The volume disruptions caused by the COVID-19 pandemic are placing private physician practices at significant financial risk, up to and including bankruptcy. The strain on revenue, which can more acutely impact specialties reliant on elective procedures, will continue for an unknown period of time. Accordingly, a practice’s current financial strength will dictate the optimal strategy for remaining viable during the pandemic.
Short-Term Options
Several temporary solutions can provide stability for stronger practices adjusting to the immediacy of the crisis.
Blanket Waivers
At the outset of the federal response to the pandemic, the Secretary of the Department of Health and Human Services issued blanket waivers intended to ensure patient access to healthcare providers. The provisions under these waivers enable practices to seek relief through temporary arrangements that aren’t required to meet the fair market value standard.
Request the following from health systems:
- Rent reduction or forgiveness
- Short-term loans
- Adjustments to other lease arrangements
- Personal protective equipment
- Technology infrastructure to offer telemedicine
While these are viable options, any reliance on the blanket waivers requires equitable treatment by health systems, as a few, select physicians cannot benefit from extraordinary terms.
Traditional Financing
If a health system cannot offer more favorable financing terms, consider applying for a line of credit or other external financing from a bank.
Returning Patient Volume
A practice analyzing its short-term options must consider how much patient volume will rebound after the COVID-19 surge diminishes. There is likely pent-up demand from the practice being closed for several months; however, practices have no way to take advantage of the volume surge without hiring additional staff and providers or extending operating hours. As such, do not depend on pent-up demand to stabilize 2020 cash flow.
Long-Term Options
Practices with low levels of cash and no acceptable lines of credit available will need to consider larger-scale, longer-term solutions—such as turning to health systems and private entities for relief. The right decision for a physician group will depend on the culture and career trajectories of its shareholders. During and immediately following the COVID-19 surge, health systems and other market players alike are expected to be aggressive in seeking alignment opportunities with practices that are strategically important in a specific market.
Health System Strategies
Aligning with a health system, which will have larger capital reserves, may be the best move for physician groups struggling to meet payables. This will result in greater financial certainty for the physicians, though they will sacrifice some autonomy.
Employment and professional services agreements (PSAs) are two viable options for physician group/health system alignment.
- Employment: Physicians choosing employment will continue to receive a paycheck, although that stability means relinquishing operating responsibility for their practice.
- Professional Services Agreements: PSAs offer a clinical coverage agreement that is more flexible than employment. PSAs lock in compensation for clinical services provided typically at health system–owned clinics, which allows the physicians to remain somewhat independent from the system. Physicians are able to determine how the PSA compensation is distributed among their practice, which commonly includes both physicians and/or advanced practice providers. PSA terms can vary in length from one year to a more common term of three to five years.
Non–Health System Alignment Alternatives
A practice may choose to partner with a private equity (PE) firm, another independent physician practice, or a company with a practice management division. While each option would afford independence from a health system, the physicians would still lose some element of control over their practice. As compensation models with these types of entities are variable and typically linked to the practice’s profitability, there is greater at-risk compensation.
- PE Firm: An independent physician practice could seek relief from a PE partner. Larger practices regarded as “platform” acquisitions command higher valuations, while smaller practices can also be appealing to PE firms primarily as complementary “bolt on” acquisitions to existing platforms.
- Larger Private Practice: A small physician group could seek a partnership or acquisition with a larger private practice group. The larger group would benefit from acquiring a new specialty, enhancing its service offerings, and further allocating fixed costs. The seller, however, will likely receive little to no up-front value of their practice and would need to buy into the larger practice value if they want to maintain any ownership.
- Practice Management Entity: Organizations such as OptumHealth, Humana, and Cigna have a demonstrated history of acquiring large physician practices and often have strong balance sheets. These organizations have shown a willingness to employ physicians as a strategy to manage patient care and the financial risk associated with a given population.
Evaluate Your Strategy
Your practice’s financial stability is the factor most likely to dictate your strategy for getting through this crisis. If your physician practice has cash reserves or access to a line of credit, you’re better positioned to support current operations and wait out the surge and its aftermath. But if your practice is unable to pay rent or cover payroll, you’ll need to seek alternatives with a health system or other entity. Even if you’ve gotten through the past few months with minimal revenue, another surge of COVID-19 cases could occur. Accordingly, evaluate your options carefully and seek qualified advice from experts.
Published May 15, 2020