Healthcare systems vs. private equity: If you can’t beat them, join them?

Physician groups mulling buyout offers from private equity firms often simultaneously entertain alignment opportunities with healthcare systems, including not-for-profits. For this reason, hospitals do well to stay competitive for finite clinical talent.

And that’s when they’re not weighing the benefits of, instead, partnering with private equity.

That’s one takeaway for healthcare execs from VMG Health’s 2023 Physician Alignment: Tips & Trends report.

In a section on healthcare systems differentiating themselves from managed service organizations (MSO) run by private equity, VMG points out that the former enjoy longer time windows before ROI must be accounted for. This allows healthcare systems to commit to physicians for longer terms.

“This can be a major benefit for physicians who are seeking stability,” the national healthcare advisory firm notes. “Additionally, health systems are often able to implement more unique compensation models that can better align with physicians’ motivations.”

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Finally, while most private equity models focus on a single specialty, or a few related specialties, the physician who is aligned with a health system is often more integrated with physicians across a spectrum of specialties, which can be intrinsically rewarding.

Team of rivals?

On the other hand, VMG comments in the same section, it’s seeing an uptick in strategies reflecting an “intersection”—read as “collaboration”—between private equity and hospital systems.

Among the trends driving this effect, as observed by VMG:  

1. The growing desire of healthcare systems to better compete by financially evaluating practices based on their “synthetic EBITDA” (or earnings before interest, taxes, depreciation and amortization).

Under this model, practices sell off excess earnings and are in turn paid upfront consideration, VMG explains, adding that such payments are usually subject to more favorable tax consequences.

2. Healthcare systems’ increasing willingness to take minority positions in independent practices “and essentially ‘joint venture’ the synthetic EBITDA calculation.”

“Often the health system attempts to bring its contract rates to the relationship,” VMG remarks.

3. Openness—by healthcare systems and independent practices alike—to consider establishing alignment on the common ground of value-based care.

This might involve the development of Waiver Incentive Programs (WIPs) through an ACO or a compensation arrangement qualified under the Value-Based Exception, VMG suggests. “In both instances, the successful management of cost and quality may lead to income and can assist the practice with income repair as part of selling compensation.”

4. The small but potentially contagious movement of healthcare systems joining directly in a regional managed services organization (MSO) or ambulatory strategy.

This model generally involves a third-party investor, along with the health system’s participation in the underlying capitalization table of the MSO’s private equity platform.

“There are a lot of nuances as to whether this makes sense strategically; nevertheless, it will be an increasing trend in 2023 and beyond,” VMG offers.

Understand how private equity plays  

When working on physician alignment, understanding the private equity model is “crucial for healthcare leaders,” VMG underscores. “This understanding should encourage healthcare organizations to find innovative ways to align through new models.”

The firm states that, in the second half of 2023 and into 2024, healthcare watchers shouldn’t be surprised to see more provider organizations aligning with private equity companies—or at least considering some version of a private equity model.

With the continued growth of private equity companies entering the healthcare space, healthcare organizations “should understand the private equity play if they want to align with physicians as part of their growth strategy,” VMG writes.

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The MSO model is different than a traditional employment model or an independent contractor arrangement, but it has proven to be attractive to physicians. When evaluating your organization’s physician alignment strategy, it is worth considering the benefits of this model and how to potentially partner with private equity companies.

The 46-page report is available in exchange for contact info here.