To have “control over their patient base.”

For PE firms, the fracking boom was nirvana. An eternal-growth industry. A big part of the money they poured into the scrappy oil & gas companies is now going up in smoke. Other industries are mired in a no-growth or shrinking environment. Chaos keeps breaking out in the international markets, most recently over Greece and China.

So, healthcare, which accounts for nearly one-fifth of US GDP, “is really the growth opportunity,” Tom Banning, CEO of the Texas Academy of Family Physicians, told The Texas Tribune:

“The forces are aligned to force consolidation, and frankly, how those independent doctors are able to compete against well-heeled, deep-pocketed systems or networks is going to be a problem,” Banning said. “To me the question becomes, if a for-profit, publicly traded or privately held venture-capital fund owns these doctors, what’s their fiduciary duty to the patients?”

Think of the possibilities! The Texas Tribune: “Sensing a new vein of potential profits to be mined in the multibillion-dollar health care industry, a small but growing number of private equity firms is seeking to buy into primary care practices, interviews with doctors and financial analysts suggest.”

Mergers and acquisitions are at an all-time record in the US. In the second quarter alone, US targeted deals reached $635 billion, the highest quarterly total ever. These deals are driven by corporate buyers. Armed with cheap debt and their overpriced shares, they’re out-bidding PE firms and pushing them aside [read… “Everyone Is Wondering When the Volcano Will Erupt”].

Consolidation in the healthcare sector is running rampant, from the M&A activity among the largest health insurers, such as Aetna’s acquisition of Humana, to hospital systems buying physician practices.

“They’re finding that they have to be bigger, stronger, integrated organizations in order to be viable in the marketplace,” Texas state Rep. John Zerwas explained. Backed by PR firm Welsh, Carson, Anderson and Stowe, his Greater Houston Anesthesiology practice merged in 2012 with Anesthesia Partners. The group now employs over 1,000 anesthesia providers. Big is good.

A report by Bain and Company found that last year, healthcare buyouts by PE firms – not corporate M&A – in North America soared nearly 60% year-over-year, to a new record of $15.6 billion, across 80 mostly smaller deals, with only two deals above $1 billion.

The new thing is that PE firms are targeting primary care groups.

“It’s a land-grab right now,” Todd Spaanstra, a partner at Crowe Horwath, an accounting and consulting firm, told Modern Healthcare in April. Part of the reason why they’re chasing after primary care practices is because specialty practices have become targets of publicly traded corporate entities that have been driving up prices beyond what PE firms are willing to pay.

Hospital systems too are buying primary care groups to get ready for the next big thing, which is a shift in Medicare and other public programs.

Medicare is transitioning from a fee-for-service payment system, which pays doctors for services they provide, to a value-based model that pays doctors for providing cost-effective treatments. The idea is to keep their enrolled populations healthy rather than just treat them for specific illnesses. The White House hopes that by 2018, half of the payments Medicare makes will be for value-based care. Primary care is going to play an essential role in this, and PE firms hear the siren call of government money.

But this buyout binge of primary care doctors leaves some people scratching their heads. Michael Gorback, M.D., in Houston, Texas (and a WOLF STREET contributor) explained it to me this way:

Other than pediatrics and perhaps psychiatry, I can’t think of a specialty with lower profit margins.

There was a wave of this in the 90s. Big economies of scale, increased efficiency, blah, blah, blah. Almost every one of these fell flat on its face.

I remember being jealous because my colleagues were getting incredible offers for their practices and I wasn’t. It turned out that the purchases were paid in restricted stock and by the time the doctors could sell, the shares were worthless.

This time, it’s different. Though not everyone believes it.

The Texas Tribune cites Doug Curran’s family medical practice in the small town of Athens, Texas, whose 14 doctors “pride themselves on an intimate knowledge of their community.” He got a call earlier this year from Florida-based United MSO of America:

The would-be investors said they could help the family medicine group save money by trying “new models of care” to pocket greater payments from insurers, said Curran, who declined to specify the dollar amounts discussed.

But they were “big numbers,” he said. “Our feeling was the only way you could get those numbers back out of our practice would be to do some things with our patients and to our patients that would not be appropriate.”

He wasn’t the only one. The Texas Tribune:

Representatives for several independent practices in Texas, who asked not to be identified for reasons of financial privacy, said investors have approached them aggressively, in some cases as often as twice per month.

Doctors like Curran worry that selling the family practice would cost them independence and could mean less personalized care or higher costs for their patients.

But is there more to it? Derron DeRouin, COO at United MSO of America, put it this way:

“There’s been this enormous uptick in hedge funds and even bond funds as well as private equities not interested in acquiring physicians’ practices but having control over their patient base.”

“It’s kind of an ideal model because it allows physicians to maintain their autonomy – keep their practice, essentially – but to be capitalized and grouped together to leverage these numbers and leverage these patients to the independent provider’s advantage.”

Get control over their patient base and leverage these patients?!? You get the drift.

So will primary care be nirvana for PE firms? Or just another fracking boom? Dr. Gorback, who doesn’t have a crystal ball either but knows a thing or two about doctors, mused:

Managing doctors is like herding cats. These deals almost always lead to a culture clash between the spreadsheet people and the doctors, resulting in disillusionment on both sides and parting of ways, usually with a lot of bitterness.

The PE strategy of slash and burn is particularly unsuitable for this type of arrangement. I can see the PE guys acquiring practices with magic beans, loading up the company with debt, taking it to IPO, and burning whoever touches it.

That’s what happened to the intrepid souls who bought the PE firms’ prior hot product, the energy IPOs in 2013 and 2014.

Millennium Health – biggest drug-testing lab in the US and biggest recipient of Medicare drug-testing payments – is Exhibit A of how a credit bubble allows companies and banks to put yield-desperate investors, blinded by a zero-interest-rate policy, through the wringer. JP Morgan did this one. Read… “Leveraged Loan” Time Bomb Goes Off