Staying Independent in a Consolidating Marketplace: A Guide for Physician Practices

Over the years, running an independent medical practice has become far more complex and resource-intensive. Gone are the days of a solo physician with minimal staff. Today’s practices require dedicated IT, HR, billing, front desk, pre-authorization and other administrative personnel — and the profitability required to support these levels of staffing.

Unfortunately, the healthcare landscape is rapidly evolving, making it increasingly difficult to balance profitability with quality patient care. Reimbursements are stagnant or declining, while costs for labor, supplies, rent and other overhead continue to rise with inflation.

Meanwhile, the industry is experiencing significant consolidation. Larger physician groups also seek to consolidate to increase profitability, share resources and expand their footprints. Private equity is also making inroads, acquiring many of these larger groups and consolidating them further.

So what are you to do as the owner of an independent physician’s practice? Is it time to start thinking about a transition plan, or should you remain independent? In this article, we’ll explore the factors you should consider before making a decision and discuss the steps you can take to strengthen your practice — regardless of the path you choose to take.

Exploring the Independent Physician Practice Landscape

Many physicians are not natural businesspeople. This is only natural; as a physician, your priority is providing quality patient care. The prospect of consolidation might raise concerns. It’s only rational to be worried about being forced by a third party to compromise that standard of care in favor of increased profits.

At the same time, the majority of physicians understand the need to maximize the value of their practice, whether it’s to prepare for an exit or to make their practice more resilient. If you want to continue your work in an increasingly competitive market, you must streamline your operations and ensure your practice is operating as efficiently as possible.

Today, physicians with a well-operated, valuable practice have two choices: continue operating independently for as long as possible, or gain access to more resources by selling or consolidating.

Private equity firms typically seek to acquire larger, multi-provider practices with multiple locations rather than very small or solo practices. Smaller independent practices that are motivated to sell should focus on consolidating with larger, regional groups, which are a more attractive target for PE funds.

The Business Case for Selling Your Practice

If issues like stagnant reimbursements and rising overhead have become overwhelming, consolidating with a larger group or selling to private equity may seem like an attractive solution.

Let’s say you, along with a few partners, run a multi-physician primary care practice that collects millions in revenue annually. Despite the revenue, costs like staff, rent, insurance and operating expenses have ballooned. This has constricted the compensation of you and your partners.

In situations like this, consolidating into a larger group or selling to private equity can provide significant relief. With a larger, more well-funded group behind you, your practice may benefit.

Larger physicians groups, and groups owned by PE firms, can leverage their scale to secure favorable terms. Their patient volumes and larger market share give them more leverage when working with insurance companies, often allowing them to negotiate above-market fee schedules that deliver immediate benefits for newly acquired practices.

Private equity firms are also often better equipped to handle rising overhead costs through streamlining operations, negotiating superior contracts or other economies of scale that flow through to the bottom line.

Similarly, consolidation allows independent practices to significantly reduce overhead by sharing resources. By joining a larger group, practices can benefit from group purchasing, centralized administration and facility cost savings.

Optimizing Your Independently-Owned Physician’s Practice

If you’re not looking to sell your practice at the moment, optimizing operations is crucial for sustainability. Inefficient processes, revenue cycle issues, rising costs and competition strain profitability and resources and compromise your ability to provide the best care.

Many physicians’ practices have opportunities to become more efficient — and therefore more profitable.

When patients call to schedule appointments, they’re forced to wait months before they can be seen. Despite this, your schedule is full of openings from cancellations and reschedules. Slow or lackluster billing procedures result in payment deficiencies, and short staffing causes burnout.

If any of those issues sound familiar, it’s likely your practice has the opportunity to significantly improve performance and profitability while increasing patient satisfaction.

Here are three ways you can optimize your independent practice’s operations.

Revenue Cycle Enhancement

For physician practices, the revenue cycle stretches from patient scheduling to final payment. Even minor inefficiencies in this cycle lead to costly revenue leaks through denied claims, underpayments and delayed reimbursement.

Revenue cycle enhancement aims to identify and resolve gaps or problems in these processes. By optimizing functions like registration, charge capture, claims submission and collections, you can maximize legitimate reimbursement while accelerating cash flow.

To optimize your revenue cycle, start by collecting representative data — let’s say, 25 patient engagements, from initial contact to final payment across different physicians or kinds of procedures. Then analyze each step of the process to identify common sources of inefficiency and resolve them.

For example, if patients face long delays and your calendar has frequent cancellations, improving your patient scheduling processes could benefit everybody.

While often overlooked, comprehensively enhancing your revenue cycle boosts your profitability and makes your practice more efficient. In one revenue cycle enhancement project undertaken by the James Moore team, we were able to deliver a 900% increase in profitability.

Reviewing Overhead Costs

Maximizing revenue is only one part of the profitability equation. Practices must also diligently manage their overhead. These are the operational expenses required to run the practice, separate from direct patient care costs.

Overhead includes expenses like staff compensation, rent, utilities, supplies, insurance premiums, professional fees, marketing and more. While necessary, these costs can quickly accumulate and strain profitability if not properly contained.

By thoroughly analyzing the profit and loss statement line by line, practices can identify opportunities to cut costs without compromising care quality. This may include renegotiating contracts, optimizing staffing models, eliminating unnecessary expenses and more.

Reviewing and managing overhead is a critical but often overlooked profitability lever for independent practices. An experienced healthcare CPA can provide essential guidance and objectivity during this process.

Long-Term Planning for Potential Sale

The decision to sell a practice often comes down to personal priorities. For some physicians, maximizing the financial return on their hard work is the most important factor. For others, preserving relationships with patients and ensuring continuity of care after their practice has been sold is a top priority.

All too often, physicians hold off on the decision to sell until it’s too late — often when the physician is ready to retire. This means the practice missed out on valuable opportunities to plan ahead and maximize their chances. So thinking ahead, even if selling isn’t on the table right now, has long-term benefits.

If selling is the goal, physicians closest to retirement age are in the best position. This is because when a practice is acquired, buyers typically require the physician to remain in position for a certain period of time. This can often be five years or more.

Physicians nearing retirement might choose to take a larger upfront lump sum “buyout” payment to fund their retirement, making it easier to transition out of the practice after a short period. The physician may also own the real estate and be able to lease it to the new owner of the practice. However, the main issue is finding a provider to transition patients to over time.

Younger physicians often receive a smaller upfront payment instead and are expected to remain employed with the practice long term (often five years or more), with opportunities to benefit from future transactions if the practice is resold since they retain some equity. This structure allows the acquiring physicians group or PE firm to retain the key elements of any physician’s practice: the physician themselves, and their relationships with their patients.

Regardless of the approach you choose, the key to a successful outcome is to start preparing years in advance when your practice is at its peak performance rather than trying to sell when it’s already in decline.

By planning ahead, you open up valuable opportunities for yourself in the future. This way, if you’re ever in a situation where you must sell, you’ll find yourself in a position of relative strength.

James Moore: Full-Service Healthcare CPAs

Navigating the consolidating healthcare landscape is complex for independent physician practices. With rising costs and increasing corporatization through consolidation and private equity, keeping your practice healthy can be an uphill battle.

James Moore’s Healthcare team can leverage their deep industry knowledge to help you set your practice up for success — whatever that looks like. Whether you want to improve your operations as an independent practice, or start planning to sell, an experienced healthcare CPA can assist.

To learn more about how James Moore can help your practice stay financially healthy, contact an advisor today.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.