Physician Groups and Physician Asset Securitization: Emerging Investment Trends in H2 2016

May 29, 2016 08:00 CST Updated 08:00

Looking ahead to the second half of 2016, with the macroeconomic recovery and the restoration of market confidence, investors should consider allocating a portion of their portfolios to thematic investment targets with greater earnings elasticity, while focusing on sectors with high growth certainty. As an inevitable path for optimizing the allocation of physician resources in China amid the broader trend of healthcare reform, the development environment for physician groups is maturing, and they are poised to become a new focal point of market attention.

Recently, CITIC Securities released a report titled "H2 2016 Investment Strategy for the Pharmaceutical Industry: Identifying the Industry’s True Leaders Amidst Policy Turmoil》industry investment report, which includes investment analyses across multiple sectors. VCBeat has summarized and consolidated several key investment areas, presenting them in a series format. This issue focuses on—Physician Groups.

The Focus of Healthcare Reform Lies in Improving the Allocation Efficiency of Physician Resources

Since the Central Committee of the Communist Party of China and the State Council released the “Opinions on Deepening the Reform of the Medical and Health Care System” in 2009, the new round of healthcare reform has undergone seven years of development. Significant progress has been made in three key areas: the pharmaceutical system, public health, and medical security. Specifically: 1. A systematic essential medicines system and a national reimbursement drug list system have been established; 2. Public health service systems, including disease prevention and control as well as health education, have been improved and strengthened; 3. Basic medical services now achieve near-universal coverage in both urban and rural areas.

However, the field of healthcare service reform has yet to achieve a thorough and substantive breakthrough. Therefore, over the next 3–5 years, the focus of healthcare reform will be on transforming the service sector, with the core objective of enhancing the efficiency of resource allocation by restructuring how medical resources are distributed. The underlying logic is as follows:

1. Only by structurally stratifying the supply of medical services can we meet the new, multi-layered, and full-process healthcare demands, thereby adapting to the differentiated structure of demand.

2. Only through reforms that foster close coordination and seamless integration across all stages of healthcare delivery can we improve the efficiency of medical services and alleviate the difficulty of accessing medical care.

3. Only by restructuring data resources can we adapt to new medical concepts such as chronic disease management, health check-ups, and tiered diagnosis and treatment.

Physicians are the core of medical resources, and the essence of improving the allocation efficiency of medical resources lies in promoting the efficient allocation of physician resources. Only by changing the model of physicians’ participation in medical services and enhancing the efficiency of physician resource allocation can we effectively alleviate the diagnostic and treatment pressure on tertiary hospitals, improve outpatient care quality, and optimize the referral system. This is the only way to effectively implement the separation of prescribing from dispensing, address difficulties in accessing medical care, meet patient needs, and achieve market-based pricing of physicians’ value.

Therefore, improving the allocation efficiency of physician resources is central to enhancing the overall efficiency of healthcare resource allocation, which in turn constitutes the core essence of healthcare reform.

The Inevitable Path to Rational Allocation of Physician Resources and Independent Practice: Physician GroupsCurrently, over 95% of physicians in China are engaged in fixed-site practice. Since the launch of the new healthcare reform, the central government and local authorities have introduced numerous policies to promote independent practice. Only by liberalizing independent practice and addressing the issue of physician mobility can we achieve market-based pricing and reasonable monetization of physicians’ professional value. This will enhance physician motivation, provide patients with high-quality, appropriate, and personalized medical services, resolve hospitals’ revenue structure issues, and realize the rational allocation of physician resources.

So, how can independent practice be achieved, or what is the vehicle for independent practice?

Physician Groups, also known as "physician practice teams," refer to alliances or organizations composed of multiple physician teams. Their essence lies in group practice, where physicians jointly calculate income and costs, share losses and medical risks, and pool facilities, equipment, and patient resources. This model of practice is well-established in the United States, accounting for nearly 80% of physician practices. Moreover, after years of development, various forms of physician groups have emerged in the U.S., including open-access physician groups, Independent Physician Associations (IPAs), single-specialty physician groups, and multi-specialty physician groups.

Physician groups will serve as the primary vehicle for independent medical practice in China, as they can meet physicians’ needs for support services such as patient acquisition, integration with commercial and public health insurance, and access to practice facilities.

Physician groups can fully leverage physician branding, media influence, and the Internet to attract a sufficient patient volume, thereby resolving the dilemma faced by physicians who leave the public system and enter independent practice without an established patient base.

Physician groups can better interface with both public health insurance and commercial insurance, helping physicians manage medical risks, secure revenue streams, and pursue greater opportunities for growth.

