Examining physician practice groups’ options to manage rising administrative and operational complexities

Charles River Associates (CRA) was commissioned by McKesson to analyze the economic role of McKesson’s Management Services Organizations (MSOs) within the healthcare industry, including evolving trends among independent physician groups, the economic incentives for physician group customers and MSOs, and the dynamics of competition for practice management services. The analysis finds that McKesson’s MSO businesses operate in a competitive environment that delivers economic value to physician group customers, and that regulatory restrictions on wholesaler-owned MSOs would harm physician groups and likely accelerate physician consolidation.

Operating and administering a physician group has become increasingly complex. The Government Accountability Office notes that studies have shown at least 47% of physicians were employed by or affiliated with hospital systems in 2024, up from less than 30% in 2012, reflecting physician group consolidation through mergers between physician groups, acquisitions of physician groups by hospitals, payers, and other healthcare providers, and the employment decisions of individual physicians.

A Management Services Organization (MSO) provides non-clinical practice management services to physician groups, including billing, revenue cycle management, technology, marketing support, and procurement, allowing physicians to focus on patient care while outsourcing administrative burdens.

While consolidation is one way to overcome the difficulties of running an independent physician group, outsourcing practice management to a specialized MSO, like McKesson’s, is an alternative that addresses the same problem without requiring physician groups to give up their independence or clinical autonomy.

CRA’s analysis is based on publicly available data and information, including academic and industry publications and physician data from IQVIA. Our full assessment is available to download here.

Six economic principles underpinning the value of MSOs

The white paper highlights six economic principles that underpin the value McKesson’s MSO businesses bring to its physician group customers:

1. Labor specialization: Physicians can focus on patient care while specialized MSOs provide non-clinical functions like billing, IT, human resources, payroll, and vendor contracting.
2. Economies of scale: MSOs spread the fixed costs of practice management infrastructure across multiple physician group customers, reducing per-physician group costs below what an individual physician group could achieve on its own.
3. Efficient outsourcing of services: A comprehensive MSO arrangement provides efficiencies and other benefits to physician groups compared to contracting with multiple individual vendors for billing, IT, procurement, and other services.
4. Expansion of provided services: MSO infrastructure allows physician groups to offer expanded capabilities, such as clinical research participation and value-based care programs, that would be inefficient to develop independently. For example, some of McKesson’s physician group customers participated in CMS’s Oncology Care Model and Enhancing Oncology Model, which resulted in savings to CMS of $337 million and $44 million, respectively, when compared to the benchmark amounts.
5. Alignment of long-run incentives: MSOs typically engage physician groups through long-term contracts (often 10 years or more), with compensation tied to physician group revenue or profitability, aligning the MSO’s interests with the long-term success of its customers.
6. Reduced procurement costs: Because McKesson operates both an MSO and a drug wholesaling business, it has an incentive to offer lower distribution prices on drugs and supplies sold to its MSO customers, reducing their procurement costs.

We also explore potential concerns related to the vertical integration of McKesson’s MSO businesses with the drug wholesaling services offered by McKesson. We conclude that such concerns are unlikely given McKesson’s business model where, for example, it does not have clinical control over its physician group customers and offers drug wholesaling services similar to those provided by other wholesalers.

Regulatory overview

The white paper analyzes the likely competitive impact of legislation which would prohibit drug wholesalers from owning MSO businesses or require them to divest their existing MSO businesses. The analysis finds that such legislation would harm physician groups through reduced competition for practice management services, with some physician groups that would have selected a wholesaler-owned MSO, instead being acquired by another physician group, hospital system, or payer that would limit or eliminate their clinical autonomy. The result would likely accelerate the ongoing trend toward physician consolidation.