Large, single-specialty cardiology practices were not uncommon during the 1990s and early 2000s, but that changed over the past decade as hospitals and health systems have purchased cardiology practices, directly employed cardiologists, and entered into professional services agreements (commonly referred to as “PSAs”) with cardiologists. The migration of private practicing cardiologists to hospitals was caused in large part by the significant site-of-service fee differential between the reimbursements to hospital outpatient departments (HOPDs) and the reimbursements for identical services furnished in an independent physician’s office or ambulatory surgery center (ASC).
During the past 10 years, the primary vehicles for physician alignment with hospitals have been employment agreements, whereby the physicians are employees of the “captive” or “friendly” medical practice; or PSAs, whereby hospitals provide administrative services to physician practices, and the practices remain independent. In this model, practices can access some of the advantages of employed physicians – most notably, the hospital’s favorable payer contracts.
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According to a recent opinion piece in The Wall Street Journal “Medicare has paid hospital outpatient departments nearly twice as much as it pays independent physicians or ASCs for the same services. Even off-campus facilities, which are hospital-owned but otherwise identical to independent physicians, have until recently enjoyed higher rates.”
There has been a major push for site-neutral cardiac testing payments in order to migrate more services to outpatient settings. This shift could reportedly reduce Medicare spending by more than $150 billion in the next decade and reduce beneficiary spending on premiums and cost-sharing by more than $90 billion during that time. It is remarkable that such dramatic savings may be achieved without reducing the breadth of services or otherwise compromising the quality of care. As an increasing number of Baby Boomers retire and enroll in Medicare, the corresponding economic burden on the Medicare Trust Funds necessitates these kinds of value-based cost-saving measures.
This shifting of services to outpatient settings will likely cause hospitals to unwind their contractual relationships with cardiologists, sending the physicians back into private practice. Indeed, we have observed this process beginning with some of our clients already. Unwinds present several challenges, including but not limited to the fact that the cardiologists transitioning back to private practice no longer have their own Tax Identification Numbers (TINs) and payer contracts. In light of these logistical challenges and as a longer-term survival strategy, we are likely to see a reconstitution of large cardiology practices, this time with the potential for private equity participation.
Until recently, there were few private equity opportunities for cardiology practices, but that could change relatively quickly. In the Wall Street Journal’s opinion piece, authors Neil M. Gheewala and Bobby Jindal noted: “Cardiac care is on the cusp of a major transformation, but hospitals need not be left behind.” Astute hospital administrators will have already anticipated the migration of cardiologists away from hospital inpatient care and started to prepare for a different type of alignment with cardiologists. We anticipate significant opportunities for single-specialty and/or multi-specialty roll-ups in which an investor, such as a private equity firm, purchases multiple medical practices and combines them into a larger practice. We also expect that Management Services Organizations (commonly referred to as “MSOs”) will continue to be utilized to achieve economies of scale in the furnishing of administrative services to practices.
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Photo: eakrin rasadonyindee, Getty Images
Daniel B. Frier is a Co-Founding Partner of Frier Levitt, a national boutique healthcare and life sciences firm with offices in Pine Brook, New Jersey and New York City.
Theresa M. DiGuglielmo is Senior Counsel to the firm’s Healthcare Department.
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