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St. Cloud-based CentraCare Health has spent more than $40 million over the past 18 months buying three physician practices in central Minnesota — moves that the health system says were needed to make sure patients in the region didn’t lose access to doctors and services.

Health systems have been buying physician practices for many years, and health economists have argued the consolidation contributes to higher health care prices as systems gain market power in negotiating with health insurers.

CentraCare officials say they would be happy if doctors remained independent, but the economics just don’t work anymore. The state Health Department says roughly half of the clinics in the state were affiliated with a larger health system in 2016, up from 25 percent in 2010.

“There’s very little independent primary care left in the state, and the primary driver is an economic one — you can’t stay in business,” said Dr. Ken Holmen, the chief executive at CentraCare, in an interview.

CentraCare Health is one of the state’s 10 largest nonprofit groups with operating income during fiscal 2017 of $42.2 million on $1.26 billion in revenue. The health system includes six hospitals and more than 25 clinics.

The health system is in the process of acquiring a physician group based in Willmar with 180 doctors called ACMC Health, but has not yet disclosed financial terms. In a recent financial statement, CentraCare listed financial information about its October 2016 purchase of St. Cloud Medical Group P.A., plus deals in 2017 to buy a plastic surgery group and an anesthesia practice.

Holmen said the health system paid just over $40 million combined for St. Cloud Medical Group, a large primary-care practice, and Midsota Plastic and Reconstructive Surgeons, PA. CentraCare paid $2.8 million, he said, for Anesthesia Associates of St. Cloud, Ltd.

While CentraCare officials describe the acquisitions as saving services for the region, there likely are additional drivers, said Allan Baumgarten, an independent health care analyst in St. Louis Park.

If the St. Cloud-based health system hadn’t completed the deals, it’s likely that other health systems might well have been interested in establishing a presence in the region, Baumgarten said. HealthPartners has a clinic in nearby Sartell. Sanford Health, Essentia Health and Fairview Health Services all have been adding to their networks beyond the Twin Cities metro in recent years.

In general, he added, health systems that control a broader array of services are in a better position to negotiate payment contracts. That’s true whether they are operating under new contracts that pass financial risk to health systems, he said, or traditional “fee-for-service” arrangements.

“I think the economics of health care say that in developing your network, you do want market power so you can negotiate the best rates possible with the insurers,” Baumgarten said.

When health systems acquired medical practices in the 1970s and 1980s, valuations were sometimes based on assigning a dollar value per patient chart in a clinic, Holmen said, with the idea that the health system was acquiring market share. There also was a “blue sky” aspect to the deals, he added, since buying a practice provided a growth opportunity.

But with deals nowadays “there is no blue sky,” Holmen said. Systems no longer assign a value per patient chart, he added, since many practices just aren’t making money.

Nowadays, about 75 percent of the purchase price pays for the acquired practice’s buildings and fixed assets, Holmen said. The remainder goes toward things like retention bonuses to ensure that doctors, nurses and other workers join CentraCare ­following the sale.

“Everybody thinks $40 million is going into somebody’s pocket,” Holmen said. “That’s the way the reader reads it — ‘boy, somebody sure made out like a bandit on that one.’ And the answer is: That’s not true.”

Independent practices struggle with the costs of implementing and upgrading electronic health record systems that have become ubiquitous in health care, Holmen said. On the revenue side, he said, roughly half of the business is paid by government programs where reimbursements barely keep up with inflation.

Large systems like CentraCare can make the economics work, Holmen said, by using excess funds from profitable services to subsidize other operations. The goal with acquisitions is not simply to get bigger, Holmen said, but to create a health system that can cover all bases when it comes to providing care for the population of a region.

CentraCare’s acquisition of St. Cloud Medical Group initially was challenged by regulators due to concerns about the effect on competition. In the end, the Federal Trade Commission cleared the acquisition on the condition that CentraCare release up to 14 physicians from noncompete agreements if doctors wanted to join or create competing practices in the St. Cloud area.

Some physicians in the practice have retired, Holmen said, but none have opted to join or create a competing practice. “The business model doesn’t work anymore,” he said.

Christopher Snowbeck • 612-673-4744 Twitter: @chrissnowbeck

Recent Deals

Like other health systems, St. Cloud-based CentraCare has been acquiring more physician practices in recent years.

October 2016: St. Cloud Medical Group

January 2017: Midsota Plastic Surgeons

October 2017: Anesthesia Associates of St. Cloud

Early 2018: ACMC Health