How to Structure a Quality Incentive Program for Physicians

December 1, 2022

By: Anthony Domanico, CVA and Nicole Montanaro

The following article was published by the American Association of Provider Compensation Professionals

While the healthcare industry has been moving from volume to value for the last two decades, the movement toward true value-based care has really taken off within the last few years. This is because the way health systems are paid has been largely based on fee-for-service payments with a relatively small share of a health system’s revenue being driven through “value.”

The 2022 MGMA Practice Operations Survey found that health systems see approximately $31,000 in value-based revenue per FTE physician [1]. While that figure is just a small portion of what organizations bring in for the typical physician, the expectation among leaders in the healthcare provider and the payor industries is this trend of shifting revenue away from fee-for service and towards value-based care is going to grow significantly over the next several years. As the way organizations are reimbursed moves towards quality and other non-productivity-based metrics, how those organizations pay their physicians needs to evolve in similar ways. Many organizations we work with at VMG Health are engaging our firm in the following ways:

  • Organizations without a quality program in the current compensation program are looking to operationalize quality. They are looking to do this both in selecting and building meaningful quality metrics within their EMR and in developing a compensation program that rewards physicians for high-quality care, in addition to just a high volume of care.
  • Organizations with a quality program are looking to take quality to the next level. They are doing this by organizing the care model into an increased care-team type approach or moving away from just quality metrics in the comp plan for primary care physicians. In moving away from just quality metrics, they are focusing on a more robust panel/population health management system that rewards physicians for things like panel size, patient access, and outcomes-based metrics (vs. process metrics in other areas).

The remainder of this article will focus on common ways organizations are implementing value into their physician compensation plans. It will also include guidance to organizations on how to select meaningful value-based metrics to provide the most value to the organization.

Determining the Magnitude of Compensation

For those organizations just starting on this journey from volume to value, the most important decision is how to start including quality in plans that have previously paid physicians solely based on the volume of their work. Organizations often start by adding a modest amount of compensation tied to value, and typically it is an amount that guarantees a physician’s base salary or rate per wRVU does not need to decrease to make room for the quality incentive while staying within budgetary expectations.

For example, a productivity model at $55 per wRVU with an expected 2.5% budget increase in 2023 might leave the conversion factor at $55 and add a 2.5% quality incentive as a bonus. Over time, that percentage tied to quality can increase as physicians become more familiar with and trusting of value-based metric reports as they are with wRVU reports. However, this process generally starts small and typically tops out somewhere in the 10-20% range for organizations on the value-based side of the volume-to-value continuum.

Structuring the Quality Incentive Program

Once the magnitude of compensation is determined, there are a few main ways organizations typically structure value-based incentives in their physician compensation plans. These structures are typically based on how the organization’s leadership team answers the following question:

Question: “Should quality be the same for everyone, or should there be some variability for factors like productivity, tenure, base salary differences, or other factors?”

Potential Answer 1: “Quality should be the same for everyone.” – The Flat Dollar Approach

These organizations typically pay all physicians the same flat dollar amount, regardless of physician subspecialty area. As an example, every physician, whether a neurosurgeon or a family practitioner, would have the same $20,000 quality opportunity.

Potential Answer 2: “Quality should be the same for everyone within a specialty.”- The % of Median Approach

These organizations typically use a percent of market (usually median) approach that pays everyone within the same specialty the same total dollars for quality. As an example, every family medicine doctor would receive up to $13,500 (~5% of median), and every neurosurgeon would receive $37,500 (~5% of median).

Potential Answer 3: “Quality should be the same for everyone, with some small differences based on the physician’s base salary (typically based on years of experience, tenure, or other factors).” – The % of Base Salary Approach

These organizations typically use a percentage of-base salary approach where the base salary is set according to organizational policies. This might provide a differentiated level of base compensation for factors like tenure, experience, productivity level, or other factors, and each physician can receive 5% of their individualized base salary as a quality bonus. As an example, Family Medicine Physician A with a $230,000 base salary is eligible for an incentive of up to $11,500, and Family Medicine Physician B with a $250,000 base salary can earn up to $12,500.

Potential Answer 4: “Quality should vary with productivity such that my highest producers should have the most at-risk for quality.” – The Rate per wRVU and/or the % of Production Comp Approach

These organizations typically use either a quality rate per wRVU or a percentage of total production-based comp approach. Under a pure productivity-based plan, if the compensation plan targets a compensation per wRVU rate of $50 then$47.50 per wRVU might be earmarked for wRVU productivity, and an additional $2.50 per wRVU is set aside, and paid based on quality performance. This type of incentive provides different (and sometimes significantly different) quality incentive opportunities for physicians with different levels of productivity.

Selecting Meaningful Metrics

Regardless of which of these quality compensation structures is selected, when considering supporting quality bonus payments to physicians a key factor is having a substantive set of quality metrics.

VMG Health collected industry research and identified multiple healthcare articles, publications, and other sources related to quality bonuses paid to physicians. The takeaways about value driver considerations related to the metrics are summarized below. While this list is not exhaustive, it does provide the most common and important factors that support quality bonus payments to physicians.

  • Metric Type: Outcomes metrics are more valuable than process metrics.
  • Benchmark Endorsement: Nationally endorsed benchmarks are more valuable than internal benchmarks.
  • Superior Performance Benchmark: Superior performance targets based on top decile performance are the most valuable targets.
  • Difficulty of Metric: Stretch goals are more valuable than minor improvements and/or maintaining performance.
  • Selection and Number of Meaningful Metrics: Including a substantial number of meaningful metrics (usually five to 10 metrics).

Generally, factors such as paying for the achievement of “superior” performance standards and selecting patient clinical quality metrics demonstrably impacted by the subject physician(s) help to justify higher-quality bonus payments.

Further, the following chart outlines some best practices to consider for identifying and selecting meaningful metrics, as well as factors to consider before including value-based incentives in a compensation model.

It is important to note the considerations described herein are most pertinent when a party wishes to fund its own value-based compensation program. Alternatively, and subject to certain facts and circumstances, if the funding for a value-based compensation program were to be tied to incremental quality or savings payments from a governmental or commercial payor, other factors may be relevant to consider. Some examples of factors are the incremental revenue/actual savings generated, and the risk and responsibility of the parties.

Non-Productivity Incentives – The Next Evolution

Organizations that are already far along on the value-based care continuum with a robust quality department/program are starting to expand beyond the quality incentive programs outlined above. These groups are starting to include patient access or acuity-adjusted panel size factors to further focus their compensation plans on population health management. Patient access can include incentives for things like open panels, time to third-next-available appointments, or other factors that get layered on top of productivity and quality compensation.

Acuity-adjusted panel size is an alternative productivity metric to wRVUs that attempts to measure how large a panel of patients a particular physician is charged with caring for. Raw panels (actual number of patients) are adjusted for some level of patient acuity factor – an age and sex adjustment factor, hierarchical condition categories (HCCs), or a multitude of other factors to ensure panel comparability. Unfortunately, there is no perfect acuity-adjustment factor, which makes comparing panel sizes to the external market a unique challenge.

