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Join us for a discussion with Nathaniel Arana, CEO of NGA Healthcare, as we explore the growing influence of private equity firms in the health care sector. Over the past decade, private equity has invested nearly $1 trillion in health care, reshaping the industry from fertility clinics to primary care and beyond. We’ll delve into the consequences of this shift, including the tragic case of Zion Gastelum, and discuss how profit-driven models impact patient care, physician autonomy, and overall health care quality. Nathaniel will share insights on economic pressures, legal challenges, and strategies for physician groups to maintain independence and negotiate better reimbursement rates.

Nathaniel Arana is CEO, NGA Healthcare.

He discusses the KevinMD article, “How physician groups can beat private equity.”

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Transcript

Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast, and get CME for this episode by clicking on the CME link in the show notes. Today we welcome Nathaniel Arana. He is CEO of NGA Healthcare. Today’s KevinMD article is “How physician groups can beat private equity.” Nathaniel, welcome to the show.

Nathaniel Arana: Thank you for having me.

Kevin Pho: Let’s start by briefly sharing your story and journey.

Nathaniel Arana: Absolutely. So I started NGA Healthcare over 10 years ago. It started on the premise that we had a lot of physician groups that I was working with, I was consulting, and they kept telling me, hey, our reimbursement is terrible, there has to be something that we could do about this.

We started approaching insurance companies on behalf of these groups, and we started working with them and understanding the negotiation process. That was 10 years ago, where nobody else was negotiating reimbursement rates. Now it’s become much more common, and we have hundreds of physician groups that we work with that ask us to perform this service for them. And it’s a very, very, very vital service.

There’s no other industry where you can’t simply raise the rates or adjust the rates. As we all know, we’ve all been to the supermarket, or have had to pay utility bills, everything has skyrocketed. But yet these physician groups are tied to these contracts that they can’t necessarily just quickly increase the reimbursement. There’s an entire process. We provide that process for our physician groups, and it’s helped them to stay independent from private equity, which we will discuss shortly.

Kevin Pho: And in general, how much negotiating power do independent physician groups have when it comes to reimbursement rates?

Nathaniel Arana: Surprisingly, they have a lot more than they used to. People think, well, if I’m a solo doc I have absolutely no leverage against an insurance company. And it’s not exactly about leverage. You can be a solo physician, and insurance companies are starting to realize, well, we have to work with these groups, because if not, they’re just going to join the larger group that’s getting two, three times what they’re getting reimbursed. So it’s going to be a wash for us anyway, we might as well start working with them. So we’re absolutely happy about that.

Kevin Pho: All right. So let’s talk about the phenomenon of private equity, and that’s in the forefront of a lot of physicians’ minds. Your KevinMD article is “How physician groups can beat private equity.” For those that didn’t get a chance to read your article, tell us what it’s about.

Nathaniel Arana: So in essence, what it discusses is the dangers of private equity entering into the medical practice field. Why is it dangerous? Well, think about it this way. Whenever a private equity company approaches any industry, their model is basically a slash and burn model. Let’s acquire as many of these groups as possible, make them as large as possible, and create as many efficiencies as possible.

The problem with that is that that’s not necessarily in the best interest of patient care. If previously a physician was independently running this practice, let’s say he was running it with a group of five, now he’s owned by a corporate entity who’s in essence practicing corporate medicine. They’re going to be dictating to the physician when they should see patients, how often they should see patients, how those patients should be treated, what sort of ancillary tests should be performed on them. And you end up with a situation where, number one, the patient is not being treated the way that they should be treated, and also the physician is now employed and unhappy with his or her situation, understandably.

And the problem with that is that we know that clinical outcomes are better when physicians are independent. Think about the models that we utilize for things like attorneys, where a group of attorneys will bring on newer, younger attorneys as associates and essentially turn them into partners over the course of time. They teach them didactically, they teach them the intricacies of their specialty, they really learn from their mentors. You just don’t have that when it’s a private equity company. They’re not going to allow the physicians to be training the younger physicians. So that’s a problem, and it’s a problem with a care model that we really need to pay attention to.

They’ve spent over a trillion dollars acquiring practices over the last 10 years. They’ve paid out half a billion dollars in fines for falsifying claims, for killing people. It’s just not a very good situation.

