The scene opens to a nurse. She is lit in a white coat and fire orange hair standing in the Starbucks line with a doctor she has never met before waiting behind her. He is practicing mindfulness and working on not looking at his phone while patiently awaiting his morning infusion. The nurse picks up a Starbucks gift card and hands it to the cashier.

Nurse: “One of these too please, I’ve got another friend leaving.”

Doc: “There is a lot of that going around these days.”

Nurse: “Yes, third this year.  It didn’t used to be like this.”

Doc: “Unfortunately, it is endemic here.”

Nurse: “I’ve been here 32 years, and I’ve never seen anything like it.”

Doc: “Yes, strategy matters.”

Nurse: “Yeah, when I started none of this other stuff existed.  These clinics, other hospitals, other practices. None of it was here.”

Doc: “I asked admin about their strategy yesterday in the Medical Staff meeting, whether it was still valid.”

Nurse: “What did they say?”

Doc: “They ignored the question.”

Nurse silently nods her head as she steps back from the counter.

Doc: “Have a good weekend.”

Nurse: “Thanks, you too.”

As consolidation within physician practices continues, not just in radiology, but many other specialties such as dermatology and emergency medicine, my coauthors and I offer some thoughts on these mergers.

The creation of value in horizontal mergers is dependent on abundant resources and “during times of labor shortages, acquisitions that do not provide a labor advantage, or worse have vacancies, will be value detractors.”

We believe that academic medical centers with their training pipelines have a strategic advantage over shareholder groups currently operating in medicine today.  As academic medical centers expand into the community they have the ability to compete aggressively with shareholder corporations, many of which are highly leveraged when compared to the typical academic medical center.

Physicians would be wise to view recent federal economic regulatory changes within the context of potential opportunities and threats within our industry.

One requirement is that hospitals publish their charge-masters.  This is a largely symbolic first step towards Secretary Verma’s goal of “empowering patients”. It is symbolic because in practice very few patients will be able to use the transparency to calculate their costs under their high deductible health plans.  It will be interesting to see if hospitals see this change as an opportunity to provide common sense pricing to undercut their rivals who chose to hold on to the opaque status quo.

Another change comes from a bipartisan effort to eliminate surprise medical billing.  The issue of surprise billing is another effort to empower patients economically in their medical care.  While hospitals tend not to directly engage in surprise billing, out-of-network independent physician contractors do.

It should not be surprising that Envision, a private equity physician group owned by KKR, is the antagonist of the surprise-billing story.  The attractiveness of physician groups to private and publicly traded corporations is likely due to the perception of their powerful ability to set prices as a result of a the steep demand curve for healthcare, and corporate consolidation occurring in the marketplace limiting competition.

Private equity companies are notorious for the financial leverage they place on their acquisitions.  They often take on too much debt in order to leverage their return on equity and earnings. For example, as in the case of Toys-R-Us which was owned by KKR.  In this example the debt payments overwhelmed declining revenues and the company was left bankrupt. 

KKR’s recent acquisition of Envision ended public disclosure of their financial statements so we have little insight into whether KKR is employing Toys-R-Us type leverage tactics with Envision.  However, MEDNAX’s interest expense is up 3.8x between 2015-2018 while net income is down $112,020,000 over the same time period.  If Envision is experiencing similar market forces as MEDNAX, both companies may be facing challenging operating environments in the future; particularly if patients become increasingly financially empowered and our federal government is able to shift pricing power away from these organizations.

It is important to remember that physician salaries are the largest expense for these companies, but in an era of physician and radiologist shortages the labor market is likely to be another threat to their solvency.  If these companies cannot offer attractive salaries, they will be unable to service the contracts they own.  These companies may become squeezed between declining or flat revenue, interest, and labor costs.

While drawing parallels between the toy and medical industries may seem obtuse, we need to keep in mind that fundamental economic forces are ubiquitous.  If companies lose the ability to price physician services above their debt and labor costs, they may quickly become insolvent. In an era of increasing physician employer consolidation into private shareholder companies, we need to be aware of potential fallout for patients.  Many of these organizations do not hold the physician-patient relationship as a core value, but they are experts in finance.

An earlier version of this blog appeared in the Pennsylvania Radiological Society Spring 2019 newsletter.

Physicians commit an immense amount of time, money and energy into their training.  The typical physician attends 4 years of postgraduate school, followed by an apprenticeship of 3-8 years.  The cost of the time alone is tremendous, but when factoring in tuition, lost wages, taxes, and interest; the break even point can be well into a physician’s 40’s or 50’s.  Is it any wonder that physicians have a certain attitude of entitlement when it comes to wages; or panic, anxiety, and occupational dissatisfaction in an increasingly unstable medical economy?  These concerns are perfectly reasonable from the perspective of psychology, but not economics.

Courses in economics or finance are not required of physicians and thus few understand the concept of sunk costs.  When faced with a career decision today, past educational expenses are irrelevant.  Framing effects and loss aversion are two important behavioral economics concepts that trick smart physicians into making stupid career decisions.  For example, they may not choose to pursue a dream outside of medicine because all the work they put into becoming a physician would be “lost”.  What sunk costs demonstrate is that time and energy are already lost, in any moment an individual should be mindful of their best choice.

The value of education is immense and arguably the greatest investment one can make in themselves.  However, the 30 year liability of school loans is a very concrete anchor.  This anchor may negatively bias physicians’ future career decisions, and it is unfortunate when an unhappy physician feels compelled to keep a higher paying job to recuperate sunk costs.

While interviewing medical schools I met a Neurologist dying from ALS (of course he specialized in neuromuscular disorders during his career).  While gasping for air on his Passy-Muir valve, his advice to me was to choose a career and never complain about that choice.  This sage’s paternalistic expression of agonal energy and choice not to be bitter, left an impression we can all learn from.

Undergraduate students need to understand the concept of sunk costs as well as the cognitive dissonance that burdensome student loan debt creates.  If only to have increased awareness of the system and its pitfalls when loved ones become sick the value of a medical education is tremendous.  A young physician is owed nothing by society, the risk they have taken in becoming a physician is entirely their own.  From a temporal perspective, students need to structure the value of their education well beyond the fiscal liability of their student loans.   They need to understand that the time and energy spent in achieving that education can never be recovered.  Ultimately, happiness and career satisfaction is entirely within their personal control.