Alignment Opportunities with Independent Physicians Due to COVID-19

April 14, 2020

Written by Colin McDermott, Kevin McDonough  and Troy Castle

The outbreak of the coronavirus disease (“COVID-19”) has gripped the planet in what the World Health Organization has officially declared a pandemic. In the United States, small local businesses as well as massive national corporations in a multitude of industries have been forced to enact blanket salary reductions, furlough employees, and pursue drastic cost cutting and cash conservation practices as the COVID-19 crisis threatens their financial viability. Despite the essential nature of the service the industry provides, healthcare and its providers have been far from immune to these challenges. In speaking with leadership of prominent healthcare systems and physician provider groups across our country, one clear yet simple theme has emerged – the financial impact of this crisis will alter the healthcare provider landscape in many markets. It has reshaped their opinions with respect to alignment and has accelerated discussions between their organizations and other market players.

The impact on the provider marketplace has been drastic. Non-essential, elective medical, surgical and dental procedures have been instructed to be put on hold [1], essentially halting one of healthcare’s most profitable revenue streams. Health systems and hospitals have been forced to reallocate resources to meet the demands of treating COVID-19 patients while simultaneously managing cash flow challenges as a result of elective procedures being delayed. S&P Global Ratings revised their outlook for the not-for-profit acute care sector to “Negative” from “Stable” reflecting the possible prolonged COVID-19 impact.  S&P indicated, “the pandemic will result in sizeable increases in operating costs, particularly for labor and supplies, reduced volume and revenues related to elective and non-essential health care needs, reliance on working capital lines of credit (…)” [2].  Consistent with the S&P outlook, many health systems have announced employee furloughs and indicated significant impact to their financial results for March.

One of the hardest hit segments of the healthcare market has been independent physician practices. In Massachusetts, it was announced that an orthopedic group, New England Orthopedic Surgeons, made the decision to halt physician pay and furlough 168 employees, more than half of its workforce. The practice expects to rehire its furloughed employees in three to four months once the practice revenue and volume recover. [3] This trend has increased over the last week with several additional orthopedic groups announcing similar initiatives.  Beacon Orthopedics & Sports Medicine furloughed 219 employees on April 1, 2020 due to the impacts of COVID-19.[4]  The largest independent physician group in Massachusetts, Atrius Health, also announced they will furlough many nonclinical employees and defer approximately 20% of the pay for other employees as they battle a decline in patient volume of approximately 75% since mid-March. [5] Finally, as an indication of the dire situation faced by the broader independent physician market, Shawn Martin, senior vice president of the American Academy of Family Physicians, indicated this week that, “nationwide, widespread closures may be just four to six weeks away”. [6]

Shocks to the system, such as those presently being brought forth by the current crisis, are not new to the healthcare industry. Although rare, the broader healthcare industry periodically experiences significant disruptive events. Such events most often serve as a catalyst for change and tend to shift or drastically accelerate prevailing trends in an otherwise deliberate industry. Such a disruption was last observed over 10 years ago beginning with the financial crisis and following soon after by the passing of the Patient Protection and Affordable Care Act in March 2010. The financial crisis, lasting from December 2007 through the summer of 2009, pushed many physicians to seek employment as the economic pressures challenged many small independent practices. A survey by the Medical Group Management Association in early 2009 found that almost 70 percent of physician practices were experiencing material declines in revenue, 66 percent were reducing their operating budgets, 59 percent were freezing staff hiring and 75 percent were seeing more uninsured patients. [7]  Following the financial crisis, the Affordable Care Act was signed into law on March 23, 2010. A September 2016 study by the Physician Advocacy Institute found that between July 2012 and July 2015 (i.e. time period ensuing ACA implementation), the number of physicians employed by hospitals increased by nearly 50%. [8] Although the outcomes are far from decided, the short-term financial impact of the coronavirus pandemic are proving to be much more acute than the prior financial crisis to both health systems and physician practices. The current coronavirus pandemic could be considered a perfect storm. Its characteristics blend the economic challenges of the financial crisis with the market disruption caused by the sweeping changes resulting from the Affordable Care Act.

A critical component of any healthy local healthcare delivery ecosystem is a stable physician workforce. As physician groups comply with CDC guidance for COVID-19, the underlying economics of these groups, as described above and which are inextricably tied to patient volume, are deteriorating. Similarly, health systems and hospitals are experiencing significant downturn in both their operating profits and in their investment returns. As a response and with an eye towards stabilizing their respective organizations, health systems and physician groups are actively engaging in enhanced communications to explore collaboration and alignment strategies. The immediate goal of these strategic discussions will be focused on organizational stability. Equally as important, however, should be the long-term goal to position both organizations to capitalize on market opportunities that are presented post-crisis. Like the disruptive events from the past, the COVID-19 crisis will be a catalyst for change that is likely to alter the healthcare provider landscape in many markets.

If your organization is having discussions and considering alignment with independent community physicians, please reach out to the VMG Health professionals above.  We would enjoy the conversation and will be able to provide current market observations. Perspective and attitudes are constantly evolving, and each market is responding to the impacts of COVID-19 differently.  Having an adviser who is experienced in providing flexible, forward thinking solutions while thoroughly understanding the significance of FMV in healthcare transactions is critical.