The Future of Healthcare is Private Practice

The team is back with another Slow Snail Mail edition, this time to unpack why we believe the future of healthcare is private practice, and why/how startups can make it so.

Private practice is dying because of consolidation by PE/health systems on one hand and increasing barriers to new practice formation on the other. The admin burden and practice complexity has become so great that providers can’t make it work on their own; they need to consolidate for economies of scale.

Yet, we know that private practice generates better outcomes, at lower cost, with less provider burnout, and better lifetime earnings for physicians.

Now it’s time for the pendulum to swing back and revitalize private practice in America. And startups can help by catalyzing new private practice formation while keeping existing practices independent.

Want a more elaborate breakdown? Check our our deck or dive in below.

1. Consolidation has turned doctors into employees while worsening outcomes and cost 

Over the past two decades, the healthcare industry has consolidated substantially and that’s accelerated since 2010. Now for the first time ever the majority of doctors are employees, rather than practice owners.
During this period, outcomes and cost worsened:

• Average charges per claim increased for private equity practices after acquisition. (Source)
• Meanwhile, the net revenue physicians generate on behalf of their affiliated hospitals has been increasing much faster than their own earnings. (Source, Source)

Patients pay more, for less. Physicians do more, for less.

2. The door to practice ownership has closed

Practice owners get offers they can’t refuse (as much as $1 million to $2 million), cutting off generational transition for younger docs. And the barriers to new practice formation for young providers have increased:

• Practice complexity has grown faster than the practice revenues. Getting set up (staff, real estate, software, etc.) can be prohibitively expensive and intimidating when starting from 0. 
• Contracting with insurance is hard and new practices get terrible rates from payers. 
• Over the last 30 years, tuition costs nearly tripled for private medical schools and quadrupled for public medical schools, increases that drastically outpace inflation.
• MDs are trained to be clinicians not executives; learning how to manage a business while acting as primary care provider is an additional job.

Value based care will make the admin burden worse and increase benefits to scale/consolidation.

3. Private Practice Delivers Better Care and Cost

The reasons are obvious but important:

• Better jobs and less turnover. Private practices retain doctors better and so don’t struggle with constant churn leading to inefficient/expensive stopgap staffing with no continuity of care. (Source)
• Medicine comes first. Private practice docs are freer to treat as they see fit leading to less “upselling” and fewer expensive procedures. (Source)
• More human care. Physician owners have relationships with patients and don’t engage in the ruthless cost cutting that can punish patients with worse care. (Source)
• More competition. PE platforms attempt to vertically integrate or corner a speciality within a region, leading to less competition, self-dealing, and monopolistic pricing. (Source)

4.  Private Practice Is Ready for a Comeback

The catalysts are in place to end consolidation:

• Regulatory. Policymakers are wise to the consequences of consolidation and are showing signs they'll block megadeals and rollups with bi-partisan support.
• Economic. Funding new acquisitions and servicing loans is harder to pencil out with higher interest rates, putting sand in the gears of the M&A machine.
• Cultural. Providers are burned out hard from consolidation. The indie/SMB movement is coming for medicine.
• Financial. Medicine has become a bad job financially (students loans, low earnings) as the surplus accrues to owners, not doctors.
• Technological. Software can increasingly replicate the benefits of consolidation and scale with back-office and admin leverage. AI will accelerate this.

5. Powering the next wave of private practices

6. Where to build and invest 

How to directly catalyze and monetize the coming private practice resurgence:

• Vertical MSOs (managed service organizations) and IPAs (independent physician associations) can spur practice formation in emerging specialties.
• Franchises can de-risk and accelerate entrepreneurship for providers in established specialities and primary care.
• Generational transition and financing for practice with retiring owners looking for an off-ramp as an alternative to a PE exit.
• Creator-led practices to capture and drive demand/intent from consumers with built-in distribution.
• Contracting and payment infrastructure so smaller practices can participate in lucrative contracts and new payment schemes.

Take a deeper look into the future of healthcare by checking out our deck. Let us know what you think and where we’re wrong!

Acknowledgments

Thanks to our reviewers and collaborators including Sean Doolan, TJ Parker, Otto Sipe, Lainy Painter, Reza Sanaie, and Alex Barrett.