Physician Practices Continue to Do More with Less
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Valuation Implications of Continued Reimbursement Cuts and Increased Costs
Recent trends in financial performance and provider productivity reflect a challenging situation facing medical groups related to practice margins. Across the nation, many physicians and practice leaders find themselves in a seemingly continuous cycle of rising costs and declining reimbursement. External forces have had a severe impact on practice profitability, forcing physicians to do more with less.
By The Numbers
Data from the Medical Group Management Association (MGMA) demonstrates a painful reality: operating costs are on the rise at the same time Medicare reimbursement rates have decreased.
- The dollar figure Medicare uses to determine physician services reimbursement has decreased for four consecutive years (2020-21 to 2023-24). [Blue line in graph]
- In 2021-22, operating costs per FTE physician grew slightly slower than CPI-U. However, this year represented the third straight year of increased costs.
- Meanwhile, according to data from the 2023 MGMA Cost and Revenue Survey, operating costs per FTE physician in physician-owned multispecialty groups with primary and specialty care increased for three consecutive years, and for two years grew at a rate that exceeded the national CPI for urban consumers(“CPI-U”).
Why it Matters
- Today’s economic realities mean many private practice physicians need to work harder to achieve the same income they may have earned even a few years ago.
- For physicians in physician-owned and hospital owned practices, wRVUs have increased dramatically since 2017. These productivity gains have offset the escalating costs and stagnant payment levels, contributing to increased dissatisfaction and burnout among physicians nationwide.
- Physician practices have expanded their use of advanced practice providers to increase overall practice productivity.
- Physician leaders express serious concerns about their financial future. Practices must balance potential revenue gains with the potential for increased practice costs of hiring additional support staff. To sustain profitability in the face of rising costs and declining payment levels, practices must find ways to enhance efficiency.
Health Care Valuation Takeaways
- Physician practice margin compression poses a long-term threat to financial sustainability for practices across various specialties nationwide. Many physicians have partnered with corporate organizations, private equity firms or hospital systems as a strategic response to these financial dynamics.
- Since most physician practices are currently owned by corporations or hospital systems, the practices themselves are often insulated from the direct impact of Medicare reimbursement cuts. Many physicians are compensated based only on revenue, production and quality metrics, leaving the strategic partner exposed to the risk of margin pressures.
- The valuator must understand and incorporate the effects of higher cost and Medicare cuts to the owner of the physician practice and understand how physician compensation structures and incentives affect these dynamics.
Contact us for more information about the effect of physician practice margins on health care valuations. We are here to help.
Authored by Connor Campbell
©2024