Medical professional talking to patient

Time for health systems to re-examine the value of primary care

Health systems have long looked to primary care acquisitions to foster value, but may need to consider updated strategies and models.

In brief

  • Despite their status as loss-leaders on balance sheets, health systems value primary care acquisitions for their downstream benefits.
  • Disruption and increased competition, coupled with a dwindling and competitive primary care acquisitions market signal a time for systems to consider new models and tactics.

Health system executives navigating historic financial pressures and rising competition are still actively pursuing primary care acquisitions. Competition for these assets has intensified, despite primary care’s loss-leader status for many systems across the country. However, the way executives approach their primary care growth strategy likely needs to change.

While many feel their focus on primary care investment is warranted, there is also widespread recognition of the need to adopt new models that place less importance on primary care acquisition. Options to consider along with M&A include a renewed focus on core business functions, partnering with disruptors or improving system operating models.

An EY-Parthenon study set out to understand how important primary care acquisitions are to health leaders. The results brought surprising insight into the needs of health systems as they look to include a broader set of strategic alternatives in response to new market entrants and economic trends squeezing health systems. More than half (55%) of the more than 250 executives surveyed by EY-Parthenon in November of 2022 say their owned primary care assets must evolve to remain competitive in the future amid innovative and well-financed new market entrants.

Adoption requirements

Q48: Do you feel your owned primary care assets need to adapt to compete with alternate primary care options?

To improve access, outcomes, and patient experience, systems should proactively assess their local market context and develop a primary care strategy that aligns to the system’s overarching strategy and positions them for long term growth while also being financially sustainable in the short to medium term.

Changing a traditional approach

Health systems have traditionally acquired primary care assets as a captive source of referrals to specialists and ancillary services that they own or control. Primary care assets’ ability to generate downstream revenue make them a critical element of the fee-for-service (FFS) health system value chain. Conversely, they can also benefit systems shifting to value-based payment models by restricting referrals to specialists and ancillary services that add cost without a corresponding improvement in outcomes.

Given how primary care supports growth in both FFS and value-based contract (VBC) payment paradigms, it shouldn’t come as a surprise that according to our research, health systems’ top investment priority is to acquire primary care assets, with urban markets taking an even deeper interest in primary care acquisitions.

Importance of type of investment

Q17: “How does your organization rank the following types of investments in terms of strategic importance?”

Still, there are more than a few challenges to integrating primary care assets, as system executives are aware. A health system's investment thesis often relies on realizing acquisition synergies, such as reducing referral leakage to drive downstream revenue. These systems, which are rarely accustomed to operating within a value-based care environment, have not focused on making their primary care assets profitable on their own, partly due to accounting structures that attribute all costs to the primary care asset. These structures assign revenues solely from their own professional fees, while excluding the downstream revenue they generate. Thus, many of the perceived losses attributed to primary care are illusory or arbitrary.

A total of 60% of executives citing average subsidy per primary care physician of over $100,000 say primary care contributes heavily to their losses. Despite its downstream rewards, primary care businesses rarely become profitable after acquisition, raising questions concerning the sustainability of this long-held strategy.

Surveying a crowded new landscape

The pandemic and other economic changes have affected the health industry in myriad ways:

  • Hospital margins are at an all-time low, impacted by lingering effects of the COVID-19 pandemic that include a persistent depression in demand for elective procedures, outpatient shift led by insurers, and rising labor costs.
  • Hospitals continue to operate well below pre-pandemic levels, and fears of a recession are expected to continue to disrupt patient volumes.
  • Leading national and urban center systems continue to post major losses, further complicating funding and execution of acquisitions.
  • While potential primary care acquisition targets are scarce due to the limited supply of providers, systems must also contend with new competitors who are well capitalized and motivated to acquire and grow innovative primary care businesses. Major retailers and insurers have stepped in to meet patient needs where traditional providers lack the resources to do the same.

The rise in both competition and scarcity have already made an impact on health systems. While more than 60% say they explored acquisitions last year, only 53% of those managed to complete transactions, and most of the 29% of respondents who say they lost out on acquisitions reported being outbid for their targets.

Moreover, a Health Affairs report published in Oct. 2022 stated that healthcare systems in the U.S. were on track for their worst financial year in decades, led by net losses totaling over US$1B apiece by market leaders.

With system finances constrained in a suddenly crowded market, it will become more challenging to fund and execute acquisitions, or to continue to support unprofitable primary care businesses.

Systems may need to alter their strategies to avoid further financial strain due to market conditions and other macroeconomic factors.  At the very least, systems may need to weigh the implications of all available strategic paths and select the option that best suits their market reality, financial position, and future vision for their organization.

