How healthcare services consolidation and MSOs benefit buyers and sellers

Over the past few years, we’ve seen a high level of transaction activity and consolidation in healthcare services. Physician practice management has been especially active with few specialties untouched. Orthopedics/physical therapy, dermatology, urology, plastic surgery, dental, vascular surgery, pain management, ophthalmology, fertility, and women’s health have also seen their fair share of activity. behavioral health, and home health and hospice have also driven a significant amount of investment dollars. 

We anticipate M&A activity in these sectors will continue but expect the areas of focus to change depending on the macroeconomic conditions, competitive landscape, and regulatory environment. The increased deal volume in healthcare services is driven by buy and build strategies designed to consolidate fragmented subsectors that are attractive from a value creation standpoint. This assumes investors have an appetite to acquire small businesses from unsophisticated sellers.  

Value creation in healthcare services includes the ability to create economies of scale. This can be done by consolidating services into centers of excellence (MSO and DSO structures), gaining access to needed capital, relieving physicians of their practice management duties and regulatory burdens, and improving the overall quality of care. 

At face value, it seems plausible to assume that provider consolidation can reduce costs and enhance efficiency; But consolidation is just the first step in the process. Fully realizing the benefits requires a well thought out post-transaction integration strategy which can be a lengthy process. 

In recent years, we have seen the Management Services Organization (“MSO”) structure used when consolidating physician practices. This may or may not involve an outright acquisition of the underlying physician practice. MSOs are designed to help physicians and other healthcare providers with the non-clinical, administrative part of their practices. This allows them to focus on delivering patient care while all the administrative, IT, billing, marketing, accounting, and bookkeeping is performed by the MSO. In return for providing these services, the MSO typically receives a management/admin fee based on a percentage of cash collections. However, other compensation structures may calculate the management/admin fee using other metrics.  

For private equity firms, MSOs can address regulatory constraints in certain states that place limitations on non-physician ownership. The MSO model provides access to greater levels of financing and capital since there is less risk associated with the administrative side than there is in owning and running medical practices. MSOs can create scale to service multiple practices and specialties. 

Access to shared resources in a tight labor market, and increased bargaining power in negotiating contract terms and reimbursement rates, are two major advantages of MSOs. For investors and selling physicians, MSOs can provide a win-win scenario for all parties despite having other reasons and agendas to explore different strategic options.