Why the Hospital Buying Spree May be Coming to an End

March 29, 2014

With the future profitability of physician acquisition still up in the air, hospitals will likely slow their approach.

In recent years, hospitals have spent millions buying out private practices and adding the former practice owners to their referral groups. These acquisitions dominated headlines and appeared to be on the rise. In fact, a 2013 survey conducted by Jackson Healthcare regarding practice acquisition trends found that nearly half of the 118 participating hospitals were involved in physician practice acquisitions in 2012. And that number was projected to grow by 8 percent in 2013. But has this trend already hit its peak?

Deloitte found that the acquisition rate of hospitals acquiring medical groups has slowed in the past few years, with the apex having already occurred back in 2011. The number of acquisition deals dropped to just 70 medical groups in 2012, after 108 deals were reached in 2011. Why the sudden change?

The budgets of many of these same hospitals that once prioritized physician practice acquisitions are now in the red, causing administrators to rethink their practice acquisition strategies. Modern HealthCare recently chronicled the struggles hospitals are facing in their attempts to make physician acquisitions pay off. They quoted a 2013 report from the Medical Group Management Association that calculated the median loss for employing a physician to be $176,463.

In its 2013 poll, the American College of Physician Executives found that following an acquisition, the costs went up for 32 percent of surveyed health systems, while only 5 percent said the costs went down. This led analysts such as Moody’s to predict a pullback on physician practice acquisitions in 2014 as costs continue to outpace revenue. In fact, Moody’s identified physician employment as one of the largest expenses impacting hospitals’ margin pressure.

Hospitals acquire practices in order to expand their networks, which they hope will in turn boost their revenues. However, in doing so, they also incur the costs associated with physician/employee salaries, benefits, office space, and necessary upgrades to IT infrastructures. Modern HealthCare references a quote from one of Moody’s analysts, Daniel Steingart, who points out how health systems that have followed a consistent physician integration strategy since the 1990s have been successful, whereas systems that have begun acquiring physicians more recently are now unprofitable.

With the future profitability of physician acquisition still up in the air, hospitals will likely slow their approach. This might actually be a blessing in disguise for practice owners, as many recently acquired physicians have found that selling to a hospital isn’t all it’s cracked up to be.

Many physicians who choose to sell their practices to a hospital system believe that doing so will allow them to spend more time with their patients. While they might encounter fewer administrative hassles, they also end up feeling less productive because they lose the ability to have final say on their schedules. Instead, hospital administrators become the individuals in charge of setting doctors’ office and on-call hours.

As many hospital systems slow their acquisition pace and closely monitor the practices they’ve already purchased, physicians who are considering selling to a hospital should monitor how recently acquired physicians react to the transition. Are they happier now or are cost-cutting measures causing them to miss the autonomy of being a private practice owner? Their answers to these questions could shift as the recent hospital buying spree comes to an end.