Finally, some organizations are using incentives embedded in payor contracts – quality incentives, shared savings, and other payments – as additional incentives in the provider compensation formula. Typically, organizations take some percentage of dollars received from payors to cover costs incurred by the system and to provide some level of additional remuneration to physicians.


As these value-based programs continue to evolve, organizations have many levers to provide competitive levels of compensation to their physicians. These options help move physicians’ focus from being solely on production to providing high-quality care to patients and reducing unnecessary procedures.

With this complexity, however, organizations must be more diligent than ever to ensure their provider compensation programs continue to align with federal fraud and abuse laws. These regulations are also changing and providing additional levels of protection to organizations that ask physicians to take on meaningful downside risk in their compensation plans. Therefore, careful consideration should be taken in establishing a compensation strategy to ensure the compensation levels remain both competitive and compliant.


  1. Medical Group Management Association. (2022). “Data Report: Patient Access and Value-Based Outcomes Amid the Great Attrition.”
Categories: Uncategorized

Lithotripsy: Demographics and Technology to Drive Demand

November 28, 2022

Written by Taryn Nasr, ASA and Madeline Noble

The following article was published by Becker’s Hospital Review.

The demand for lithotripsy procedures is expected to increase in the coming years. This expected increase is supported by a review of the Global Lithotripsy Devices Market. It is forecasted to grow at a 5.5% CAGR and is expected to be valued at $2.03 billion by 2027. [1] While several factors have contributed to this rising demand, the primary drivers are the increasing incidence of kidney stones among the geriatric population and the advancements in lithotripsy technology. Healthcare systems and facilities must meet increasing patient demands for lithotripsy services.

Industry Background

The most common lithotripsy procedure is referred to as extracorporeal shock wave lithotripsy (ESWL). ESWL is a noninvasive procedure that uses high-intensity acoustic pulses, or shockwaves, generated by a lithotripter machine to break up kidney stones that are too large to pass through the urinary system. Another common lithotripsy procedure is ureteroscopy with laser lithotripsy which utilizes a ureteroscope and laser fibers to break up the kidney stones. ESWL is typically used for stones inside the kidneys while ureteroscopy is typically used for stones inside the ureter.

Lithotripsy procedures can be performed on an outpatient basis in a variety of formats such as fixed-site, transportable, and mobile. While there are many providers of lithotripsy services throughout North America, the two most recognized names in the mobile lithotripsy space are NextMed and United Medical Systems (UMS). In addition to these nationwide providers, there are smaller, physician-owned providers that service healthcare facilities on a geographic/regional basis.

Service Agreements

One approach for facilities to meet the increasing demand for lithotripsy services is to enter into arrangements with lithotripsy providers through professional service agreements. Oftentimes, healthcare facilities find it to be financially prudent to purchase lithotripsy services on an as-needed basis rather than purchase equipment, employ dedicated staff, and fund other expenses associated with the service. In those instances, the hospital or ambulatory surgery center (ASC) will contract with a lithotripsy provider to assume responsibility for all costs related to the operation of the lithotripsy service. In return, the hospital or ASC will pay a predetermined fee to the provider for the services rendered.

The contracted fees are structured to compensate the lithotripsy providers for equipment, personnel, and other costs related to the lithotripsy service. The agreements are usually structured on a mutual, nonexclusive basis with key responsibilities delegated between the facility and the provider. Typically, the provider is responsible for transporting and maintaining the lithotripsy equipment, training and licensing the technician to assist with the procedure, and providing the supplies required to support the procedures.

The most common fee structure consists of a price per lithotripsy procedure. In addition, many agreements consider a maximum annual payment for lithotripsy services to determine the commercial reasonableness of the services agreement. In other words, it must be financially prudent for the facility to purchase lithotripsy services on an as-needed basis rather than purchasing the equipment,
employing the staff, and funding the other operating costs associated with the provision of the services. Other fees that may be included in a lithotripsy services agreement include cancellation fees, minimum on-site charge fees, and after-hours/holiday fees. Regardless of the fee structure of the agreement, the arrangement between the facility and the provider must be understood and followed by both parties for regulatory compliance.

Compliance Considerations

For lithotripsy and similar equipment-based arrangements to maintain compliance, the compensation stated in a service agreement between a facility and a provider must be set at fair market value (FMV). To determine the FMV of service agreements, the environment surrounding healthcare must be considered. The bodies of law often considered include the federal Anti-Kickback Statute and the Physician Self-Referral Law (Stark Law). These statutes provide guidance in determining whether service agreements between facilities and providers, such as lithotripsy service agreements, are compliant and based on FMV.

The Stark Law prohibits physicians from ordering designated health services (DHS) for Medicare patients from entities with which the physician has a financial relationship. However, lithotripsy services are not considered DHS for purpose of the Stark Law. Therefore, lithotripsy services agreements are not governed by regulations regarding per-click leasing arrangements. It is important to note the lithotripsy services agreement must be structured to provide full-service lithotripsy services, and not just a lease of the lithotripsy equipment.

Valuation Considerations and Conclusions

When completing an FMV analysis of lithotripsy services agreements, one must consider the rising cost of equipment and technology advances, staffing pressure causing rising labor costs, requests for quality assurance programs, and market-specific trends such as volume trends and service areas. As the demand for lithotripsy services continues to rise, it will become increasingly important for healthcare facilities to execute proper due diligence and ensure regulatory compliance. To avoid violations of the federal Anti-Kickback Statute and the Stark law, parties must document why an agreement for lithotripsy services is at fair market value.


  1. Mordor Intelligence. (2022). Lithotripsy Device Market – Growth, Trends, COVID-19 Impact, and Forecasts (2022-2027).
Categories: Uncategorized

2022 Not-For-Profit Health System Performance Trends

November 10, 2022

Written by Quinn Murray and Ed McGrath

Not-for-profit health systems nationwide are experiencing material financial pressures as the industry recovers from the impact of the COVID-19 pandemic. Now providers are faced with the difficult task of adjusting to the new challenges that healthcare systems are experiencing in 2022. The VMG Health Strategic Advisory Services team works primarily with not-for-profit systems, which is one of the reasons we decided to complete this report and the associated analytics. A consistent theme in this study finds that few organizations have been immune to material declines in financial and operational performance in 2022. This performance is not sustainable for the long term.

In addition to the costs associated with labor, supply, purchased services, and other inflation pressures, not-for-profit healthcare systems are also experiencing increased competitive threats. These threats are coming from niche players supported by private equity and other financially backed organizations that are typically focused on more profitable commercial business instead of serving all, which is the historical tradition of not-for-profit healthcare systems.

This report is based on data from publicly available sources and represents a statistical sample size of various organizations across the nation, but with that said, our findings may not be applicable in all markets. However, the organizations reviewed for this report represent a large cross-section of not-for-profit health systems in the country. The composition of these systems is summarized below.

On a combined basis, the 21 systems analyzed as part of this study represent $184 billion in total operating revenue for fiscal year 2021. A significant portion of this total was generated from the systems operating 560+ hospitals with approximately 100,000 beds across 32 states.

