Are we witnessing Practice Management 2.0? Today we are seeing a resurgence of market enthusiasm to invest in and manage physician specialty practices, which generally had fallen out of favor over the last ~20 years. In an upcoming Industry Perspective, TripleTree examines the convergence of forces that are once again driving interest and investment activity in practice management capabilities and the specialty practices of physicians, including a closer look at three specific specialties. In this blog, we preview TripleTree’s thoughts into how the business case for practice management is more sound than ever, and a different experience than in the 1990s.
This resurgence warrants an updated review of the landscape since the 1990s, when we previously saw such interest. Led by PHP Healthcare in 1991, more than 35 physician practice management companies went public within a five-year period, in addition to purportedly more than 250 privately-owned practice management companies. Groups like MedPartners, PhyCor, FPA Medical Management and others were successful in driving rapid growth via physician affiliation. At the time, the value proposition was largely centered on the promise for physicians to remain independent assuaging concerns around aggressive payer contracting and capitated arrangements that were making profitable independent operation challenging. Practice management companies offered an alternative path for physicians to remain independent. Further, physicians envisioned that their incomes would grow through more efficient back-office operations, improved payer contracting, and new revenue streams (e.g., extending into select outpatient services).
Unfortunately, the promise of more efficient and profitable independent physician specialty practices didn’t materialize. Practice management companies raced on a roll-up path, acquiring hundreds of practices at valuations that were not tethered to the underlying business fundamentals, as the practice management companies’ market valuations generally required faster growth than was actually achievable, and assumed improved operating performance from cost efficiencies and improved payer contracting and success in capitated reimbursement arrangements. Simply put, the economics of the model were off. The efficiencies required to drive profitability and increase physician compensation were not realized, and physician productivity generally declined. At the same time, physicians’ equity value in the practice management companies plummeted with the market valuations. The models were not working, physician attrition piled up, and significant losses mounted quickly. Eight of the ten largest public practice management companies would file for bankruptcy by early 2000.
So what’s different this time? Gone is the tenuous rationale of the 90s that through professional management and growth capital, physician practices would effortlessly grow and become more profitable. Today’s realities are that managing a practice is more complicated than ever, that more physicians are attracted to the prospect of practicing in a large group setting, and practice management companies offer a legitimate and financially attractive alternative to independent practice, while providing the opportunity for returns to external investors as well. The resurgence in practice management can be attributed to several forces and opportunities, including:
- Managing the growing administrative and regulatory burden triggered by government regulation required to run successful practices, while allowing clinicians to focus on care delivery
- Adapting to changing reimbursement models and the shift to value-based care
- Creating efficiencies and economies of scale in very fragmented provider segments, in multi-site models
- Responding to changing lifestyle preferences and generational wants/needs of physicians
- Optimizing clinical productivity and offsetting a growing shortage of specialists by better leveraging advanced practice providers and other non-physician clinicians
- Supporting and keeping pace with growing consumer demand and needs
- Expanding the range of services offered by practices
Watch for our next Industry Perspective in the coming weeks. Practice Management 2.0 will take a fresh look at why practice management is more relevant than ever and highlights three specific specialties, each at a different level of maturity in the proliferation of practice management models, to understand the market forces and unique characteristics creating momentum and opportunity in the market.
In the meantime, please share your thoughts. We welcome the opportunity to hear what you think about the resurgence of practice management.