Four paths to future value

For years, the industry was focused on short-term survivability and operational nimbleness. This focus, accompanied by historically dire financial pressures that limit strategic capital and managerial bandwidth, has left systems of all sizes stuck in outdated, traditional approaches to value that fail to reflect reality for customers and organizations alike. While industry-wide divestiture from primary care would be premature, it is likely that primary care acquisitions will outpace their viability due to widely held industry beliefs.

In fact, 64% of the executives say that organizations are planning to increase primary care investment soon, even though 75% of respondents are in markets with low PCP acquisition opportunities.

EY-Parthenon teams have identified four strategic paths health systems can consider for driving value through primary care assets: Doubling down on primary care acquisitions, partnering with primary care disrupters, shifting to value-based payment models, or divesting primary care assets.

Each path has a unique set of market, financial, operational, and strategic considerations that may make it attractive for certain systems.

  1. Doubling down on acquisitions: Given appetites to continue primary care investment, one path is to continue acquiring and integrating primary care physicians. This path requires both available assets and the resources to win a highly competitive bidding process. Acquisitions also require rigorous diligence, valuation and dedicated post-transaction integration to realize full value. These acquisitions can be driven by both FFS and VBC growth ambitions as executives currently measure the attractiveness and success of acquisitions largely based on measures of visit volume, downstream revenue generation, and total attributed patients. With fewer independent primary care practices of scale available to purchase and greater competition from well-financed non-traditional market entrants, high acquisition costs and deal complexity await health systems poorly situated to navigate market conditions. Systems that elect to double down on acquisitions should introduce a value measurement system that includes downstream revenue to accurately measure future value.
  2. Partnering with a primary care disrupter: Organizations looking to expand primary care reach can also partner with new market entrants. This better suits organizations in markets with limited acquisition opportunities and more traditional competition. Also, financially strained organizations can follow this path to limit capital spending to expand their primary reach while still reaping the downstream revenue associated with referrals. Evaluating, selecting, and negotiating these partnerships will require strong strategic evaluation capabilities. Managing partnerships will require both cultural and operational alignment between systems to meet goals and priorities. If done correctly, these partnerships can support the growth of a system’s brand and reach within its market while differentiating itself as new players enter the market. These partnerships also enable systems to trade exclusive referrals' lower negotiated prices for hospital day rates and other acute care services.  Successful health care systems may need to compete on price, quality, and patient experience. They are at risk for being “vendorized” by non-traditional market entrants with a lower cost structure and sophisticated data analytics capabilities.
  3. Shifting to a value-based payment model: Continued acquisitions and partnerships can be supportive or independent of a system’s pursuit of a value-based care model for their owned primary care assets. Systems will need a thorough understanding of their payer landscape and population needs to design and implement a workable model. This path is significantly more operationally complex than other suggestions, as value-based shifts require a critical mass of covered lives for actuarial soundness as well as accessible, integrated primary care resources and a top-down care model redesign along with advanced analytics and contract renegotiation. Transitioning to value-based care may improve margins and jumpstart system transformation, but systems must evaluate all downstream effects. This is especially true for services that rely on fee-for-service revenue, making this path best suited for organizations willing to self-disrupt with an adequate number of covered lives under management. Organizations that adopt this path can unlock opportunities to win preferential status and tiering with key payers and possible direct-to-employer lines that will also contribute to further growth in covered lives.
  4. Divesting primary care assets: Finally, systems can consider divesting primary care assets to pursue value elsewhere. For organizations facing significant financial hurdles with primary care assets that fail to contribute to growth, divestiture provides immediate relief, enabling systems to refocus investments in core services. Systems will need dedicated transitional support to sell primary care assets, particularly to model potential demand destruction and volume loss associated with sale. Finally, systems that divest will need clear, swift re-investment plans to replace potentially lost revenue given how central primary care has been to health system growth strategy for so long.

Systems clearly do not want to forsake primary care growth, but environmental pressures and financial realities may force them to adapt.

Looking forward, systems looking to acquire and grow primary care may need to dramatically shift their acquisition strategy to avoid further financial deterioration due to market shortages, rising competitive pressures, valuation increases and systemwide financial strains. At the very least, systems can weigh the implications of all available strategic paths and select the option that best suits their market reality, financial position, and future vision.

Joseph Baez, Bhavna Mehta, Ansh Aggarwal and Sakshi Kathuria contributed to this article.


Health systems looking to retain value and remain competitive should look beyond traditional primary care acquisition and consider new models and approaches to remain successful.

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