Other advisory firms have also noted recent declines in industry performance. The contributing factors identified by other firms are wide-ranging, some of which are consistent with the findings of this report.

For example, KaufmanHall reported in September 2022 that for the first six months of CY 2022, hospital operating margins declined 100% compared to 2019 before the pandemic. In addition, KaufmanHall noted the number of hospitals with negative margins in 2022 is projected to be greater than pre-pandemic levels since hospital margins continue to be consistent with, or worse than, 2020 levels.

Another example from RevCycleIntelligence from July 2022 cited survey results from over 200 CFOs of health systems and large physician groups. The results indicated that only 8% reported they were on track to exceed 2022 goals. Additionally, RevCycleIntelligence noted hospitals and health systems are experiencing increases in volumes and patient revenues. Research completed for this report is consistent with the findings noted in the RevCycleIntelligence article.

As noted, the factors driving poor financial performance in 2022 are wide-ranging. Discussions with management for purposes of this report have indicated that some of the issues include the following:

  • Contract Labor – Many VMG Health clients have been successful in managing contract labor costs due to reductions in hourly rates. Others are reducing clinical capacity, including beds, to minimize travel and agency staff needs.
  • Employed Staff Labor Costs – In order to attract and retain staff during increased market pressures and demand, systems are implementing pay raises well above traditional industry norms. Based on our research, this is expected to continue going into 2023. Conversations with the management of various systems included in this report indicate planned salary increases of 4% to 8% in 2023.
  • Medical and Other Supplies – Recently, systems have experienced material increases in the cost of goods purchased and services purchased by these systems. The calendar year 2023 expectations from VMG Health clients indicate planned increases of approximately 6% or greater, which would be materially higher than traditional industry norms.
  • IT and Other Support Services – Beyond clinical staff, market competition also exists for IT and other support staff who are in short supply. This is another contributing factor driving up the cost for health systems.
  • Medical Malpractice – As a result of cases being delayed for the greater parts of 2020 and 2021, clients are beginning to experience increased malpractice activity from cases during this time period. This is leading to increased malpractice costs which are rising to levels that may have not been anticipated.

Key Findings & Conclusions

The findings and forecast based on this report do not necessarily paint a pretty picture for not-for-profit systems. While our research is focused on healthcare systems, VMG Health’s experience with standalone hospitals in 2022 also indicates, in most cases, financial performance is weaker than what is being reported for several other systems.

Of the 21 systems analyzed for this report, in calendar year 2022, 16 are reporting negative operating margins (75+%). The other five are reporting breakeven or very minimal operating margins. Each of these systems reported positive FY 2019 operating margins before the pandemic.

The range of the operating margin declines in 2022 as compared to 2021 and/or pre-pandemic levels approximates from 4.0% to 7.0%. In other words, if the operating margin was a positive 2.0% in 2021, then the 2022 operating margins will likely approximate between -2.0% to -5.0%. Likewise, operating EBIDA for these systems has deteriorated materially to approximately 3.5% of total operating revenue in comparison to 8.0% in 2021 before the pandemic.

Similarly, these systems have experienced a significant decline in days cash, specifically in 2022, approximating -18% from 2021. The systems have also experienced material losses from investment income in 2022. Recognizing this mostly includes unrealized losses, these systems reported investment losses of approximately negative -$22 billion on a combined basis.

Summary Performance Results from FY 2021 to Annualized FY 2022

Negative operating margins in addition to poor investment performance (and other non-operating activity for certain organizations) are driving declining cash balances. 2022 performance indicates systems reporting somewhat material declines in days cash on hand. These 21 systems are reporting a 15% to 25% decline in days cash with an average of an 18% decline from fiscal year-end 2021.

As an additional consequence of the material losses, especially for smaller systems, debt service coverage ratio (DSCR) covenants may not be met. Most of the systems included in this report have the cash reserves necessary to avoid procedural requirements relative to the days cash covenant in their bond agreements, and this includes taking into account the poor 2022 performance.

Organizations in 2023 may be required to develop a financial improvement plan outlining the recovery path to fulfilling the DSCR covenant in a subsequent fiscal year. In many cases when a bond covenant such as DSCR is not met, systems are required to hire management consultants to report on their opinion relative to the likelihood the system can meet the DSCR threshold in the near term.

VMG Health recently completed one of these assignments for a large hospital in the northeast. Based on this assignment and discussions with others, based on 2022 performance it appears other organizations will unfortunately need this type of study completed by experts such as VMG Health.

Areas of Consideration – Initiatives to Address the Impact of 2022 and Beyond

It is clear most organizations will not be able to shrink their way to success, and over time, strategic growth is imperative to long-term success. The following are example actions either undertaken or being contemplated by VMG Health clients to address recent performance:

  • Addressing care management issues to better utilize limited clinical care resources.
    • Increased focus on APP utilization to the max of their skill levels.
    • Enhance utilization of scarce clinical staff resources.
    • Digital care to increase patient access at a lower cost.
    • Expansion of remote monitoring and other vehicles to reduce more expensive utilization.
    • Expansion of hospital-at-home services.
  • Assessment of the value proposition of employed/aligned medical groups.
    • Identification of how best to maximize the group size, strength, and the system’s investment in the group.
  • Contract negotiations with managed care payors.
    • Will likely be difficult to obtain increases that will address inflation pressures.
  • Strategic assessments of existing operating assets/investments.
    • Reevaluation of the continuation of existing service lines.
    • Closure and/or sale of hospital assets in non-strategic markets.
    • Disposition of unprofitable ventures that are no longer strategically imperative.
    • Reassessment of the need for existing real estate and/or MOBs.
    • Evaluation of the potential sale of other non-core assets.
  • Operational improvements.
    • Reducing bed and other capacities to match available non-agency/travel staff.
    • Identifying opportunities to improve revenue cycle efficiency.
    • Staff modifications, primarily in non-clinical areas.
  • Acquisition of organizations that are struggling.
    • Based on discussions with VMG Health clients, systems are being more diligent relative to making investments in new facilities.
  • Partner/affiliate with other systems for non-clinical services.
    • Example areas include IT, revenue cycle, cybersecurity, analytics, and others to improve cost efficiency and reduce potential future investments.
  • Price transparency.


Not-for-profit healthcare systems are experiencing extreme challenges in 2022. Based on conversations with many of these organizations and other clients, this is unlikely to improve materially in 2023. Not-for-profit hospitals and systems need to explore other innovative avenues to work smarter and more efficiently so they can be well-positioned for success in the future. VMG Health has a history of experience developing long-term relationships with clients through providing assistance across a variety of areas. These areas primarily consist of financial and strategic related assistance, which has prepared and positioned VMG Health to provide support and insight to not-for-profit hospitals and health systems. As we continue to assess the not-for-profit landscape, VMG Health has the experience to add value and help systems address some of the issues outlined in this report.