Physician groups can collaborate with hospitals or establish their own surgical centers, providing practice facilities and related service support for independently practicing physicians.

In summary, physician groups offer distinct advantages in patient acquisition, risk management, and resource coordination by fostering shared responsibilities and enabling physicians to focus on clinical care. Therefore, as regulations on independent medical practice are liberalized, these advantages will become increasingly prominent, making physician groups an inevitable pathway for the development of independent medical practice.

Securitization of Physician Assets Is the General Trend

Over the past few decades, pharmaceuticals, commerce, medical devices, and hospital assets have successively undergone securitization. However, physicians—the most critical and scarce resource in the healthcare sector—have not yet seen direct capital participation. Physician resources are typically acquired indirectly through the acquisition or establishment of new hospitals. Currently, physicians do not constitute an independent, valuable medical asset class with a dedicated investment framework.

Based on current trends, the securitization of physician assets is set to become an inevitable trend and will emerge as the greatest investment opportunity within the future healthcare service system. The primary rationale is as follows:

The securitization of physician assets can bring about a significant transformation in physicians’ income structure, shifting from a previous reliance on fixed salaries and bonuses within the public healthcare system, along with some informal income, to market-oriented, transparent compensation models that include annual salaries, equity stakes, and dividend distributions as forms of capitalized returns, thereby aligning with physicians’ aspirations.

Physicians naturally desire a safe, comfortable, efficient, and convenient platform for their medical practice. However, the development of diverse practice platforms requires deep capital involvement, and the integration of physicians with these platforms inevitably constitutes a process of asset securitization.

Independent practice will inevitably lead to a transformation of physicians’ roles and pose pricing challenges. The optimal model is to achieve reasonable valuation through market-based mechanisms, and enthusiasm among physicians for participating in capitalization models continues to grow.

Capital participation will help advance the marketization of physicians’ independent practice, addressing issues such as negotiations with commercial health insurers and other payers, as well as platform expansion.

Deep capital involvement helps realize the market value of physicians in independent practice, enabling market-based pricing for differentiated, personalized, and systematic medical services.

Physician Groups Are the Optimal Model for Physician Asset Securitization

Physician groups represent the optimal model for the securitization of physician assets, as they offer advantages across four dimensions:

Transferability of Physician Resources: By establishing or participating in physician groups, fragmented physician resources can be integrated into structured medical organizations, thereby transforming physicians from mere employees of public hospitals into mobile healthcare professionals with the capacity for independent practice.

Specialization of Physician Practice Models: By forming physician groups of various types, medical resources across different levels, specialties, and regions can be optimally integrated, enabling targeted solutions for specific pain points associated with particular diseases and achieving specialized utilization of physician resources.

Clear Cash Flow: By delivering medical services through models such as Physician Health Partnerships (PHP), self-built surgical centers, online consultations, and departmental collaborations, physician groups can clearly define their revenue-generating capacity per unit of time. Coupled with factors such as their ability to expand the number of affiliated physicians, this allows for a relatively clear projection of their revenue levels.

Increasing Leverage: High-quality physician resources are scarce and cannot be replicated in the short term. However, by leveraging these top-tier physicians—increasing their leverage ratio, minimizing or eliminating the time they spend on redundant operational tasks, enhancing their academic leadership and mentorship for early- and mid-career physicians, and utilizing their academic resources and influence to better integrate high-quality resources—we can effectively and reasonably amplify the impact of elite physicians.

Incorporating independently practicing physicians into physician groups enables the securitization of their professional assets. This approach not only facilitates more accurate valuation of physician assets but also increases leverage and enhances physician value. Therefore, the physician group model represents the optimal framework for the securitization of physician assets.

Driven by the combination of top-down policy support (the gradual liberalization of independent practice) and bottom-up physician entrepreneurship, physician groups in China have developed rapidly. Currently, over one hundred physician groups have been established, with the Zhang Qiang Physician Group, CareRay Physician Group, and Wanfeng Physician Group achieving smooth operations and rapid growth, thereby attracting widespread attention.

It is estimated that physician groups will enter a period of rapid growth over the next 3–5 years, primarily because the key factors driving their development are becoming increasingly mature:

Commercial insurance is gradually maturing, with strong policy support. In recent years, regulatory authorities have introduced multiple policies to encourage the development of commercial health insurance. Furthermore, population aging, rising incidence of chronic diseases, and growth in the high-income population have significantly stimulated demand for various types of commercial insurance. Looking ahead, the commercial insurance sector will enter a period of accelerated growth driven by policy, demand, and supply, bringing about significant changes on the payment side.

