Why insurers are spending billions to acquire physician practices

A couple of giant proposed healthcare mergers have garnered a lot of attention in recent months. People want to know what CVS’ $69 billion deal for Aetna or Cigna’s $52 billion agreement to buy Express Scripts can tell us about the future of U.S. healthcare.

But a clearer picture of how the industry is changing might actually come from a string of smaller, less heralded deals.

Insurers are snapping up physician practices. UnitedHealth Group, the largest U.S. health insurance company, agreed in December to pay $4.9 billion for DaVita Medical Group, whose physicians serve some 1.7 million people a year in nearly 300 clinics. That’s the largest recent deal, but it was at least the fourth acquisition of a medical provider group by the company in 2017.

Overall, 147 transactions last year involved physician practices, according to Bloomberg BNA. More multibillion-dollar acquisitions are to be expected this year.

Why? Insurers, employers and the government—the “payers” in the American health system—realize they need to pay for outcomes rather than procedures. In other words, they’ve come to understand that the fee-for-service model is broken, even if it still accounts for the bulk of the money flowing through the system.

More and more, insurers want to compensate doctors based on what they achieve rather than how many procedures they do. No wonder insurers want to own medical practices. It’s easier to improve healthcare services and rein in costs if you control what gets done in doctors’ offices, not insurance company cubicles. As much as an insurance organization wants to encourage getting a flu shot, for example, it’s doctors and nurses who actually talk to patients and administer shots.

Does this mean that your doctor is soon going to be an insurance company employee? Not necessarily. Most medical offices are too small to be swept up by insurers, which are looking for specific characteristics.

The most attractive targets for acquisition will be:

1. Physician-led. Cost-control and quality improvement are more likely to happen when practitioners themselves have a stake in the outcome. Groups in which physicians are no longer in control of the operations and outcomes of medical care tend to be less effective. And hospital-led medical groups tend to focus on filling beds—the most expensive way to provide medical care.
2. Strong in primary care. Primary care is the entry point for most patients and where doctors are focused on the whole patient, not just one condition. It’s a strong platform for any practice’s future growth—and the key to preventing illness rather than just treating it.
3. Diversified. Covering enough specialties to provide a broad spectrum of patient care is important for patient retention and satisfaction, with access to strong cardiology, endocrinology and gastroenterology being key.
4. Wired. A medical group must have up-to-date technology to collect and analyze patient data. Higher quality outcomes and lower costs come hand in hand when better data and information are available. Real-time analytics drive better prevention and enable strong physician groups to achieve better population health outcomes.

Driving these transactions isn’t just a sense among insurers that the only way to grow their business is through owning medical practices. There’s also the influence of public policy and government programs—specifically, the growth of Medicare Advantage. MA is an option for Medicare beneficiaries in which an individual signs up for a health plan instead of receiving their care through the fee-for-service delivery system. Medicare Advantage, also known as Medicare Part C, has grown steadily and now accounts for over a third of all enrollees in the government’s retiree healthcare program.

A key provision in MA, introduced in the Affordable Care Act, pays plans on the basis of quality measures. In fact, it’s impossible to run a profitable Part C plan without continually improving population cholesterol levels, glycemic control for diabetic patients, and immunization rates. These are all outcomes driven by clinical care, so a focus on physicians is central to such improvement.

What do patients ultimately want? Lower cost, higher quality and more transparency around their choices. By aligning more directly with physician-directed care, through acquisitions as well as contracts, plans are able to provide just that.

These acquisitions also show the power of partnership between the federal government and private sector in healthcare.

Healthcare always entails a balancing act between public and private interests. In this case, Medicare is on the right track by making it more lucrative for health plans to serve patients’ interests.

Dan Mendelson is president and founder of Avalere Health and a former healthcare policy adviser in the White House Office of Management and Budget.

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