The assistance VMG Health’s experts are able to provide can take many forms. Some examples are:

  • Medical Group Transformation
  • Bond Covenant Repair Reports
  • Financial Projections
  • Service Line Planning
  • Revenue Cycle
  • Performance Improvement
  • Mergers and Acquisitions


  1. Muoio, Dave. (August 29, 2022). July’s hospital margins were among the worst of the pandemic, Kaufman Hall says. Fierce Healthcare.
  2. LaPointe, Jacqueline. (July 7, 2022). Healthcare Revenue Falling Short of 2022 Goals for Many Providers. RevCycleIntelligence.
  3. Kaufman, Kenneth. (September 21, 2022). The Sobering State of Hospital Finances. KaufmanHall.
Categories: Uncategorized

Three Key Considerations in Physician Medical Group Transactions

November 8, 2022

Written by Clinton Flume, CVA, Tim Spadaro, CFA, CPA/ABV, Olivia Chambers, and Blake Toppins

The following article was published by Becker’s Hospital Review.

The physician medical group sector remains a hot transaction space that outperforms expectations each quarter. This sector’s strong prospects are driven by interest from private equity groups, health systems, and value-based care organizations. However, before buyers operate in this robust sector, they must consider the unique transaction intricacies of such deals, including physician alignment, compensation structure, and due diligence considerations. 

For more in-depth insight on this sector, refer to VMG Health’s 2022 Healthcare M&A Report which describes the nature of this sector and summarizes the robust transaction environment experienced in 2021. This report also projected the ongoing elevated deal activity in 2022 which has been confirmed by the 170 deals in Q3 2022 alone (representing a 63.0% increase over Q3 2021).1

Below are three key considerations when executing a physician medical group deal. 

1. Physician Alignment

Effective medical group alignment strategies are imperative to a healthcare organization’s growth, and the two most common strategies are direct employment and equity investment. The latter can be accomplished through joint ventures or investment in a management service organization (MSO). MSOs are an increasingly popular alignment strategy in states that adopt the corporate practice of medicine (CPOM) doctrine. For more information on MSOs and how they work, read “Physician Practice Strategy: The Private Equity Play.”

According to the Physician Advocacy Institute, 74% of physicians are employed by hospitals or corporate healthcare entities (a 19% increase since 2019).2 The main drivers of this trend include physicians’ financial security, physicians’ professional and work-life balance, the payor environment’s evolution from fee-for-service to value-based care, and the administrative complexities of running a business. In many instances, a direct employment model enables physicians to receive market compensation consistent with their productivity and to focus more closely on clinical initiatives which alleviates their day-to-day administrative responsibilities. From a buyer’s perspective, direct employment models mitigate the risks associated with provider contractual arrangements and enable more definitive long-term planning. 

Joint venture structures with physicians may also constitute an attractive proposition for alignment. A joint venture opportunity may take the form of an equity investment in a medical practice (state specific based on CPOM) or in a physician-aligned business, such as an ambulatory surgery center or retail healthcare business. Joint venture affiliations can strengthen physician alignment through synergies such as reimbursement lifts, growth capital, and economies of scale. Along with governance rights, each of these elements plays a key role in defining post-transaction equity alignment structures.

Due to the regulated healthcare industry and strict guidance around physician transactions needing to be consistent with Fair Market Value, it is important that both the business being valued and the compensation offered is documented to be Fair Market Value. Further, there are a myriad of structural nuances that should be considered from a legal, operational, and clinical perspective. As a result, leaning on experts focused on the physician practice sector is highly recommended.

2. Compensation Structure

Compensation can be the single most important negotiation item in a medical group transaction. As private equity, insurance companies, and for-profit management organizations enter the sector, compensation models demand careful attention to ensure a good alignment of physician productivity, physician pay, and medical group returns.

  • Alignment Complexities: Internal alignment (such as pay-for-productivity) and external alignment (such as equity investment returns) are crucial in physician medical group transactions. Competitive buyers design compensation models that are appropriate to all parties across the continuum of care. Internal alignment promotes provider performance while simultaneously supporting buyer-specific goals. 

External alignment allows providers to benefit from direct investment when shifting to an employment model. Although complex, it has increasingly become the norm for compensation models to factor a physician’s external interests into an agreement.

  • Incentivization: Growing and stable practices rely heavily on provider motivation. To keep providers highly productive, incentives (such as bonuses tied to growth and quality) must be included in post-transaction arrangements. A well-designed compensation model balances physician incentivization with compensation stability, care quality, cost efficiency, and the satisfaction of all parties.

Compensation arrangements continue to require ongoing innovation to stay competitive and relevant. As transaction activity intensifies and healthcare shifts from a volume-based system of care to a value-based system of care, compensation arrangements must be designed to evolve with the dynamic intricacies of the industry. Understanding the latest compensation models, and how to design those models and a transition plan, has proven to be a critical factor for success with physician practice strategy. For recent insight on design, further information can be found here.

3. Due Diligence

The competitive environment for medical group assets has intensified as capital continues to flow into the sector. As part of the deal process, performing both pre- and post-acquisition due diligence is now the standard for high-value deals. Due diligence focuses on the following areas: 

  • Financial Due Diligence: The preparation of quality-of-earnings analyses, once relegated to buy-side advisors, is now a standard part of the sell-side advisor process. Experienced sell-side advisors perform the required due diligence to identify adjustments, such as cash to accrual revenue recognition and projected provider/owner compensation. These adjustments lead dealmakers to develop creative deal structures to comply with healthcare laws and regulations. 
  • Coding and Compliance: Experienced buyers conduct coding and billing audits to validate a target’s revenue and identify post-acquisition corrective action and revenue opportunities. Without a coding review, a buyer’s investment could risk noncompliance with governmental and commercial billing standards.
  • Reimbursement Analysis: The difference in commercial payor reimbursement between a buyer and a seller plays a crucial strategic role in the post-transaction development of an affiliation structure. A buyer’s ability to leverage commercial contracting post-transaction can provide an upside opportunity for a medical group affiliation. 

In a unique, complex, and dynamic transaction landscape, expertise in healthcare-specific attributes can transform a transaction. Considering the surge in physician medical group deals as the expected continuing high rate of activity, buyers will have to increase their knowledge of the sector’s intricacies to remain competitive and achieve their strategic goals. At every stage of a transaction, VMG Health’s expertise as the leading provider of healthcare transaction and strategy services provides the advantage needed to execute successful deals. 


  1. Kalinoski, Glenn. (October 14, 2022). Healthcare M&A Activity Remained Strong in Q3:22, According to Market Data Captured By Irving Levin Associates, LLC. Irving Levin Associates, LLC. 
  2. Avalere Health. (April 2022). COVID-19’s Impact On Acquisitions of Physician Practices and Physician Employment 2019-2021. Physicians Advocacy Institute.
Categories: Uncategorized

The Vertical Consolidation of Tech-Enabled Primary Care Practices

October 27, 2022

Written by Tyler Perper and Madeline Noble

Since the beginning of 2022, the healthcare industry has seen the fast-paced consolidation of tech-enabled primary care practices reach new heights as market participants prepare for a potential shift in the way payments are made for healthcare services. There are a multitude of players seeking to capitalize on the shift from the fee-for-service payment structure to the value-based care (VBC) structure. The fee-for-service payment structure focuses more on the volume of care provided to a risk-bearing, but in the VBC structure, the provider’s services are compensated based on the quality of the care. The current players in the VBC space span a wide range of verticals including payers, health systems, retailers (CVS Pharmacy,, etc.), Medicare Advantage-focused primary care providers (CareMax, Cano Health, etc.), and investors (private equity groups). In this article, VMG Health highlights three transactions we believe illustrate the current state of the VBC space and where it is headed.

