when a growing technology market allows consumers to access more “one-stop shops” like Amazon for traditional consumer products – shaping their expectations of the health care market, too.
- Supergroup organizations are also sharing common ancillary services, branding and marketing to address consumer demands more conveniently, as evidenced especially in the vision-care industry with entities such as Capital Vision Services, LP and its optometry practices branded as MyEyeDr., as well as Riata Capital Group’s portfolio company Acuity Eyecare Group.
- Accessing capital
- Third parties ranging from private equity-funded management companies, to technology vendors and analytics firms, are emerging to support the formation and performance of supergroups.
- This support can be through various means ranging from serving as a vendor via a service contract, holding a partial or full equity interest in the supergroup itself or an affiliated management services organization (MSO), or through models in which the third party and the supergroup partner through a joint venture entity that holds or supports FFS or value-based contracts and performance.
- MSOs can even invest in one another. For instance, Smile Brands, a dental services organization, invested in DecisionOne Dental Partners to help fund DecisionOne’s continued growth and acquisitions in the Chicago area and neighboring states.
- The most active owners in the supergroup space remain private equity firms, who have focused on investing in specialty clinician practices and are expected to increase their overall activity and broaden the scope of specialty practices from dermatology, dental and ophthalmology to include gastroenterology, behavioral health, orthopedics, radiology and urology.
- Obtaining specialized expertise to support operations
- Private equity owners will frequently deploy specialized management and administrative expertise that allows supergroup clinicians to focus on clinical care, and less on practice management.
- Capital from third-party investors can also help to rapidly scale the delivery system, operating structures, technology, data analysis, and other systems to help drive innovation and future success.
- In lieu of private equity investment, clinician-owned or -driven models can also help supergroups thrive while they maintain more independence. For instance, privately owned Pacific Dental Partners, which has over 600 practices in 20 states, contracts with various suppliers and vendors to provide technology advancement, financing, laboratories and other needed services to remain highly competitive.
- Meeting marketplace needs for alternative practice models
- Just as many clinicians prefer involvement in a supergroup, many third-party payors find supergroups desirable because they involve relationships with clinicians who are independent of health systems with significant market share and negotiating leverage as a result of their own M&A activities.
- There are generally two alternative organizational models for supergroups: fully integrated models, and partially integrated models.
The conceptual framework for Polsinelli’s continued analysis of the health care ecosystem’s rapid evolution and predicted future state included four key areas of focus: ownership, organization, delivery and payment. The potential implications for each of these focus areas were first profoundly noticeable to Polsinelli’s Health Care M+A team in the announced formation in 2018 of a new health care company by Amazon, JP Morgan and Berkshire Hathaway (the “Amazon Venture”) – thus the series of white papers with the moniker, “Health Care ‘Prime.’” The title also recognizes a double meaning of “prime,” because the future state of health care will be more optimized, in the view of the authors.
Recognized as a leader in health care law, Polsinelli was ranked as the 2018 "Law Firm of the Year" in Health Care by U.S. News & World Report's "Best Law Firms" for the second time in four years, and continues to hold the national Tier One ranking in Health Care Law. The practice is currently ranked by the American Health Lawyers Association as the largest health care practice in the nation (AHLA Connections, 2018), and is nationally ranked by Chambers USA 2018.
Polsinelli is an Am Law 100 firm with more than 850 attorneys in 22 offices nationwide. Recognized by legal research firm BTI Consulting as one of the top firms for excellent client service and client relationships, the firm’s attorneys provide value through practical legal counsel infused with business insight, and focus on health care, financial services, real estate, intellectual property, middle-market corporate, labor and employment and business litigation. © Polsinelli PC, Polsinelli LLP in California