The Decline and Fall of Private Practice

The Business Diaries - Part 2

Last week I wrote about how Rachel and I founded Westside Family Medicine out of a desire to bring the unique style and practice of Family Medicine to a new population of patients in New York City. 

This week I want to explain why being independent has come to feel like being the last of the snow leopards.

One of the most striking trends in American medicine over the past decade has been the consolidation of health care in the form of hospital networks, insurance company conglomerates, and private equity backed mergers. This has been accompanied by a corresponding decline in private practice, defined as a practice wholly owned by physicians. 

The Covid pandemic accelerated this trend, forcing thousands of smaller, independent practices to either shutter, merge, or sell.

In 2020, the percentage of physicians working in private practice dropped below 50% for the first time. And even that statistic is deceiving, skewed by the number of older doctors who are approaching retirement. 

Perhaps more revealing is this: for doctors over the age of fifty five, only 42% are employed by someone else; for doctors under the age of forty, the number is greater than 70%.

I see three main reasons for this shift - one is a perennial issue, while the other two are structural problems that amplify it exponentially.

The perennial issue is that running a business is hard work. In addition to seeing patients, with all the increasingly onerous administration entailed, practice management requires many other tasks and responsibilities, some of which I listed last week.

When medical students or residents come to me for advice about opening an independent practice - mind you, this has not happened for a while - I tell them two things.

First, yes, the good news is that starting your own practice means that you can take a vacation any time you “want”; the bad news is, that time will never come!

Second, if you want to understand what it means to start a practice, don’t hang out with me, hang out at the Korean deli on the corner because that will give you a better feel for everything that’s involved - from inventory to staffing to utilities and more.

Meanwhile, among other business gripes, costs keep going up while prices - at least for doctors who take the medical insurance that most Americans use to pay for medical care - are relatively fixed. Accepting insurance means that you cannot increase your prices to compensate for increased costs the way most businesses do. 

But at least everyone must be in the same boat as far as insurance reimbursement is concerned. Insurance companies must have to pay the same amount for the same procedure regardless of who performs it, right?

Actually, no, which brings us to the first structural problem.

One of the peculiarities of United States antitrust law is that while individual doctors are not allowed to collectively negotiate with insurance companies, those grouped under one corporate umbrella - such as hospital systems for example, which can include thousands of doctors - are allowed to collectively negotiate for higher rates.

In theory, this means that individual doctors cannot “collude” together against billion dollar insurance companies to “fix” prices.

But in practice, this results in a tiered system where hospital practices get paid as much as fifty to one hundred percent more for the exact same work, putting them at a major competitive advantage.

That’s why the various New York City hospital systems can come to us on a regular basis proposing to take Westside Family Medicine off our hands, shoulder the administrative burden, and yet increase our compensation for seeing the same number of patients

In other words, their preferred rates are so much better than ours that they can literally pay us to go home early and give us a raise.

Hmm…tempting. I’m starting to see where younger doctors are coming from.

But let’s say you nevertheless want to be independent. Can you still compete?

Well, even with one hand tied behind your back - the revenue hand - there’s still the other hand - the expense hand. After all, both income and expense contribute to the bottom line. If you are smart, lean, and efficient, you may be able to stay profitable by limiting expenses despite being forcibly handicapped with lower reimbursements. 

Which brings us to the second structural problem.

It goes without saying that an independent practice, like any other small business, has to make a profit to survive. How else can you put food on the table? 

Conglomerates, however, expect to lose money in primary care.

Hospital systems typically see primary care as a loss leader that justifies its financial support by providing a patient base for specialists who do lucrative procedures. 

If you see a primary care doctor who works for hospital system X, for example, don’t expect to be referred to a specialist who works for hospital system Y, even if they would be the better doctor for what you have - it just doesn’t work that way.

By contrast, for an independent primary care practice to receive such financial support breaks all kinds of rules, and rightfully so.

Even worse are the venture capital and private equity-backed companies that have entered the primary care market, like the chain, One Medical.  

One Medical was a classic V.C. play: burn cash, acquire market share, and exit at a high enough multiple for early investors to make a killing - which by the way, feels a little like a Ponzi scheme to me, but what do I know?

I do know that One Medical went public in an IPO over a year ago at an astronomical valuation, despite the fact they never came close to breaking even, let alone making a profit. 

How many hundreds of millions of dollars did they burn along the way? It was impossible to say when they were a private company. Now that they are public, however, they are free to disclose that they have pared down their losses to a mere $40 million a quarter. 

As Rachel and I like to joke, it would be a lot easier to expand Westside Family Medicine to Brooklyn if we were in a position to lose $40 million a quarter.

(By the way, if this reminds you of the early days of Uber vs. Taxis, that is exactly right - meanwhile, you may have noticed that since going public, Uber has become a total ripoff in New York compared with the yellow cabs that remain.)

Now I really get where younger doctors are coming from: If you want to be independent, all you have to do is work twice as hard to get paid half as much and compete on an uneven playing field with both hands tied behind your back.

A couple of caveats:

I initially hesitated to write this post out of fear that pulling back the curtain on the financial side of medical practice would signify that medicine is all about the money. 

It is not. I think medicine is a calling. In fact, there are so many better ways to make money than practicing medicine that, in my humble opinion, anyone who goes into medicine just for the money should be considered too dumb to be a doctor.

But money is the key to understanding one important trend: the last generation of doctors were mostly independent, the current generation is about half and half, and the next generation will be mostly employees.

The second caveat is that this may not really matter.

I know fantastic doctors in all kinds of practice environments. My daughter, for example, who had congenital heart disease and scoliosis, has doctors at Columbia who are absolute exemplars of the profession.

The converse is also true: there are doctors in private practice whom… let’s just say that given the choice I would refer my patients elsewhere.

I can also see the argument that perhaps the M.D.’s should focus exclusively on the medicine and leave the business side to the M.B.A.’s. The independent practice might just be anachronistic in 21st century American capitalism.

Then again, as Epictetus, the Roman Stoic philosopher and former slave put it: Who is your master?

Centuries later, the question still deserves to be asked.

At the end of the day, the independent doctor is primarily beholden to the patient, whereas the employee doctor is ultimately beholden to the boss - the hospital administrator, the insurance company executive, the financier. 

Time will tell which is the better model. But if I were the patient, all else being equal, I know which one I would choose.