Optum Health, a subsidiary of UnitedHealth Group, is considered the market leader in the shift to the VBC payment structure. Optum currently employs over 60,000 physicians at over 2,000 locations. As Optum has expanded its service capabilities, it has focused on data as the key to its success. To that end, in January 2021 UnitedHealth announced the potential acquisition of Change Healthcare for which they would pay approximately $13 billion for the business.

Although the Department of Justice filed an antitrust lawsuit against the acquisition, a Washington federal judge denied the DOJ’s attempt to block the deal in September. As a result, Change Healthcare will join OptumInsight, the data and analytics division of Optum Health, to provide software and data analytics, technology-enabled services, and research, advisory and revenue-cycle management offerings (1). The combined entity will bring together the two largest electronic data clearinghouses which will provide Optum Health with crucial data on how to optimize their patient care service (2). Though the current deal is under review by the DOJ for anti-trust reasons, the investment by Optum Health maintains the intentions of the market leader in VBC by investing big in its data and analytics arm.

Per the president of UnitedHealth Group and the CEO of Optum Health, “Together (Optum Health and Change Healthcare) we will help streamline and inform the vital clinical, administrative, and payment processes on which healthcare providers and payers depend to serve patients.” (1)

To maximize the value-based care payment model, the players in the space have realized the importance of patient data to enhance patient care and lower the cost of managing a patient population. In addition, UHC’s acquisition of Change Healthcare is another example of payers looking to diversify their capabilities to capture the entire flow of the premium dollar (3).

Another monumental value-based care deal in 2022 was CareMax acquiring Steward Health Care System’s Medicare Advantage business. As part of the deal with Steward Health, CareMax became the exclusive management service organization for Steward’s Medicare value-based care business which includes 171,000 lives (50,000 MA lives, 112,000 MSSP lives, and 9,000 direct contracting lives) across eight states in the Southeast of the U.S. (4).

CareMax, another organization that understands the value of data and analytics, is a leading technology-enabled provider of value-based care to seniors. CareMax, Cano Health, Oak Street Health, and other full-risk primary care clinics are partnering with payors to ensure the patient’s care is provided in the correct setting, focuses on preventative medicine, and ultimately, lowers the mortality rates (especially among older populations) (5). CareMax’s focus on whole person health through a unique blend of targeted technology and comprehensive, high-touch care has resulted in improved clinical outcomes compared to peers and traditional Medicare benchmarks. CareMax has achieved a five-star quality rating, the highest possible rating, across its locations overall (6). The CareMax/Steward Health deal shows the continued growth trajectory of the tech-enabled PCP business model and how providers with the proper insights are willing to bear additional risk on behalf of their patient population.

Lastly, in July Amazon made its entry into the primary care and the VBC space through its $3.9 billion acquisition of One Medical, a membership-based, tech-enabled provider of primary care. Back in June 2021, One Medical announced a $2.1 billion deal with Iora Health, a VBC care PCP clinic focused on Medicare and Medicare Advantage patients. This deal expanded One Medical’s patient population from solely commercially insured patients to include Medicare patients and introduce risk-based care models. One Medical’s strong clinical growth, with a 180+ current clinic footprint, and new VBC models require large capital spending. Due to this, One Medical had an operating loss of $255 million in 2021 (7).

Questions remain regarding Amazon’s plans with One Medical, but one thing is for certain: Amazon has the analytical capability, customer base, and capital needs to turn One Medical into a cash flow machine. Additionally, Amazon has the capacity to take on enormous amounts of risk which is needed to successfully run Medicare and Medicare Advantage risk-based care models as a part of One Medical’s Iora segment. Amazon can transform the delivery of healthcare services by making it more accessible and affordable for the millions of customers they reach. There are many opportunities for integration with existing Amazon services, including Amazon Care and the Amazon Prime subscription service, which could expand One Medical’s current capabilities. This transaction, along with many others, might be the beginning of Big Tech in the VBC space.

The rapid vertical consolidation of tech-enabled primary care organizations is representative of the opportunities noticed by existing and new players. It is an opportunity to transform the primary care delivery into risk-bearing, population-specific models focused on lowering healthcare costs of the patient population while tailoring offerings specific to patient needs.

Providers should be prepared to transform their care delivery for the potential evolution to the VBC payment structure by retooling financial and clinical strategies, and by converting patient population data into actionable information. Data and analytics are the key for providers to achieve high value care for all stakeholders. To ensure that your primary care clinic is set up for success under the VBC delivery of care model you need to have a contracted network of specialists and medical centers, the proper assortment of non-physician practitioners to treat patients, and an electronic health record system in place that can more seamlessly facilitate care coordination and the flow of patient information across clinical sites. 

Sources & Endnotes:

  4. Jeffries – “HC Payment Care Delivery Landscape Evolving”
  5. Jeffries Research Services, LLC. (October 20, 2021). H/C Payment/Care Delivery Landscape Evolving as Value-Based Models Gain Ground. Jefferies LLC.
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Physician Practice Strategy: The Private Equity Play

October 20, 2022

Written by Holden Godat and Taylor Anderson, CVA

Health systems, outpatient facilities, payors, and private equity firms (PE) are all vying for alignment with physicians since they drive practically all healthcare decisions. As a result, physicians are faced with many choices regarding employment and strategic partnerships. Of all these choices, the PE play appears to have grown the most among physician practices. The following outlines fundamentals to the PE option, as well as how health system partners offer different opportunities.

The Evolution of PE

Private equity (PE) investment in healthcare is not particularly new. However, the level of PE investment in healthcare has climbed from $19.5 billion in 2015 to $74.4 billion in 2022. (1) The growth of PE activity is also not projected to slow down anytime soon as the total number of deals has exceeded 1,000 in each of the past three years. (2) With projected increases in healthcare spending, along with significant stores of uninvested capital, PE investment in healthcare is still anticipated to flourish in the coming years. (1)

Over time, PE has expanded its area of focus from a few specialties to a much broader range of specialties. VMG Health has observed that there was a time when PE investment was focused primarily on specialties such as anesthesiology, dermatology, and gastroenterology. (3) Today, VMG Health has observed that significant PE investment is now focused on a wider range of specialties, such as primary care, urgent care, ophthalmology, and dentistry. (4) Additionally, the pandemic brought about new opportunities for PE investment including, but not limited to, behavioral and mental health as well as telehealth. (5)

Even with the growth of PE activity, health systems still maintain a significant advantage over the PE model- the advantage of specialty mix. PE firms typically have the limitation of focusing on a single specialty or at most a few similar specialties. Health systems, on the other hand, have the ability and infrastructure to integrate across a broad spectrum of specialties, which can lead to a larger referral stream for affiliated physicians. This larger referral stream also carries the secondary benefit of a higher quality of patient care by providing patients with a more connected continuum of care, which is a significant theme in healthcare today.

