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Expect more consolidation in the healthcare industry in the coming year, said Ricky Goldwasser, managing director at Morgan Stanley, during the annual "Wall Street Comes to Washington" event sponsored by the Brookings Institution.

"We think that we're definitely going to see more consolidation," Goldwasser said Wednesday at the virtual event, which was sponsored by Arnold Ventures. "I think that we're going to see small-scale players sort of merging with others to create scale. We're going to see the larger stakeholders, whether they're healthcare companies or tech companies in some areas or large consumer companies -- we see them ... opportunistically looking at M&A [mergers and acquisitions]."

"I do think that we're going to see more of it in the second half of the year, because the thing we're watching for is what's happening with those companies that need to come back and raise money next year, especially given all the volatility," she added. "They're just going to be more pressured to go ahead and do something that's strategic."

Physician Practice Buyouts Continue

In the world of physician practices, doctors are continuing to sell their practices to different entities, although the buyers vary depending on the specialty, said Ann Hynes, managing director at Mizuho Americas, an investment firm. "Private equity companies tend to focus on emergency room physicians, anesthesiologists, and maybe neurology a little bit ... [while] cardiologists tend to like to be owned by hospitals," she said.

Several factors play a part in physicians deciding to sell their practices, including high medical malpractice insurance costs, Hynes added. "For emergency room doctors, medical malpractice is very high. It's very difficult for them to be independent." Obstetricians often tend to go into hospital ownership because of high medical malpractice insurance rates, while for anesthesiologists, the reason they've been selling their practices for the last 5 or so years "has to do with the reporting data. They would have had to invest a lot of dollars into technology to report data back to the government, and they just didn't have the money."

What about the No Surprises Act, which prevents out-of-network providers from sending large "surprise" bills to patients who went out of their networks to get emergency care, including anesthesia? Will that have an impact on the selling of anesthesiology practices? "It probably decreases the urge" to buy those practices, said Hynes.

"That was a big strategy -- not all private equity [firms] would do this but some would; they would acquire these physician practices and specifically make them out-of-network to get high reimbursement," she said. "I would say that has stopped, though, over the past few years because of the government's initiatives to stop those types of things ... I don't think it ends it. I just think it probably slows the growth."

Ultimately, this will all lead back to insurer ownership, said Goldwasser. "If you have a large Medicare Advantage (MA) [population], you want to own a provider because that's going to create the stickiness with the memberships, which is going to be increasingly important as the market becomes more competitive, and ultimately, growth in MA is going to slow down at some point," she said. "I think that the end game is that private equity does sell those [practices] to the health insurers and to health systems."

Value-Based Payment Growing Slowly

How is value-based payment faring in the healthcare marketplace? Its use is increasing to a degree, "but it's going to be slow," said Hynes. "A lot of the companies are talking about it more as a big strategy -- like United Healthcare or some of the managed care companies, especially with their Medicare Advantage population -- they're really trying to shift people into providers they own just to save costs ... I think it's very difficult to change the traditional fee schedule. Hospitals will say, 'We have some value-based contracts,' but it's really still like 5%. I think it's happening; I just think it's going to happen slower than some people think."

On the outpatient and ambulatory side, "you're seeing things move much faster," said George Hill, managing director at Deutsche Bank. "We've seen a tremendous amount of capital formation in that segment of the market over the last 2 to 3 years." Addressing the federal policymakers in the audience, he noted that "rules to some degree drive behavior, and participants in the market are going to look at rules and change behavior to solve for outcome. So are your policy decisions well aligned with what you want to see?"

Although the number of value-based care participants has increased greatly, "it's still a very small percentage of the total pie, but you're putting up 25%, 35%, 45% year-over-year growth rates that are projected to grow at that rate for that handful of years," Hill said. But some providers "are not incentivized to take that kind of risk because they're getting paid well under the fee schedule, so we're seeing different degrees of movement in different parts of the market."

Goldwasser agreed. "Value-based care clearly is a good solution for Medicare Advantage, and we're seeing more full-risk [contracts] in that market," she said. "But it's not necessarily right, at least for now, for commercial plans," which are participating more in "upside-only" contracts that don't require providers to take on risk -- instead, they share in any savings that occur without having to absorb losses.

Better Tools Needed

One problem is that "providers, hospitals, and health systems don't have the tools to take on risk," said Goldwasser. "We need to make sure that there are tools that can help providers and health systems take risks ... before we really get to that massive shift" to value-based care.

Hill said he had recently spoken with a benefits consultant who was working with self-insured employers. "The self- insured employer plan sponsor wants the provider to take more risk and put more skin in the game, but they don't want to buy risk and they don't want to pay a premium to the insurance company," he said. "So why are we not seeing more commercial plans moving towards risk? The hospitals and insurers are getting paid very well right now without taking risk ... Everybody feels like they're doing great right now, without paying for a bunch of risk. But everybody else wants somebody else to put more risk in the game without paying for it."

Mental health services are one area that's likely to see growth, Hill said. "Mental health is a very, very small slice of the healthcare dollar, so there is lots of room for mental health to grow ... without changing the size of the pie, so to speak. And the good news is you can increase access for telemedicine while you mix down on price per visit at the same time." Rather than cost being the issue with providing more mental health care, it's the labor shortage that looms larger, he added.

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