The Prominence of Personalized Treatment and Differentiated Patient NeedsAs payment capacity, technological advancements, treatment modalities, and internet-based healthcare continue to evolve, the personalized needs of patient populations are constantly developing. This necessitates more personalized and differentiated medical services, which objectively drives the growth of physicians’ independent practice and physician groups.

Growing Awareness of Independent Practice Among Physicians. In China, physicians face certain instabilities in doctor-patient relationships and work environments, while transparent components of their income structure, such as salaries and bonuses, remain relatively low. Against the backdrop of continuous policy liberalization and the growing influence of overseas healthcare models, awareness and willingness among physicians to engage in independent practice are steadily increasing.

The Internet Lays the Technological Foundation for Development. The advancement of internet technology has provided technical facilitation for physician groups in areas such as brand establishment and dissemination, optimization of physician resources and operational efficiency, and patient services, thereby supporting their development with robust information and resource flows.

Based on the above analysis, physician groups in China have entered a stage where supporting conditions are gradually maturing, with the future market size estimated to reach hundreds of billions of yuan. Based on the total revenue of public hospitals in 2013, which amounted to RMB 1,844.681 billion, and assuming that drugs currently account for approximately 40% of total revenue in public hospitals, after excluding diagnostic revenue (approximately 10%), the revenue from medical services amounts to approximately RMB 922.341 billion.

Assuming that physician groups account for 20% of the medical service system, with a corresponding approximately 20% increase in medical prices, the market size would be approximately RMB 221.4 billion.

Therefore, physician groups are expected to achieve a revenue scale of hundreds of billions of yuan within the next 3–5 years, with some large-scale physician groups potentially reaching annual revenues in the tens of billions.

Listed Companies Have Great Potential in the Professional Development of Physicians

The development and growth of physician groups are a necessary prerequisite for continuously facilitating the securitization of physicians’ professional assets and meeting their demands for independent practice. Such development requires support in two key areas: capital and essential resources.

Capital Requirements: If a physician group remains at the level of a “partnership enterprise” or a “small-scale workshop,” it does not have a strong demand for capital. However, when the physician group needs to further expand, establish physical medical institutions, replicate and incubate more subsidiary groups, and incorporate and layout more clinical departments, corresponding capital requirements inevitably arise.

Element Requirements: The development of physician groups requires multifaceted resource support from payers, operational layers, hospitals, and other stakeholders. The resource endowments accumulated by listed companies through their long-standing core pharmaceutical businesses will serve as the optimal conduit.

Meanwhile, the securitization of physician assets ultimately requires pricing and circulation through the secondary market; therefore, listed companies are poised to play a significant role in this process.

As the optimal entities for securitization with multi-channel financing capabilities, listed companies can and will inevitably participate deeply in the wave of physician asset securitization. By constructing physician group structures with clear hierarchies, reasonable division of labor, and improved efficiency, they can secure physicians—the most scarce factor of medical resources—thereby establishing core barriers to their layout in the healthcare services sector.

The diversity and scalability of physician group models provide listed companies with ample room for capital operations. Based on industry resources, deployment models, and actual progress, medical service enterprises with systematic physician practice architectures and pharmaceutical manufacturers with prescription drug resources for major disease areas are more suitable for establishing physician groups and deeply participating in the securitization of physician assets.

In major specialty fields amenable to deep vertical integration—such as oncology, orthopedics, cardiovascular and cerebrovascular diseases, and psychiatry—physician independent practice, followed by asset securitization and the formation of physician groups, offers greater value and development potential.

VCBeat Summary

1. The focus of healthcare reform lies in improving the allocation efficiency of physician resources. As physicians are the core of medical resources, healthcare reform can only be achieved by changing the model of physician participation in medical services and enhancing the allocation efficiency of physician resources.

2. Physician groups offer the advantages of shared resources and risks in patient acquisition, risk control, and resource coordination, enabling physicians to focus on clinical care; therefore, physician groups will become the inevitable path for physicians’ independent practice.

3. Driven by physicians’ expectations regarding income structure, career platforms, role transitions, and market value, the securitization of physician assets is poised to become an inevitable trend.

4. Due to characteristics such as the transferability of physician resources, the ability to customize practice models, clear cash flows, and ease of increasing leverage, physician groups have become the optimal model for the securitization of physician assets.

5. The maturation of commercial insurance, increased policy support, rising market demand, growing willingness among physicians to join, and technological advancements have paved the way for the development of physician groups.

6. The capital requirements, resource factor needs, and securitization demands of physician groups make it logical for listed companies to participate in the strategic layout of such groups.