Regulatory Landscape

PE investment in healthcare is not as straightforward as PE investment in other industries. In most other industries, a PE firm could simply utilize its capital to purchase a controlling stake in a business. However, the financially driven nature of PE has the potential to negatively impact the quality of patient care. This makes PE investment into healthcare a bit more complex by adding regulatory hurdles such as the Corporate Practice of Medicine (CPOM) Doctrine.

The CPOM Doctrine was developed to protect the quality of patient care. It is described by the American Medical Association (AMA) as a doctrine that “prohibits corporations from practicing medicine or employing a physician to provide professional medical services.” (6) The CPOM Doctrine in individual states may vary slightly; therefore, it is very important that the PE firm is aware of the specific state level adaptations that could impact a potential transaction or investment.

In addition to CPOM, there are additional regulatory factors that could impact the growth of PE activity in the healthcare space. One such event is a recent executive order that was issued by President Joe Biden in July 2021 that will likely cause further scrutiny of PE activity in the healthcare space. (5) Further, there have been instances where PE firms were held liable and were forced to pay damages for wrongdoing perpetrated by a healthcare entity related to the PE firm, even though the PE firm itself was not found to have perpetrated any wrongdoing. (7) Lastly, there is a growing focus by the Department of Justice and Federal Trade Commission to focus on anti-trust enforcement in private equity related ventures. (8) The regulatory scrutiny found in the healthcare space is somewhat unique and certainly provides a new challenge for the typical PE firm.

Unlike PE firms, health systems have long been aware of the regulatory environment surrounding healthcare. This is an advantage to a physician practice since health system leaders are typically apprised of regulatory risks and understand how to protect the parties from scrutiny. Many healthcare regulations, such as CPOM, require value exchanged with physicians to be set at fair market value. It is important for physicians to understand this standard is applicable in most transactions whether it be a health system or PE company.

Even with the presence of the CPOM Doctrine, many PE firms are still investing in the healthcare industry through the creation of a Management Services Organization (MSO). Once a PE firm creates an MSO, that MSO will typically enter into a comprehensive management services agreement (MSA) with a physician practice. Through the MSA, the MSO will typically provide as many services allowed under the state’s CPOM Doctrine. These services may include, but are not limited to, the provision of accounting, billing and collection, non-clinical personnel, supply procurement, equipment, office space, and numerous other services. In exchange for the provision of the subject services the physician practice will compensate the MSO through a management fee. This management fee is what effectively serves as the return for the PE firm’s investment and should be set at fair market value.

The MSO model provides numerous benefits for the physicians. The first benefit is the physicians receive a lump sum amount upfront which carries a high multiple on the physician practice’s earnings. This lump sum comes in exchange for the physicians’ agreement to lower levels of compensation moving forward. Many PE healthcare transactions also involve the physicians receiving “roll-over” equity in the MSO. This “roll-over” equity provides the physicians with some future compensation upside, and serves to keep the physicians motivated to maintain (and/or grow) the clinical operations of the practice. In addition to the monetary benefits the physicians receive from the MSO model, they also retain physician control and governance over the clinical operations of their practice.

A major strategic difference between an MSO and partnering with a health system is PE firms are typically eyeing shorter and more defined time horizons between transactions. On the other hand, health systems often have longer strategic time horizons which allow them to employ physicians for longer terms. This ability to align with a health system for the long term can be very beneficial for a physician seeking stability. Additionally, health systems have the ability to implement unique compensation models that can better support physician motivations.

It is obvious physician practices are in high demand and have numerous choices for partnerships in the market. Due to the fragmentation that exists in the healthcare space, the significant stores of uninvested capital, and the growth of new healthcare services, PE activity in the healthcare space is not projected to slow anytime soon. PE firms have brought an innovative model to the healthcare space that many practices are considering. However, physician practices should consider the differences between the MSO model and health system opportunities prior to pursuing a strategy.


Sources & Endnotes:

  1. Sourced from Pitchbook, Inc. data
  2. Sourced from Pitchbook, Inc. data
  3. VMG Health observed these specialties being the most common specialty for PE investment for several years.
  4. Based on observations of common specialties in the valuations the authors have done.
  5. Sourced from the article titled “Private Equity and Health Care Investments: How Has COVID-19 Impacted Deal Flow?” that was published by the Transaction Affinity Group of AHLA’s Business Law and Governance Practice Group on September 15, 2021.
  6. Sourced from file:///C:/Users/Taylor.Anderson/Downloads/corporate-practice-of-medicine-issue-brief_1.pdf
  7. Sourced from
  8. Sourced from remarks made by Andrew J. Forman at the American Bar Association’s Antitrust in Healthcare Conference Keynote Address, June 3, 2022.

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Top Three Strategic Issues in Behavioral Healthcare

October 12, 2022

By: Scott Ackman

The following article was published by Becker’s Hospital Review

Behavioral health is a highly fragmented market. With an increased demand for providers as well as the recent supply shortage, this sector requires innovative partnerships and strategic thinking.

Here are the top three strategic issues in behavioral healthcare to consider currently.

1. Provider Availability

Most health systems and provider groups struggle to recruit and retain enough psychiatrists to meet community needs. In many cases, a lack of provider resources limits the growth of existing services or prevents clients from offering a behavioral health program at all. Residency programs or other less formal relationships with medical schools have proven to be effective recruitment tools. 

2. Fee-For-Service Economics

From a contribution margin and net income perspective, behavioral health services are well below average for many health systems. This is largely due to some combination of the following:

  • Payer mix: For example, disproportionate share of Medicare, uninsured, etc.
  • Reimbursement rates.
  • State policy and community resources: Health systems are often required to use upwards of 25% of their capacity to board behavioral health patients due to a lack of community post-acute options. Patients no longer meet the criteria for inpatient reimbursement.

Organizations assuming higher levels of financial risk generally favor the economics of behavioral health due to the service line’s impact on the total cost of care. This phenomenon has resulted in increased interest and investment in behavioral health for many clients. VMG Health’s advisory clients have recently identified behavioral health as one of the most important service lines moving forward.

3. Care Model

The care model needed to provide behavioral health continues to be an area of interest for many organizations. Clients are increasing investment in pre-inpatient and post-admission services and community resources to improve program performance.

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Considerations in Structuring Physician Compensation-Per-WRVU Models

October 10, 2022

By: Matthew McKenzie, CVA and Thomas Torcellini, CVA

The following article was published by the American Association of Provider Compensation Professionals.

For hospitals and health systems in the United States, one of the most common methods for compensating physicians for their clinical and procedural services is via the work relative value unit (“WRVU”). In this article, we discuss some of the benefits, as well as potential pitfalls, of physician per-WRVU compensation models.

