Healthcare consolidation is not a post-pandemic phenomenon. But like other aspects of the industry, such as the utilization of virtual care, it has accelerated over the last two years.
More and more, independent healthcare practices, particularly specialty groups, are opting to consolidate. Hospitals, and other corporate entities, acquired 20,900 physician practices between 2019 and 2021, a rate that’s not expected to wane during 2022.
In the wake of an intensely turbulent period for healthcare, consolidation can provide an anchor of stability for independent practices weathering the storm on their own. Entering an agreement to join up with a larger health system or receive private equity funding can offer many benefits for a practice, however there are also key areas, such as real estate, that should be considered.
Making The Move to Consolidate
The path to consolidation can vary widely from practice to practice, each with its own needs and objectives. For some, the desire to expand the practice into new regions or locations is something that can only be accomplished by joining forces. For others, it comes down to the bottom line.
The decision to consolidate can be driven by many different factors: fiscal security, the ability to scale, retaining talent, vertical integration and more. Healthcare’s labor crisis is acutely experienced by independent practices. Med City News reports that by the beginning of 2021, one in seven U.S. physicians were employed by a hospital or corporation.
For many independent practices, especially during the pandemic, there was a greater need to deliver billable services while alleviating pain points in the business, such as overhead. Consolidating allows practices the ability provide patients with bundled payment models and ancillary health services, such as lab work, while centralizing and streamlining clerical tasks, like payroll, supply management, billing and other administrative duties.
Practices seeking consolidation for these kinds of organizational benefits will likely work with a Managed Services Organization (MSO), an entity that handles the operational side of a healthcare practice. When consolidating with an MSO, the MSO would then manage all the practices together for a simplified and outsourced structure. This differentiates from practices seeking equity in order to grow the business, which would engage an investor or private equity fund for consolidation.
Private Equity-Backed Consolidation
There are three key funders for consolidation: private equity (PE), health plans and health systems. According to the Colliers Q4 Healthcare report, healthcare businesses have become increasingly attractive to private equity investors, and growth in PE investment in healthcare has been outpacing broader PE deal activity since 2009.
This flow of capital from PE investors is driven by a few factors, but namely that healthcare is considered to be “relatively recession-proof,” an admirable trait amidst record-breaking inflation and uneven economic recovery from the pandemic. Healthcare delivery and policies will always be shifting; however, healthcare is a critical function that will never go away.
According to Scale Healthcare, the most “effective pathway to create meaningful and significant value” for consolidation is by creating a practice consolidation strategy prior to initiating any PE backing, ensuring critical questions are asked so all aspects of the agreement are understood.
Real Estate Considerations
It’s important to understand how consolidation could impact a practice’s real estate. After consolidating, certain leases or locations could become redundant; if a practice owns its current building and gets acquired, they could be stuck with property post-consolidation. It’s common that multiple specialty practices undergo restructuring, combining in one space to create an excellence center.
To ensure a successful partnership, it’s crucial to set and agree on common goals and expectations from the beginning and view consolidation as an opportunity to review all operational processes – including leases and property – before moving forward.
A few questions that practices might consider before consolidating include: Is there an ownership stake in the new consolidation? Who’s on the hook for the lease? Do we have input on future real estate decisions? Do you use local real estate experts?
Colliers’ healthcare experts have advised on many consolidation transactions, helping clients go into new markets, negotiating leases, acquiring property for expansions and more. As healthcare consolidation is only going to become more common this year, it’s crucial to partner with a brokerage that is well-positioned for multi-state consolidations and can provide national reach along with niche local knowledge.