Will the healthcare labor shortage fuel more consolidation?

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Editor’s Note: Bret Schiller is Head of Healthcare Corporate Client Banking at JP Morgan and has over 20 years of experience in healthcare finance and investment banking.

Physician groups in the US continue to consolidate at an accelerating rate, with integrated care networks and healthcare systems taking over small independent practices or being bought by private equity firms, public companies and larger practice groups.

Between January 2019 and January 2022, 4,800 physician practices were acquired by hospitals and 31,300 by corporations, according to a report by the Physicians Advocacy Institute/Avalere Health. And a study by the American Medical Association found that 2020 was the first year in which less than half of physicians (49%) worked in private practice or in a physician’s own office. It marked a drop of 11 percentage points from eight years earlier. However, the field remains fragmented, with the majority of physicians (54%) working for practices with 10 or fewer physicians.

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Physician groups are under pressure to streamline their operations and protect margins—tasks that are easier to accomplish at scale. Even the smallest practice groups face a growing demand for sophisticated EHR upgrades and enhanced IT solutions that are draining resources.

These demands could drive even more physicians to consolidation opportunities when looking for back-office support. Given the fragmented landscape, private equity firms are investing in all types of physician groups. Here are some of the key trends to consider.

The healthcare workforce is ageing

The healthcare industry is struggling with a shrinking job market and a looming wave of retirements.

According to a study by the Association of American Medical Colleges, more than 40% of active physicians will reach retirement age in the next decade. Unless medical schools graduate more students soon, the US will face a shortage of between 37,800 and 124,000 physicians by 2034, the AAMC found.

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This labor market landscape makes private equity and other consolidation moves attractive exit strategies for owners looking to sell their practices. Private equity can provide the technology solutions that can make physicians more productive while lowering their operating costs.

The newer generation of doctors appreciates efficiency and flexibility

Consolidated practices could provide the right incentives to attract and retain younger employees who are more likely to value technology, efficiency, connectivity and flexibility. Many graduates would rather join a growing company than be burdened with administrative duties in addition to their clinical duties.

Aggregator models offer an additional retail aspect

Dental practices and veterinary clinics have seen similar growth in consolidation, and their performance could predict the future of healthcare more broadly. Private equity investors have long incorporated smaller dental and veterinary practices into aggregator models that scale up to larger networks, but many are taking it a step further by adding a retail aspect and national branding. Other medical specialties are consolidating into similar multi-state practices (eg, allergies, orthopedics, and others) and also adopting national brand and retail channels. This trend is expected to continue unabated.

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Different structures require different decision-making processes

The trend toward consolidation has its detractors, particularly among physicians, who see larger business models compromising physician judgment and patient well-being. Others see the model as a valuable compromise to achieve better technology, simpler surgeries, and a more seamless experience for patients.

In any future scenario, it’s important to work with a partner who can help you better understand your financial situation and how it is affecting your future plans efficiently and effectively.

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