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.
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