But the sudden collapse of American Physician Partners (APP) in July has prompted a re-evaluation of that strategy. And, with APP’s insolvency on the heels of a separate, larger physician group’s bankruptcy in May, hospitals are now forced to reckon with whether these private-equity-backed, “growth by acquisition” companies are as stable as they’ve claimed.
Unprecedented Disruption
The APP collapse caused unprecedented disruption in the industry, forcing other physician groups to transition all of APP’s 119 contracts in just two weeks before the company closed its doors on July 31st.
“It was incredibly chaotic,” said Core Clinical Partners CEO Dr. Boykin Robinson, whose group transitioned four of APP’s service lines on short notice. “But the entire industry responded admirably, and there was no interruption to patient care.”
Meanwhile, the turmoil may not be over. Other large EM and HM groups are still facing financial challenges stemming from the pressure to service debt accumulated during the wave of industry consolidation. Now, Dr. Robinson says hospitals and health systems should take a sober look at APP’s collapse and examine the lessons learned from the events of the past few months.
Understanding APP’s Collapse
Private-equity-backed Emergency Medicine groups had been sounding alarms for months leading up to APP’s demise. This led many in Emergency Medicine to blame the private equity model for the industry’s various financial problems.
“Private equity definitely has downsides,” said Dr. Robinson. “Besides the huge debt load, it constrains decision-making and reduces flexibility by bringing in outside decision-makers.” Yet the causes of APP’s failure are multifaceted and include more than complications with private equity. For example, rising interest rates have made debt costlier than when the acquisition deals were made, which has limited options for these groups to recapitalize or bring in new investors.
Additionally, the No Surprises Act has led to numerous industry challenges. The legislation banned balance billing out-of-network patients, significantly impacting companies, like APP, which relied on this billing practice for a large percentage of their annual revenue. The NSA also made these physician groups that were heavily reliant on out-of-network billing inherently less valuable, transforming what initially seemed like profitable acquisitions into unfavorable investments.
Arguably, the change was predictable as the unsustainable nature of “surprise bills” was debated long before the law’s 2020 passage, suggesting that reliance on such billing was a dubious strategy from the start. Additionally, the NSA reduced the negotiating power large groups previously had with insurers concerning reimbursement rates. Consequently, the biggest groups haven’t been able to earn the revenue they projected during consolidation.
Lessons Learned
“There’s no doubt groups which have grown through debt and acquisition now have less flexibility to adapt to changing market conditions.”
In contrast, Dr. Robinson said, there are still several Emergency and Hospital Medicine groups, Core Clinical Partners among them, which have grown organically, winning contract after contract, without taking on debt or taking on the additional expenses that come with outside capital. “Hospital and system leaders should be taking a good, long, hard look at who they consider to be ‘safe choices’ in their contracting partners,” Dr. Robinson said.
Meanwhile, it’s clear the groups that grew by acquisition haven’t been able to achieve the cost-cutting measures they’d hoped for. Decreasing costs in healthcare, while needed and achievable, remains incredibly challenging and there are no quick fixes. In the case of APP, it seems the company planned to decrease the cost of clinical labor, something that cannot be effectively done overnight.
Rather, Dr. Robinson says, success in Emergency Medicine and physician services in general relies on consistent, steady improvement over time. Investments in process improvement and patient flow will decrease costs more permanently than adjustments to compensation. “Hospitals are more likely to find the partners they truly want in groups that have to demonstrate their quality in order to win new contracts, as opposed to simply buying their growth” Dr. Robinson concluded.