Compensation-per-WRVU models are common in both employment and independent contractor relationships between providers/provider groups and hospitals as the WRVU can often be the best measure of professional work effort and physician productivity available.

Under a compensation-per-WRVU structure, a physician’s compensation is driven to at least some extent by the level of WRVUs they personally produce. Per Sullivan Cotter’s 2020 Physician Compensation and Productivity Survey, approximately 70% of medical and surgical physician respondents have a WRVU productivity component in their compensation package.

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Laboratory-Developed Tests Save the Day!

October 3, 2022

Written by Mason Motal, Aaron Murski, CVA, Austin Grawe, and Patrick Speights 

The coronavirus disease 2019 (COVID-19) is caused by the virus severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) and was first discovered in December 2019 in Wuhan, China. COVID-19 at the time was a new human virus causing respiratory illness and was very contagious, quickly spreading from person to person. Within a few months it was announced by the CDC as a global pandemic on March 11, 2020. The laboratory industry began leading at the forefront to combat the virus, and faced many unique, complex challenges. Hundreds of thousands of people in the United States were getting swabbed every day for COVID-19, and this caused labs to face severe supply shortages and for staffs to be overwhelmed with more tests than they could handle. Laboratory employees were working 24/7 around-the-clock to try to keep up with the high testing demand. Still, they were running out of essential products faster than manufacturers could restock them.

“If the demand keeps increasing like it’s been increasing over the last couple of weeks, the lab industry will never be able to keep up with it,” said Dr. Dwayne Breining, executive director of Northwell Health Laboratories. “I think the top priority is going to be mitigating the clinical spread of the virus by doing things we know work: things like social distancing, masking, and monitoring. That would allow you to slow it down enough so that not only the lab testing industry, but the entire medical system can catch up.” (6) (10)

Clinical Laboratory Improvement Amendments Overview

The Clinical Laboratory Improvement Amendments (CLIA) was established in 1988 to strengthen federal oversight of clinical laboratories and prohibit them from testing human specimens for diagnosis, prevention, treatment, or health assessment without a valid CLIA certificate. To become CLIA-certified labs must establish specific performance characteristics such as accuracy, quality, and reliability as imposed by the CLIA statute. According to the CDC, approximately 14 billion lab tests are ordered annually, and roughly 70 percent of today’s medical decisions are based on lab results. Therefore, CLIA ensures that patients and health care providers receive accurate, dependable test results.

To help ease pressure on the lab industry during the onset of COVID-19, the Centers for Medicare and Medicaid Services (CMS) decided to loosen their CLIA policies and allowed laboratories wishing to perform COVID-19 tests to become CLIA certified and begin testing patients as quickly as possible. According to the CMS database, the total number of CLIA labs increased from 265,673 at the beginning of 2020 to 323,086 by the end of 2021, resulting in a 10.3% compound annual growth rate (CAGR). In comparison, from 2011 to 2019 the number of CLIA labs only grew from 225,746 to 265,673, a 2.1% CAGR. (5) (1) (7)

Laboratory-Developed Tests Overview

Typically, laboratory tests are developed by diagnostics manufacturers that produce test kits to sell to clinical labs. However, tests are also developed by labs that manufacture and use them in their own facilities, known as laboratory-developed tests (LDTs). LDTs are defined by the Food and Drug Administration (FDA) as an in vitro (in glass) diagnostic test that is manufactured by and used within a single laboratory. LDTs are commonly referred to as “in-house” or “home brew” tests. The FDA regulates the manufacturing of test kits by diagnostics manufacturers under its medical device authorities. Still, it exercises regulatory discretion to allow labs to use their LDTs pursuant to rules established under CLIA. CLIA’s analytical validation is limited to specific conditions, staff, equipment, and patient populations. Therefore, LDTs are reviewed during the routine biennial survey and are constantly monitored after the testing begins.

Furthermore, CLIA requirements are based on test complexity, therefore labs that develop LDTs must meet stricter requirements than standard labs. In contrast, the FDA’s premarket clearance and approval processes assess the analytical validity of a test system in much greater depth and scope. The FDA’s review of analytical validity is done prior to the marketing of the test system, as well as assessing clinical validity, which is part of the review focused on the safety and effectiveness of the test system. The CLIA and FDA regulatory systems differ in levels of focus, scope, and purpose; however, they are intended to be complementary to each other. (1) (2) (13)

When COVID-19 initially hit the U.S. in March 2020, the CDC was unable to provide testing kits for the first several weeks due to the contamination of tests at a manufacturing lab. Therefore, the government decided to permit diagnostic manufacturers to develop COVID-19 test kits and sell them to labs. They were also permitted to sell them to independent and hospital labs to develop LDTs under emergency use authorizations (EUAs). The primary benefit of an LDT over a typical diagnostic test is the time involved in the approval process. A routine diagnostic test can take years to pass through the many phases of research, testing, clinical evaluation, development of manufacturing processes, and review by the FDA or other regulatory authorities before a commercial test is available for public use. Whereas LDTs are designed to take only a few months to pass clearance and become regulated for use.

By late July 2020, LabCorp was processing nearly 180,000 tests for COVID-19 per day with an average turnaround time of three to five days. At the same time, Quest Diagnostics was performing 135,000 tests daily with an average wait of at least seven days.

President, CEO, and Chairman of LabCorp Adam H. Schechter, noted during their Q2 2020 earnings call how vital LDTs were in helping them keep up with the high demand for tests, “We launched back in March with our LDT, and it’s been remarkable the amount of volume we’ve been able to do through that LDT. We were doing 2,000 to 3,000 PCR tests per week, and here we are at the end of July, and we’re able to do 180,000 PCR tests per day. Of course, we still need our suppliers and the other companies to help us get to 180,000, but I have to say that our scientists did an extraordinary job with the LDT to get us to 180,000 today.”

When asked how many of the 180,000 tests were related to LDTs, Schechter said, “I’m not going to give you the exact number through the LDT because that changes, but we have 16 labs running tests. So, at the end of the day, it depends on where the samples are, which tests we run them, and what we try to do is optimize our network so we can get the best possible turnaround we can.”

Mark J. Guinan, VP, and CFO of Quest Diagnostics, also spoke on the positive impact of LDTs during their Q2 2020 earnings call.

“We exited the second quarter averaging approximately 110,000 and 26,000 COVID-19 molecular and serology tests, respectively, each day,” he said. “Over the next couple of weeks, we expect to have the capacity to perform 150,000 molecular diagnostic tests a day. We are providing test results in about two days for the highest priority patients. And the average turnaround time for nonpriority patients is at least seven days.”

Comparatively, before the pandemic the typical turnaround time for a lab test was one to two days.

On August 19, 2020, the Department of Health and Human Services (HHS) Secretary Alex Azar announced HHS was rescinding all informal policy documents issued by the FDA related to LDTs because the FDA had not engaged in “notice-and-comment” rulemaking. The FDA had not required labs developing LDTs to submit tests for premarket review and had deprioritized the review of EUA requests for COVID-19 LDTs in favor of traditional, kit-based in vitro diagnostics (IVDs) from commercial manufacturers. As a result, such products were no longer required to secure a EUA or other non-emergency marketing authorization from the agency before being launched commercially. However, labs that chose to use LDTs without FDA premarket review or authorization would no longer be eligible for Public Readiness and Emergency Preparedness (PREP) Act coverage absent approval, clearance, or authorization and they would remain subject to regulation under CLIA.

