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Executive Session: Following the money on healthcare M&A trends

Podcast - March 25, 2022


Partnerships, Mergers & Acquisitions

Culture & Engagement

David N. Gans MSHA, FACMPE

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Robert C. Jackson, MBA, FACHE, brings more than 30 years of leadership experience in healthcare, including almost 20 years as an acute care hospital CEO, where he managed budgets of up to $250 million.

Now as a member of MGMA Consulting, his unique insights on the evolving landscape of healthcare practice ownership make him an ideal person to speak to about how and why medical practice mergers and acquisitions (M&A) are happening today, as well as the different objectives that health systems, hospitals and private-equity (PE) interests have in pursuing these deals.

“Through the lens of an independent hospital, we spent a lot of time looking at how do we better manage [and] better sustain the services around the community that we serve,” Jackson said, underscoring why so many M&A deals occur amid mounting pressures on independent practices. “The key thing that we realized was that a lot of the services that the community needed couldn’t be sustained on their own. They really required the backing of the hospital to put those pieces together.”

During Jackson’s 20 years at that organization, the hospital created a home health entity, a multispecialty physician group, spun off assets into a charitable foundation, and created a joint venture for hospice, all while seeking to integrate those services.

Myriad reasons for M&A

The financial pressures of the COVID-19 pandemic on many medical practices spurred significant M&A activity in 2021, and the forecast for dealmaking in 2022 has intensified. Jackson noted that hospitals and other entities acquiring and financially supporting other healthcare provider organizations is about more than keeping them afloat in turbulent times.

“Fundamentally, when you look at M&A, it's always about competitive advantage,” Jackson said, drawing an analogy to major automakers acquiring parts suppliers. “Healthcare entities want control of their referral pipeline, and they also want control of the services on the back end.”

Controlling more of the care continuum becomes even more important as reimbursement continues to shift to risk-based arrangements. That might entail acquiring a behavioral health provider in an area of need to keep patients from looking elsewhere and instead direct them to system-owned facilities.

Controlling the type and location of care is a major element of controlling cost, which points to why so many new “pay-viders” — insurer-owned medical groups — are part of the M&A mix now, such as the rampant acquisitions done by Optum, a division of the UnitedHealth Group and UnitedHealthcare.

“When you think about why an insurance company would be interested in owning a physician practice, the physicians are the controlling variable [for] what their medical costs will be,” Jackson said. “Particularly with physician practice acquisition, [insurers] are able to put in clinical guidelines that will ultimately impact their ultimate medical spend.”

With time, companies like Optum can assist UnitedHealthcare in bringing high-performing physicians to their network and help them narrow that network, Jackson said, adding that this type of growth is “only the tip of the iceberg” when it comes to nontraditional M&A activity. The CVS Health acquisition of Aetna is another example of creating a scale and clinical efficiencies that can help the acquiring entity control supply chains, costs and outcomes.

Why supergroups are alluring in the M&A boom

For independent groups, the ability to combine with other groups while retaining independence is attractive, as larger specialty “supergroups” achieve increased economies of scale. “There’s no reason to have three billing departments when you could have one,” Jackson noted.

But the bigger trends in today’s market typically involve surgical specialties, anesthesia, and procedure-heavy medical specialties to grow market share in a particular area for improved coverage and increased payment with insurers. “The larger you build a supergroup, the more leverage it will give you negotiating a contract,” Jackson said. “If you are the only provider of dermatology services in a particular area, and you combine with the dermatologists who are in the four counties that surround you, suddenly you're controlling a very important piece of the healthcare pipeline that an insurance company has to have to operate.”

Scaling up has some clinical advantages beyond financial considerations, Jackson added, in that having more physicians together can foster an environment where those doctors have more clinical discussions with peers and improve the quality of care.

Similarly, the ability to bring diagnostic services under the umbrella of a physician practice can benefit the business and patients. Having the same technologists doing specific procedures each day can bring consistency to operations and patient experience, and it’s also a solid revenue source for the group.

“You want to be able to create as many inflows of cash to the practice as possible, by bringing those diagnostic tests that were previously done elsewhere,” Jackson said.

The growth of PE activity in healthcare

PE-owned healthcare provider organizations have slightly different dynamics than the typical nonprofit hospitals or for-profit health systems in the American healthcare landscape.

PE firms’ entry to healthcare M&A is focused on creating physician groups that are “profitable, sustainable and ultimately scalable,” Jackson said, but their appeal to physician-owners may vary largely by where those doctors are in their careers.

Because PE-backed acquisitions are typically focused on high-volume, high-profit practices, those ventures may not be alluring to a physician nearing retirement and winding down their productivity. Jackson said that ideally PE firms want to identify practices that have sustainability. For smaller practices with only a handful of doctors, it is harder to show to an investor that the organization will be sustainable if a physician is nearing retirement.

“PE money is maybe more geared to someone who is earlier in their career, who was really about the idea of wanting to grind it out every single day and increase that investment,” Jackson said, underscoring the desire for some degree of scale alongside the sustainability.

“When we talk about the supergroups, a PE company is going to have a great deal more interest in a group of 15 podiatrists who can give them a geographic network, rather than an individual podiatrist,” Jackson said. Similarly, a PE firm might target a company with several anesthesia contracts at hospitals versus a single anesthesia group: “For groups, they can grow the value.”

PE firms also will tend to focus on specialties that bring assets that typically aren’t found in traditional physician practices (e.g., gastroenterology groups with endoscopy centers, orthopedic groups with surgery centers). Having the physician component alongside a procedural component is “very intriguing” for PE firms, Jackson added.

Beyond the numbers, culture counts

While the strategic planning of how M&A deals make sense on the financial side for acquiring entities and the newly acquired, the success of their integration often comes down to the cultures of the two organizations and their ability to work well together.

“Where a lot of integrations fall short” is a failure among the parties to look ahead to how they will do business in the new venture, Jackson said. “When I counsel a physician on whether they should leave independent practice … I always like to ask: Can you see yourself being part of who they are? Do you have a clinical philosophy that's consistent with this acquiring entity?”

While many deals are done based on who will pay the most money, long-term success for a deal should account for cultural fit and elements tied to keeping the physicians as part of the new entity (e.g., employment arrangements, equity options).

Given the enormity of money involved in these deals, it’s a good idea for a practice to consider finding an independent consultant who is not financially tied to the outcomes of a deal for objective counsel on an M&A deal.

“Having an independent third party is essential to making any type of transaction work,” Jackson said — a practice needs someone who does not have the emotional attachments to parts of a business that may not have economic value in a deal.

Jackson suggested that this type of advisor should be someone who has experience with your type of practice and grasps the breadth of changes in store for practice employees as part of a deal, such as retirement funds, health insurance, EHRs and more.

“You really have to have an advocate for the individuals who are part of the practice being acquired,” Jackson added, underscoring the role of a consultant in being able to have important conversations that can be difficult with the acquiring entity. “The reality of it is that you're really assigning a value to everything and everybody in your organization as part of this, and sometimes that's not pleasant.” Also, having someone in the negotiation who can represent the practice leaders can be crucial to their future. Unfortunately, a leader who is a tough negotiator during the M&A may find that their efforts on behalf of their practice may affect their continued employment in the new entity. An outside consultant will represent the practice during the negotiation, and after the deal is complete, they leave while the practice leaders remain relatively unscathed in the new organization.

About the Author

David N. Gans
David N. Gans MSHA, FACMPE
Retired senior fellow, industry affairs MGMA

David N. Gans can be reached at


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