💸 The end game for healthcare consolidation

When private equity buys all or part of a physicians group - as KKR did with Envision Healthcare in 2018, as Blackstone did with TeamHealth in 2016, as WCAS did with US Acute Care Solutions in 2015 - the investment firm now owns something they will one day want to sell.

The question is: to whom?

While Congress investigates these private equity firms for their role in surprise billing, each of them will one day want to extricate themselves from their investments in the physicians groups. Presumably they will want to sell at a profit, although I’ve written before about why private equity may have miscalculated on that account. At the very least, however, they will need a buyer.

1️⃣ End Game, Phase One:

Health systems buy physicians groups

The three power centers in U.S. healthcare are insurance companies, health systems, and physicians groups. Among those, health systems and physicians groups are natural allies in their struggle against the third power center: insurance companies.

Of course, private equity could always find the odd foreign investment bank or sovereign wealth fund to sell to, and there’s always Softbank, which perhaps could be convinced to switch its investment strategy away from tech unicorns and toward businesses with actual positive profit margins.

But for my money, hospitals and health systems are the most obvious buyer.

Many health systems have already taken small ownership stakes in physicians groups which provide services within the walls of the health system’s hospitals and health centers. These investments are indications that health systems and physicians groups share a common survival plan: both are in the business of providing healthcare services, and, in recent years, both have embarked on massive consolidation sprees in order to strengthen their negotiating position against commercial health insurers.

If bigger is better in healthcare, than the next wave of consolidation will involve private equity selling its physicians group investments to big health systems.

Perhaps these mergers will be aided by additional private equity deals: PE will take a stake in the health systems to enable the purchase of physicians groups.

As I wrote earlier this week (“Recruiting physicians is a mess”), physicians groups exist in large part to handle the tough job of recruiting doctors from an increasingly scarce pool to fill roles in difficult-to-staff locations. It would be incredibly difficult for individual hospitals in rural areas to devote the amount of time and resources necessary to recruit every healthcare provider they need on their own. But the crucial recruiting role played by physicians groups becomes less and less necessary the larger the health systems become.

Suddenly, the rural hospital isn’t struggling on its own to lure a physician who would rather work in an urban center. Now, it’s part of a national health system that can draw on doctors from the rest of the country to come care for the hospital’s poorer, less financially attractive patient population. As part of a large system, that rural hospital can now airlift providers in as necessary.

In effect, a national health system can use income from its richer urban patients to subsidize care for its poorer rural patients - and the health system could jumpstart that capacity by acquiring the right physicians group.

It doesn’t end there.

2️⃣ End Game, Phase Two:

Health systems merge with insurance companies

The Game of Thrones-style battle for the healthcare kingdom will only end when insurers and health systems finally decide to unite forces against an even bigger, arguably more powerful foe: the U.S. government.

If and when the United States introduces a public option (note: I think a modest public option is the most likely outcome of any healthcare reform in the next Democratic administration) commercial insurers will suddenly be faced with a competitor who doesn’t not care about profit, and, in fact, is willing to subsidize customers’ health care at a loss.

When that happens, health insurers will look for ways to regain their competitiveness, and the most obvious path will be to vertically integrate as in the Kaiser Permanente model. Only an integrated health system, with its own intrinsic incentives to both compete for customers and lower costs, will be able to compete with a public option.

That’s where we’re headed, whether it’s one decade from now or three: a handful of gigantic, vertically integrated health systems, potentially each with its own regional monopoly, offering both health insurance plans and provider networks under the same roof.

When that happens, any private equity firms still looking to offload investments really will have no other choice: Softbank.