Very often these private equity groups are not even that sophisticated in running a medical practice. They’ve never run a medical practice in their life, they’ve never stepped foot as an administrator, they’ve never experienced what it’s like to own that sort of business. But yet they come in and they slash and they burn, they retrain people, they try and do whatever they can to increase that profit margin. And again, it’s not in the best interest of neither the patient nor the physician that’s selling.

And in fact, the majority of physicians that we have spoken to, none of them have said, I am happy with my private equity situation, I’m happy I sold my practice. That just doesn’t happen. It’s very seldom a positive outcome.

Kevin Pho: Now, knowing what we know about private equity, and hearing what you have to say, what is the initial appeal that physicians have to involve private equity, or to sell to private equity in the first place?

Nathaniel Arana: The appeal is obviously a buyout. They’re going to make a decent amount of money. And again, very often these groups are struggling because they haven’t negotiated their reimbursement rates. So if they’re sitting on contracts that are three to five years old, and inflation is 3 to 5 percent a year, well, they’re making 15 to 20 percent less in an equivalent revenue than they were three to five years ago. And that doesn’t work when administrative and clinical salaries have increased by 20 to 30 percent, costs associated with running a business have increased dramatically.

They’re looking at their margins and they’re thinking, well, why am I struggling so much as a business owner, and yet I’m not making any money? So they think, well, here comes the promise from private equity, where they say, don’t worry about a thing, all you have to do is focus on patient care, we’ll take care of the rest, we’ll take care of the billing, we’ll take care of your contracts, we’ll take care of the administrative, HR, hiring, firing staff, et cetera.

So they think, wow, this is a great situation. Not only do I not have to do any of these business related things, which by the way, they didn’t go to business school, and that’s OK, but they’re sold, they’re promised that they’re going to make more money. And that doesn’t always necessarily come to fruition, because again, private equity is not really interested in helping the individual physician. They’re interested in collecting several hundred physicians, pulling them together, using that leverage to negotiate with payers, and then selling the entity later on. So it’s not a good situation.

Kevin Pho: Now, I’ve heard similar stories about private equity buying various groups in all different specialties. You have radiology, emergency departments, anesthesiology, and whatnot. Any positive stories? Are there any positive stories where there was a successful partnership between health care and private equity?

Nathaniel Arana: I’m certain that those do exist. I don’t often hear about them. It’s often a situation where, let’s say it’s a large health system that’s backed by private equity, most of the physicians just kind of figure, well, it’s either I work here or I don’t, why am I going to compete against this monolith?

So I’d imagine that there are situations where good private equity companies really are focused on positive outcomes and patient care, but it’s just not aligned necessarily with what their goals as a private equity company are.

Kevin Pho: So your KevinMD article is “How physician groups can beat private equity.” So what are some things that physician groups can do to guard themselves against potential buyouts? Or even when they’re already involved with private equity, what are some things that they can do to defend themselves?

Nathaniel Arana: So they definitely need to negotiate their reimbursement rates. That’s number one. Again, there’s no other way to increase revenue unless you’re doing things like increasing the number of patients you see today, and we know that’s not sustainable. There are certainly other ancillary services that could be added to make you more profitable. But again, negotiating your reimbursement rates is so important, because it hits your bottom line immediately, meaning that you don’t have to spend any additional overhead, you don’t have to see any additional patients. It’s just complete margin that falls to the bottom line.

So if you’re doing that, and you’re doing that consistently on a yearly basis, what you end up with is contracts that are staying in sync with these inflationary pressures and increased cost of doing business. Without that, again, if you’re sitting on a contract that’s five years old, it’s really hard to approach a payer and say, guess what, I need a 30 percent increase because I’m 30 percent lower than I was five years ago. And the insurance company’s going to say, too bad, you should have negotiated throughout those years. So the most important thing is negotiate contracts, and then do it on a yearly basis, so that you can ensure that you are, again, not falling into that trap of inflation.

Kevin Pho: Tell us a successful outcome. What exactly does a negotiation with an insurance company and reimbursement rates, what does that look like, and what does a successful outcome look like?

Nathaniel Arana: A successful outcome is anywhere between 10 to 20 percent over your current rates, which, that’s again fantastic, it falls directly to the bottom line.

