Written by Clinton Flume, CVA, Cordell J. Mack, Tim Spadaro, CFA, CPA/ABV, Christopher Tracanna, Colin McDermott, CFA, CPA/ABV

The following article was published by VMG Health’s Physician Practice Affinity Group

Cardiovascular disease ranks as the leading cause of death in the United States, so it should come as no surprise that healthcare executives are placing an increasing emphasis on the stability and growth of cardiovascular services. In addition to the aging U.S. population, management is being forced to take strategic action due to industry factors such as shifting physician employment trends, patient procedures transitioning to lower-cost outpatient care settings, and payor models changing from fee-for-service to value-based care. To ensure continuity of alignment for cardiology providers and stakeholders, executives need to consider the strategic impact of cardiovascular medical group affiliations in their decisions. These decisions include investment in comprehensive cardiac care services, external affiliation models (joint ventures or joint operating agreements), and alignment models with private equity.

Employment Trends

According to the Physician Advocacy Institute, as of January 2022 approximately 67.3% of cardiologists were employed by hospitals or health systems, 17.9% were employed by other corporate entities, and the remaining 14.8% were in independent practices. The combined hospital/health system and corporate entity employment (85.2%) was 12.2% higher than the number of cardiologists (73.0%) employed by these entities in January 2019 [1]. Due to the high concentration of employment for cardiology, this specialty has been insulated from the traditional roll-up activity seen in the orthopedic, gastroenterology, and ophthalmology spaces. This suggests the industry is primed for a reversal of employment back to private practice as providers look for ways to diversify from legacy employment models and engage in outside investment opportunities, such as private practices and surgical centers.

Shift to Outpatient

Health systems, payors, providers, and, most importantly, patients are increasingly seeking high-quality and lower-cost options for routine cardiovascular care. Outpatient cardiology services began to see a transition to the outpatient setting in 2016 when the Centers for Medicare and Medicaid Services (CMS) approved pacemaker implants for the ambulatory surgery center (ASC) covered procedure list (CPL) [2]. In the 2019 Final Rule, CMS added 17 cardiac catheterization procedures to the ASC CPL, and in the 2020 Final Rule, CMS allowed physicians to begin performing six additional minimally invasive procedures (percutaneous coronary interventions) in ASCs. Additionally, several states have followed CMS’ lead by removing barriers to accessing cardiovascular care in ASCs [3]. The continued approval of procedures to the CPL and expanded access to care are major catalysts for the shift in cardiology services to the outpatient setting and the desire of providers to engage in external clinical investment opportunities.

Reimbursement and Payor Impacts

Cardiologists have long sought refuge from rising costs and downward reimbursement pressure by aligning with larger entities that have more leverage and pricing power. This often materialized through traditional health system employment with many hospital providers looking to operate traditional in-office ancillaries in an adjunct hospital outpatient department. The arbitrage in reimbursement (HOPD versus freestanding) was an offset to the ever-increasing physician compensation inflation. However, challenges continue to mount.

The Medicare Physician Fee Schedule (MPFS) conversion factor has fallen year-over-year since CY 2020. On November 1, 2022, CMS released the 2023 MPFS which continued to lower the conversion factor and resulted in cardiology reimbursement falling an estimated 1.0% [4]. During the same period, many health systems are reporting larger net professional losses per cardiologist as costs continue to rise faster than revenue.

These factors, coupled with bundled pricing initiatives and trends focused on value-based care initiatives, are compelling cardiologists to consider all alternative employment scenarios in response to slowing compensation growth. Whether cardiologists continue to be employed by health systems and corporate entities or they venture into private settings to explore outside investment opportunities, there is no doubt cardiology will continue to face financial pressure from rising operating costs in tandem with reimbursement cuts.

Cardiology employment trends, increasing access to outpatient cardiology services, and changes in payor models are all leading indicators that impact the strategic alignment of cardiology medical groups. The following are key external and internal drivers that serve as signals of the fragmentation of the cardiology market. Healthcare executives should be proactive in their evaluation of these market factors which can dictate how cardiology coverage is delivered and can impact current and future affiliations.