According to, the PREP Act authorizes the secretary of the HHS to issue a declaration providing immunity from liability for claims; 1) of loss caused, arising out of, relating to, or resulting from administration or use of countermeasures to diseases, threats, and conditions, 2) determined by the secretary to constitute a present, or credible risk of a future public health emergency, 3) to entities and individuals involved in the development, manufacturing, testing, distribution, administration, and use of such countermeasures. Labs that already had an active EUA for LDTs were unaffected by the announcement.

With the pandemic appearing to slow down and commercial tests for COVID-19 becoming abundant, HHS hit the reset button for the regulation of LDTs on November 15, 2021. The FDA once again had regulatory authority and required clinical labs to submit EUA requests to continue performing and marketing such tests. The agency reported in their November 15 press release that the current areas of focus for EUA reviews were: 1) at-home and point-of-care (POC) diagnostic tests, 2) certain high-volume, lab-based molecular diagnostic tests, 3) certain lab-based and POC high-volume serology tests, and 4) tests submitted or supported by a U.S. government stakeholder.

The dilemma of the FDA’s authority to regulate LDTs has long been a complex and controversial topic for many decades. As mentioned previously, the FDA has historically delegated the oversight of LDTs to CLIA because they initially were relatively simple lab tests and available on a limited basis. However, due to technological advances, LDTs have evolved and are now much more complex with a nationwide reach and present higher risks. The FDA’s main argument is inaccurate test results could lead to people initiating unnecessary treatment, delaying treatment, or foregoing treatment for a health condition that could result in severe illness or death. Whereas most clinical labs feel that LDTs are already sufficiently regulated under CLIA and should not be double regulated under the FDA.

Professor of Pathology and Immunology at Washington University Dennis Dietzen, Ph.D., said, “LDTs fill a void where there is no FDA-approved test. We need to be able to build these things with a healthy amount of regulation, but not a burdensome amount. If labs had to go through premarket review for all their LDTs, it would make the assays more expensive to run, and I think a lot of laboratories would just throw in the towel.” (9) (13) (14) (15) (16) (17) (18) (19)


When COVID-19 initially hit the U.S. in March 2020, the CDC was unable to provide testing kits for the first several weeks due to the contamination of tests at a manufacturing lab. Therefore, the government decided to permit diagnostic manufacturers to develop COVID-19 test kits and sell them to labs. They were also permitted to sell them to independent and hospital labs to develop LDTs under emergency use authorizations (EUAs). The primary benefit of an LDT over a typical diagnostic test is the time involved in the approval process. A routine diagnostic test can take years to pass through the many phases of research, testing, clinical evaluation, development of manufacturing processes, and review by the FDA or other regulatory authorities before a commercial test is available for public use. Whereas LDTs are designed to take only a few months to pass clearance and become regulated for use.

By late July 2020, LabCorp was processing nearly 180,000 tests for COVID-19 per day with an average turnaround time of three to five days. At the same time, Quest Diagnostics was performing 135,000 tests daily with an average wait of at least seven days.

President, CEO, and Chairman of LabCorp Adam H. Schechter, noted during their Q2 2020 earnings call how vital LDTs were in helping them keep up with the high demand for tests, “We launched back in March with our LDT, and it’s been remarkable the amount of volume we’ve been able to do through that LDT. We were doing 2,000 to 3,000 PCR tests per week, and here we are at the end of July, and we’re able to do 180,000 PCR tests per day. Of course, we still need our suppliers and the other companies to help us get to 180,000, but I have to say that our scientists did an extraordinary job with the LDT to get us to 180,000 today.”


  2. Laboratory-Developed Tests (LDTs) –
  3. Putting New Laboratory Tests into Practice –
  5. QSO-20-21-CLIA (
  6. Impact of COVID-19 Pandemic on Laboratory Utilization – PubMed (
  7. Strengthening Clinical Laboratories | CDC
  8. CDC COVID Data Tracker: Home
  9. About Face: Laboratory-Developed Tests for COVID-19 Now Subject to EUA Requirements | Mintz
  10. ‘The challenges that labs are facing are complex’: Why COVID-19 test results are so delayed (
  11. Laboratory Corporation of America Holdings, Q2 2020 Earnings Call, Jul 28, 2020.pdf
  12. Quest Diagnostics Incorporated, Q2 2020 Earnings Call, Jul 23, 2020.pdf
  13. COVID-19 and Lab Testing: What’s the Story Behind the Story? | Mintz
  14. HHS Reverses Course on LDTs: COVID-19 LDTs Again Require FDA Premarket Review | Ropes & Gray LLP (
  15. Laboratory Developed Tests | FDA
  16. HHS Prohibits FDA from Requiring Premarket Review of LDTs, Including During the COVID-19 Emergency | Ropes & Gray LLP (
  17. Rescission of Guidances and Other Informal Issuances | (
  18. Public Readiness and Emergency Preparedness Act (
  19. Back to the Future on Laboratory Developed Tests |
  20. Future of LDT Regulation Hangs in the Balance |

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Strategic Case Study: Oncology Services Assessment

September 26, 2022

A large, regional health system initiates to position itself strategically to offer the community a wide breadth of community cancer care programming but encounters issues.


Successful physician alignment with numerous oncologists is critical to experiencing regional growth, sub-specialization, and strategic differentiation. This regional health system was hampered by a lack of economic and strategic alignment with a large group of independent medical oncologists which is a common issue in this sector. Although the physicians fully participated in select cancer center programs sponsored by the health system, the lack of practice integration created conflict and competitiveness across infusion services, growth initiatives, and care model innovation. Further, most of the care delivery in the community did not maximize available drug purchasing programs under eligible 340B programs which resulted in raising the overall cost of care in the community.


The regional health system retained VMG Health to perform a comprehensive service line assessment and recommend potential strategic affiliation options for the health system’s consideration and the independent medical oncology practice’s consideration. VMG Health completed various analytical frameworks to evaluate affiliation opportunities, including capacity planning, retail pharmacy sufficiency, value-based care and ACO waiver eligibility, combined growth opportunities, business combination models, and 340B cost savings.

Upon selection of a preferred practice affiliation model by the independent group practice and the health system, VMG Health completed several independent valuations connected to business enterprise value, provider compensation, assets, and value-based compensation programming.


The parties signed a definitive agreement setting forth a plan for business combination and development of a single medical oncology group practice structure. A Professional Services Agreement (PSA) is the primary transaction vehicle to support the business combination strategy. The overall affiliation framework provides opportunities for community oncology providers to subspecialize, grow, and be remunerated for high-value care delivery. The regional health system has achieved greater scale to support growth and investment, full economic alignment across its oncology service, and an engaged group of providers co-leading medical administrative functions.

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