The process can be a little difficult, but our recommendation is that you really understand what your rates are on a CPT level. Because what insurance companies are doing, and there are certain ones that often do this, they say, well, OK, we’re going to give you an increase, and then they say, we’re going to send you a new contract. And then you look at the contract and there’s no rates in there, there are zero rates. They reference a fee schedule. It might be a proprietary fee schedule. Well, can they change that fee schedule? So you look at the fee schedule and often you’ll see that they’re increasing certain codes, decreasing certain codes, and you’ll notice that it’s a wash.

So a successful negotiation means really understanding what the granular CPT level contribution of revenue is going to be for that exact code, so that you’re not accepting a decrease from them, you’re ensuring that you’re actually increasing the codes that you’re utilizing, and the ones that matter.

Kevin Pho: And you mentioned that physician groups have more leverage than they think. So in general, how successful are most groups when they negotiate or renegotiate these reimbursement rates on an annual basis?

Nathaniel Arana: I can tell you that the independent ones are more successful than the private equity ones. And the reason for that is because the insurance companies understand what private equity is trying to do, which is again consolidation of physician groups.

If you have 200 endocrinologists that are under one tax ID, you have quite a bit of leverage against the insurance company. They’re not going to like that. But if you’re an endocrinology group of five physicians, the insurance company is going to look at that much more seriously. They’re going to say, OK, let’s actually work with you to ensure that you’re getting the right reimbursement.

It’s a balancing act, and you have to remember that insurance companies are interested in only pleasing one party, and that is their employer groups. They don’t care about the physicians, they don’t care about the patients. But if the only way that they can contract with a physician group is at 500 percent of Medicare, because it’s the only endocrinology group that they can contract with, their employer groups are not going to be happy with that.

So that’s the balance, and why we see that these smaller physician groups, independent physician groups, do have some sort of leverage with the insurance company. Because insurance companies are starting to wake up and realize, hey, maybe we don’t want the amount of consolidation that we see out there in the market, because it’s really going to bite us later on. We’re not going to be able to sell a product at a sustainable price to our employer groups.

Kevin Pho: So in other words, the growth of private equity owned health care facilities and groups is becoming such a phenomenon that insurance companies are taking notice of them. They’re almost becoming adversaries to these insurance groups, and as a result of that they may be a little bit more amenable to reimbursement change to these independent practices, to prevent them from being absorbed by these private equity groups.

Nathaniel Arana: Exactly, exactly. And we see it quite often. Insurance companies are now asking for disclosure of ownership forms. They want to understand who owns this practice. And even in states where there’s corporate practice of medicine bans, meaning that non-physicians can’t own medical practices, these private equity groups were still inserting themselves under the guise of management companies. And they’re saying, OK, we’re the management company, you own the clinic side of this, we take 50 percent of the overhead for providing our management services, quote unquote. And insurance companies are even starting to ask about that as well. So it’s becoming more and more of a concern.

Kevin Pho: So tell us what’s going to happen in the foreseeable future. Do you see any change in the growth of private equity in health care? What do you foresee in the next six to 12 months?

Nathaniel Arana: I think we’re going to continue to see it, but I think that, and this is my hope, is that it’s just going to be a trend for now. Because I can tell you that any physician that I’ve spoken to that is part of these private equity groups, they always tell me, you know what, I have a three-year contract or a five-year contract or whatever it is, and when I’m done with that, I’m leaving, I don’t want to put up with this.

Without that physician, they have nothing to provide. And again, if they can’t get a physician to provide these services, they’re going to have to find a new one. And what lure do they have to try and get another one in house?

My hope is that we’re going to see a downward trend in private equity, but we never know. We know that these private equity companies have a lot of money backing them, we know that they can afford to buy a bunch of these practices. But we’re hoping that money becoming more expensive is going to help stop that as much, and hopefully we’ll see a return to private practice. That’s what we’re trying to do as an organization. We’re trying to help these groups say, hey, I don’t want to be private equity backed, let’s negotiate our rates.

Kevin Pho: We’re talking to Nathaniel Arana. He is the CEO of NGA Healthcare. Today’s KevinMD article is “How physician groups can beat private equity.” Nathaniel, we’ll end with some of your take-home messages to the KevinMD audience.

Nathaniel Arana: So, take-home messages. Don’t believe everything that private equity says, don’t believe everything that they promise. Negotiate your reimbursement rates, and fight like hell to remain independent.

Kevin Pho: Nathaniel, thank you so much for sharing your perspective and insight, and thanks again for coming on our show.

Nathaniel Arana: Thanks.