Change is a defining characteristic of healthcare. From technology to regulation to reimbursement, every aspect of the industry is in a constant state of evolution.
However, few things have changed healthcare as quickly and radically as the COVID-19 pandemic. Within the space of a few months, the landscape has been fundamentally reshaped. The long-term implications are still unknown, particularly in the area of physician practice acquisition.
We recently spoke with Bill Mathias, a Co-Chair of the Health Law Group at Baker Donelson in Baltimore, Maryland, who has worked extensively with the ABA Health Law Group and the American Health Law Association. During the conversation, we discussed seven key ways COVID-19 will impact practice acquisitions in the months and years to come.
1. Expect a temporary moratorium on acquisitions.
Traditionally, acquisitions were based primarily on a practice’s historical cash flow and on market surveys. But with the pandemic, many practices were shut down for three months. Lucrative practices saw their billings vanish overnight — particularly practices that specialize in elective surgery, which tend to be more desirable acquisitions. How can you conduct a valuation of a practice that saw a large percentage of their revenues vanish, and how can you predict demand in an environment where elective surgeries and routine visits may be deferred?
Just as significantly, the spike in unemployment that accompanied COVID-19 has also clouded the predictability of future revenue. If millions of Americans are furloughed or permanently laid off, many will shift to Medicaid. With this move, practices will have to decline new patients or accept the reimbursement restrictions that these patients bring. In this environment, it’s much more difficult to project the profitability of an acquisition.
2. The rules for acquisition and valuation will be rewritten.
In addition to the short-term anomalies caused by the shutdown, the pandemic created a need to build in stipulations that cover a host of “what-if” scenarios. For example, what impact will a future shutdown have on physician compensation within an acquired practice? And, if 70% of a practice’s patients are now acquainted with telehealth, how will that impact future workload, staffing needs and compensation?
We are currently in a state of limbo where pre-pandemic data is potentially obsolete, and post-pandemic data does not yet exist. The lessons learned from this event may cause healthcare organizations and physicians to take a step back and reevaluate what makes an acquisition worthwhile, and how they can cover themselves in the event of another unforeseen pandemic, regulatory shift, market downturn or other occurrence.
3. Hospitals will search for new compensation models.
The model of taking on an acquired practice’s physician and staff as employees worked well in the past. But during the COVID-19 shutdowns, many physicians saw their patient load and reimbursements cease overnight. This left acquiring organizations holding tremendous liabilities for staff, equipment and space with little to no revenue.
Post-COVID, hospitals may choose to include clauses that protect them from future shutdowns.
“We may see a shift from fixed or highly-fixed cost models to models that are more production-based,” says Mathias. As a result, there may be a push to put doctors into employment agreements that are substantially different from the types of arrangements that have been prevalent in recent years.
4. New compensation models may discourage physicians from selling.
Owning a practice, like any other business, comes with an inherent balance of risk and reward. For many physicians, selling a practice means giving up some of the risk in exchange for a guaranteed, but possibly reduced, long-term reward.
“In the past, hospitals have been able to say, ‘we’ll take some of the risk off you in exchange for you becoming an employee,’” says Mathias. “The more we move away from fixed compensation, the more you lose one of the key selling points of the hospital acquisition arrangement.”
5. Some practices may become motivated sellers.
The shutdowns, postponement of elective surgeries, and the simple reluctance of patients to enter medical facilities during the pandemic resulted in tremendous financial distress for practices across the country. In addition to the loss of 2020 revenues, many physicians have taken PPP loans and other forms of financing to see them through this crisis, which may impact their financial stability for months or years to come.
In addition to these obvious financial challenges, practices may encounter new post-COVID regulations that could further impact their bottom line. For example, a push toward telehealth — which has seen an explosion of adoption during COVID-19 — may dramatically lower anticipated revenues from routine and non-emergency visits.
This “perfect storm” of increased debt, declining revenue and continued uncertainty may encourage those practices on the edge of profitability to sell.
6. New players will enter the field.
While uncertainty is a bad thing for a practice, it can be a powerful draw for investors. The uncertainty that exists as we enter the post-COVID era may draw new players into physician acquisition.
First and foremost, the slowdown in-office visits and the freezing of elective surgeries has left insurers flush with cash. As we exit the pandemic, insurers may evaluate new business models in which practice acquisition or investing in practices could play a key role. Likewise, private equity firms and healthcare-related organizations such as telehealth companies may also begin to explore the possible benefits of practice acquisition.
“It will have a tremendous impact on where physicians send their patients,” says Mathias, “when they’re owned by an insurance company or a hospital.”
7. Telehealth will only expand.
The pandemic has also delivered a few certainties to the market. One of the clearest: telehealth is here to stay. Adoption models that showed it gaining acceptance over the next decade have been dramatically expedited. Today, about 50% of physicians are now treating patients using telehealth.
Even consumers who have not yet used telehealth services have begun to handle business meetings, seminars, school lessons and even family reunions over virtual meeting apps such as Zoom and Microsoft Teams. As more and more people get used to meeting, conferring and visiting virtually, telehealth will become an accepted — and possibly preferred — means of seeing a doctor. The impact this will have on practice profitability, staffing, costs and overhead is one of the biggest uncertainties going forward, and will no doubt impact the valuation and acquisition of physician practices in years to come.
To hear more about Bill Mathias’ thoughts on physician compensation and practice acquisition, download or stream our recent podcast here.