The Middle Market – Physician Services M&A Outlook for 2017


Despite the change in the Oval Office and a lot of press coverage on the fate the Affordable Care Act (ACA) (and, more recently, the confusion caused by the failed attempt to repeal and replace), physician consolidation in the hospital- and office-based specialties will continue at a strong pace in 2017.

The prime mover: the changes in reimbursement from fee-for-service to value-based-purchasing under the Medicare Access and CHIP Reauthorization Act (“MACRA”) which was finalized in 2016 with tremendous bipartisan support and went into effect on January 1, 2017. Under MACRA, physicians and physician practice groups are at risk for reimbursement based on the quality of care provided. Documenting that they have met the proper standards of care requires substantial investment in clinical data capture and reporting technology. Together, these new demands are driving doctors into larger organizations to share risk and to gain the efficiencies of scale needed to invest in the reporting infrastructure.

With its focus on outcome-based compensation, MACRA represents a fundamental shift for physicians after decades of fee for service. From an operational standpoint, it will require new and more sophisticated data collection, analysis, and reporting capabilities, that will be challenging for smaller groups to put into place. The failure to keep pace technologically will, in turn, limit their ability to receive the reimbursement they are entitled to, as well as their ability to address potential clinical deficiencies or identify opportunities for improvement. Without the proper systems and investments in place, smaller groups may find themselves at the mercy of payors and larger groups that are able to proactively compete in the changing reimbursement landscape.

Hospital-based M&A

M&A transaction volume in the hospital-based specialties may slow slightly in 2017 as several large acquirers take time to integrate large mergers completed in the last 18 months. (Hospital-based specialties include emergency medicine, anesthesia and radiology, among others). Specifically, TeamHealth recently went private to integrate its acquisition of IPC Healthcare out of the public reporting eye, and Envision Healthcare is in the process of integrating the physician services division of AMSURG with which it merged in late 2016. Not all areas will see declines, however, and there are several new private equity platforms in the hospital-based market that are likely to step in to make acquisitions. M&A in the radiology specialty should increase significantly as well, with MEDNAX having just completed its first radiology practice acquisition.

Office-based M&A

The size and scale of hospitals, as well as the portion of total healthcare spending that they represent, makes them the obvious choice to be at the forefront of redefining reimbursement models as MACRA continues to take hold. At the same time, however, some office-based physician practices are also seeing an opportunity to achieve economies of scale in the midst of shifting reimbursement models, merging with competitors and making their own acquisitions. The typical office-based practice is smaller than the average hospital-based practice, increasing the rationale for consolidation as groups seek to negotiate not only with payors, but with the ever larger hospital systems that are seeking to bring services in house as they move towards a bundled payment model.

Role of Private Equity

The regulatory environment is one major factor driving change, but the need to invest in technology is close behind. In particular, given that increasing scale allows practices to better leverage investment in medical equipment, IT systems, and referral sources, several office-based specialties are seeing accelerating M&A activity. Private equity is playing an important role, with a number of specialties benefitting from PE-backed platforms, including dermatology, dental, eye care, primary care, pain management, fertility / reproductive health, and urgent care and occupational medicine.

Price competition remains. Private equity investors, or their platforms, continue to offer compelling valuations that incorporate both considerable cash at close as well as potential future “upside” through equity participation. Hospitals and health systems are countering, with the goal of adding covered to lives to their systems, and establishing more “front doors” to feed patients into their networks and hospitals. At its core, this dynamic is driven by economics – an effort control costs on the part of the payors; a need to capture a significant portion of the healthcare-consuming public on the part of providers – and is unlikely to change based on who occupies the White House.