Consolidation in a Value Based Market

ChallengesConsolidation in the healthcare community has become a growing trend that has helped strengthen physician practices in the locations where they serve.  The Ambulatory M&A Advisor addresses the process of consolidation, how it is impacting the healthcare industry, and what the future holds for the movement.

Don Weinbren, attorney with Trenam Law, says  that when discussing consolidation and speaking in terms of medical practices, providers are all getting gobbled up; that is just the world today in healthcare.

“People seem to think that bigger is better, and I think primarily in my view of function of the belief that the bigger you are and the more broadened business availability is, the better off you are in negotiations with managed care companies.  I think that is really what the reason for all of this consolidation is.  That and the government’s move towards electronic medical records and the changes in reimbursement, especially the new ones coming up with MACRA,” Weinbren says.

Wienbren says the current market is so big data intensive it becomes more and more difficult for a smaller practice to be able to maintain the systems because of the costs, to be able to generate that big data that is necessary to be able to get paid.  Weinbren believes that’s what is fueling the whole consolidation movement more than anything else.

Joshua Spielman, Partner with McDermott, Will and Emery, believes that consolidation is impacting the industry in a number of different ways.  Spielman says there is a significant amount of strategic acquirers and private equity funds who see opportunity in the fragmented nature of many of the sub-sectors within healthcare.  They are trying to consolidate in various different markets and various different sectors to develop more robust enterprises that have more of national brand recognition, he says.

Legal Issues

Bill Horton, partner with Jones Walker, explains that some of the most prevalent issues with consolidation are antitrust laws.  Horton says these are generally the laws that are designed to prevent business enterprises from getting so large and dominant in a particular market that they can control the competition in that market and control the prices at which items and services are sold.

“For example, if you have a geographic market that had three hospitals in it, and the two largest of those hospitals decide to merge, that has the potential to drive the third hospital out of business because the two merging hospitals may have enough dominance in the market that they can lock the market up.  Antitrust laws are laws that are designed to preserve the competition in products and service markets and particular geographic areas,” Horton says.

Weinbren says that as far as legal issues antitrust is still a problem in the sense that the Obama administration has made a priority of viewing healthcare through the anti-trust lens.

“Where you have seen it more often than not in the last year is more on the hospital side.  Some of those, because they are mega hospitals that have healthcare systems and physician practices with them, that is all a part of it.  Unless we have a Republican President who is going to take less of an active stance with respect to antitrust, I think as long as we are in the regulatory market that we are in now, that is probably one of the things that is going to become more important over time,” Weinbren says.

“As you get larger, the more likely antitrust questions arise.  As you start a larger share of the market place, if you are in a smaller market, you could end up having a monopoly, and that could be a problem for you.  But, more importantly, with the consolidations going on, as hospital systems with large doctor groups continue to consolidate, I think you are going to have more situations where that is going to become an issue even in the larger markets.”

Horton provides some steps that business owners can take to ensure that their transaction follows the laws in place.

“If you have a very large transaction, then that transaction is going to be subject to the Hart-Scott- Rodino Act.  That requires that before the parties can proceed with the transaction, they have to file a Hart-Scott-Rodino form and provide a lot of information to the FTC and justice department.  These forms require the parties to provide detailed information about themselves, about the transaction.  Then they have to wait and see whether the FTC or Justice Department is going to step in and ask them for more information  so as to decide whether to take action on the transaction,” Horton says.

“What we have found is that even with transactions that are not large enough to trigger Hart-Scott-Rodino filing requirements, the government is sometimes willing to take action to attack certain consolidation transactions even after they have closed.  This happens if the government has determined that the transaction has had or is likely to have an adverse effect on the competition in a particular market.”

Spielman adds that part of what is driving consolidation is just the cost and complexity for smaller practices to comply with all of these regulations or take advantage of the new opportunities that are coming out.

“For example, with MACRA and the new programs that Medicare is rolling out… a lot of providers are looking to consolidate to find a partner who can help financially make the capital investments that are required to achieve meaningful use etc. and continue to earn Medicare incentive payments and similar payments that private payors are establishing.  Legal issues involved in understanding how to achieve all of those incentives and what infrastructure you need to have in place to do so often requires greater scale and capital resources,” Spielman says.

The Future

“My fear is that in the long-run, unless we have some more changes, it is going to have a greater impact on patients than it does on the marketplace.  As our population grows, doctors are still going to obviously be needed.  As more and more doctors work in larger and larger groups, within the next 12 years, there are going to be very few private practices, in my belief.  Those that are existent are going to be mega practices of physicians employed by hospital systems and managed care systems,” Weinbren says.

“I think it is going to have an impact on doctors because the more entrepreneurial doctors are going to have less of an opportunity to do things in some ways, unless they can get on the ground floor and be able to do some of the consolidations themselves.  I think those that are doing the consolidations now and growing will probably be able to survive.  However, my biggest concern about all of this is what it is going to do on the patient side.  I think it is going to make it much more difficult for the average patient, especially a low income patient, to receive care.  It is not going to be where they need it because they are going to have to go to it.”

Spielman says that, while still several years away, several subsectors in the industry are starting a trend towards more identified brands within healthcare, which really aren’t seen in healthcare like in other industries like hotels or automobiles.

“You are going to start seeing more recognized branding in healthcare so that people know if they want to go to various ends of the cost market, they are going to start to see people who are pursuing specific brands,” Spielman says.

Horton says that he sees consolidation becoming a continuing trend.

“We are seeing a couple of things happening, both of which are driven by provisions of the Affordable Care Act.  First, we have seen the focus of the ACA on ACOs, medical homes, bundled payment initiatives, and so forth that are designed to ensure that the patients are treated throughout a continuum of care.

“You are seeing this as driving hospital acquisitions of physician practices.  Hospitals want to ensure that they are aligned with the right physicians to be able to take advantage of the structure that the ACA is pushing us toward,” Horton says.

Tied in with that, he says the industry is seeing the move toward value- based payment rather than the traditional fee-for-service model.  The success is going to depend a lot on how providers manage a patient’s care throughout an episode of care. This will drive different types of providers together and allow them to take advantage of value-based payments.

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.

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