Physician Alignment

Degree to which cardiology services are provided by independent cardiologists, employed providers, or a group professional services agreement.

High Impact – To determine the top-line revenue impact between two parties’ contracts.

Entrepreneurial Leadership

The presence of forward-thinking medical leadership.

High Impact – Visionary leadership required to change the market status quo, and generally visionary leaders see today’s disruption (rate pressure, ambulatory migration, etc.) as opportunity.

Economic Sustainability

Degree to which current employed or contracted cardiology economics remains financially viable.

High Impact – Health system alignment can result in inflated market compensation and greater economic burdens for healthcare organizations. The higher the degree of financial unsustainability, the higher the likelihood of stakeholders (health systems, payors, and providers) are open to alternative structures.

Physician Contracts

Degree to which physicians are subject to a noncompete or other similar provisions.

Medium Impact – This may delay fragmentation, but ultimately a large cadre of cardiologists seeking an alternative care model will likely prevail.

Payor Fragmentation

Depth of managed care and commercial contract consolidation.

Medium Impact – The more consolidated the managed care community is in a market, the stronger the likelihood of evolving lower total-cost care models.

Upon evaluation of the internal and external environment, health systems have strategic options that range from staying the course with minimal change through employment to proactively migrating the cardiology care delivery model in partnership with a private equity-backed platform. Below are strategic opportunities for organizations to consider when developing long-term cardiovascular medical group affiliations.

Investment in a Comprehensive Cardiac Institute

  • Service line realization that the tertiary nature of cardiology requires continued hospital/health system investment in integrated and differentiated clinical programs.
  • Enhanced service offerings, improved governance (including physician participation), and the development of cardiac operations focused on retaining and attracting community and practicing physicians.
  • If successful in the implementation of a cardiovascular institute, the likelihood of third-party competitive investment is diminished.

Joint Venture Management Services Organization (MSO) Model

  • Migration of employed physician practice to an alternative, independent practice structure. This could be a health system-endorsed response depending on current practice economics.
  • Migration of in-office ancillaries (nuclear, echocardiography, stress testing, etc.) to support primary cardiology services.
  • Development of a joint venture MSO model owned by physicians and health systems.
  • Separate ASC joint venture syndication with community cardiologists.

Partnership with Private Equity

  • Migrate physician practice to private equity and incorporate an income-less expense model for provider compensation.
  • Make it optional for health systems or stakeholders to be in the capitalization table of supporting practice MSOs. While most PE sponsors may question a role for health system involvement, a regional sub-MSO could at a minimum create value leveraged by the health system’s competitive position.
  • A comprehensive joint venture ASC strategy with three-way ownership (health system, private equity, and cardiologists).

Staying the Course

  • The existing environment affords continued incremental strategic investment and limited overall repositioning.
  • A high likelihood that self-assessment results in limited exposure to fragmentation.

As healthcare executives evaluate the overall strategic positioning of cardiovascular services, industry factors such as physician employment trends, a shift to lower-cost outpatient care, and changing payor models will continue to change the cardiovascular landscape. Mindful executives with a strong pulse on external and internal factors, such as physician alignment and service line stability, will have an advantage in tactical decision-making. Position opportunities, such as investment in comprehensive cardiac institutes, joint ventures with MSOs, and partnerships with private equity firms, are all potential models for long-term strategic success.

Sources

  1. Physicians Advocacy Institute Research & Avalere Health. (June 2022). Physician Employment and Acquisitions of Physician Practices 2019-2021 Specialties Edition. Physicians Advocacy Institute.
  2. Toth, M. (September 19, 2019). What Does CMS’ Proposed Addition of PCI in ASCs Mean for Hospitals? Cath Lab Digest.
  3. Outpatient Surgery Magazine. (2021, March 17). The Building Blocks of an Outpatient Cardiac Program.
  4. American College of Cardiology. (July 8, 2022). CMS Releases Proposed 2023 Medicare Physician Fee Schedule Rule.