Why infrastructure capture replaces capital deployment. A white paper for PHA board members and physician-owned hospital operators.
Every PHA member hospital faces the same economic reality. Individually, each facility purchases insurance, benefits, workers' compensation, and malpractice coverage at retail rates. Carriers treat each hospital as a standalone small or mid-size group. The rates reflect that classification.
Meanwhile, the health systems that PHA members compete against are self-funding. They capture underwriting margin. They retain float on their balance sheets. They build wealth from the same premium dollars that our member hospitals send out the door every month.
The gap is 25 to 40 percent on every line item. Not because our hospitals are smaller in any meaningful clinical sense. Because they are fragmented in the one place it matters most: purchasing power.
A typical physician-owned hospital with 200 to 500 employees generates the following annual insurance spend:
| Line Item | Annual Spend | Estimated Carrier Margin |
|---|---|---|
| Health Benefits | $2M to $10M | $300K to $1.5M |
| Malpractice | $500K to $2M | $75K to $300K |
| P&C Insurance | $200K to $500K | $30K to $75K |
| Workers' Compensation | $300K to $1M | $45K to $150K |
| Total | $3M to $15M | $450K to $2M+ |
That carrier margin does not disappear. It becomes carrier profit and carrier float. It builds someone else's balance sheet. Over a 20-year period, a single facility will transfer $6 million to $8 million in wealth-building capacity to insurance companies. The facility received coverage. The carrier built a fortune.
Multiply that across 100+ PHA member hospitals. The collective wealth transfer is staggering. And it is entirely preventable.
Two categories of actors have built business models around the purchasing power gap: private equity firms and hospital systems. Both close the gap. Both require surrendering ownership. Both solve the symptom by killing the patient.
Private equity has deployed over $1 trillion into healthcare acquisitions since 2000. The playbook is consistent: identify fragmented markets, acquire at 6x to 12x EBITDA, consolidate back-office functions, negotiate better rates, and exit within 5 to 7 years.
The model works financially. PE-acquired facilities do see insurance costs decrease and purchasing power increase. But PE fund structures create a fundamental tension that no amount of operational excellence can resolve.
PE funds must deliver a return of capital and a return on capital within a compressed window. Limited partners expect 20%+ IRR. The fund's life is 5 to 7 years. Every dollar deployed carries a ticking clock.
That clock forces predictable behavior: cost-cutting, debt loading, margin extraction, staff reduction. The actions that make the numbers work on a 5-year timeline are precisely the actions that destroy clinical value on a 20-year timeline.
Avalere's 2024 analysis of Medicare claims data found that beneficiaries attributed to physicians who transitioned from independent practice to corporate or hospital affiliation experienced higher expenditures post-transition, with weighted average increases of $1,140 (corporate) and $1,327 (hospital) per beneficiary per year. The consolidation models are more expensive for the system, not less.
Health systems avoid the duration problem by holding assets permanently. But they replace the clock with massive structural overhead. Bureaucracy. Administrative bloat. The economics work, but the organization becomes a monument to its own complexity.
Neither model solves the actual problem. They both solve the symptom — subscale purchasing — by creating a different disease.
| Private Equity | Health System | Infrastructure Capture | |
|---|---|---|---|
| Purchasing gap | Closed | Closed | Closed |
| Ownership retained | No | No | Yes |
| Clinical autonomy | Erodes | Erodes | Untouched |
| Capital required | $4M–$12M / facility | Employment cost | No acquisition capital |
| Duration | 5–7 year fund life | Permanent (with overhead) | Permanent (no overhead) |
| Exit required | Yes | No | No |
| Float retained by facility | No | No | Yes |
Consider a thought experiment.
If Tesla wanted to dominate the EV startup ecosystem, the obvious playbook would be capital acquisition. Buy Rivian. Buy Lucid. Buy the next ten companies that emerge. That is the PE playbook applied to automotive.
But what if instead, Tesla built a backend infrastructure platform — benefits, HR, payroll, commercial insurance — and every EV startup simply plugged into it.
Now apply that to physician-owned hospitals. Apply it to any fragmented industry where small, independent operators pay retail prices for services that scale. Insurance. Benefits. Payroll. Risk management. Any market where subscale purchasing is the structural disadvantage — infrastructure capture replaces capital acquisition.
PHA has 100+ physician-owned hospitals. Every one of them already believes in independence. Every one of them already has meaningful individual scale. And every one of them is still buying insurance at retail, fragmented, leaking wealth to carriers.
PHA convenes these hospitals. PHA advocates for them. PHA has their trust and their attention. What PHA has never had is economic infrastructure to offer them.
The infrastructure exists now.
MedMerge is the economic infrastructure that makes independent medicine viable at scale. It achieves the economic benefits of consolidation without acquisition, without equity transfer, and without clinical integration.
Beyond the immediate cost savings, there is a deeper opportunity that almost no one in healthcare has recognized.
When hospitals pay premiums to commercial carriers, they are not just buying coverage. They are funding the carrier's investment portfolio. The float — the premium dollars that sit on the balance sheet before they pay claims — is invested for carrier benefit, building carrier wealth.
This wealth transfer is not inevitable. It is a choice.
In a captive structure, the float remains inside the system. It is invested for the benefit of participating hospitals. At scale, that float generates meaningful investment returns every year — compounding permanently because there is no fund life, no exit requirement, and no capital to return.
The contrast between capital acquisition and infrastructure capture is not marginal. It is categorical.
| Capital Acquisition (PE) | Infrastructure Capture | |
|---|---|---|
| Acquisition cost per facility | $3M to $10M+ | $0 |
| Debt financing | 50 to 70% of purchase | $0 |
| Equity deployed per facility | $1M to $4M | Minimal operational cost |
| Integration cost | $500K to $2M | Absorbed in operations |
| Time to close / onboard | 6 to 12 months | 30 to 90 days |
| Total capital for 80 facilities | $320M to $960M | Near $0 |
| Facilities | Aggregated Premium | Captive Surplus | Est. Member Savings |
|---|---|---|---|
| 10 | $16M | $1.4M | $4M to $6.4M |
| 50 | $80M | $7.2M | $20M to $32M |
| 100 | $160M | $14.4M | $40M to $64M |
| 500 | $800M | $72M | $200M to $320M |
The 100-facility row is PHA. That is not a projection. That is the existing membership. The aggregated premium, the captive surplus, and the float opportunity are available to PHA's member hospitals today — if the infrastructure is activated.
Traditional healthcare M&A follows a simple logic: acquire the practice, control the economics. The acquirer owns the equity. The economics flow to the owner.
Infrastructure coordination inverts this logic: control the economics, and ownership becomes less relevant.
If an independent hospital achieves the same insurance rates as a large health system, the economic pressure to sell diminishes. If the hospital retains float and builds balance sheet assets, the financial case for independence strengthens. If switching away from the coordinating infrastructure would cost more than staying, the relationship becomes durable without coercion.
This is what makes the model permanent. Participating hospitals own equity in the captive. Their wealth accumulates inside the system. Leaving means abandoning that accumulated equity. The retention mechanism is not a contract. It is ownership. It is economics. It is the most durable form of lock-in that exists: self-interest.
Every PHA member that joins the platform makes the economics better for every other member already on it. The risk pool deepens. The purchasing power increases. The float grows. The captive surplus compounds.
This is a flywheel that accelerates with participation. And PHA — with 100+ hospitals that already share a philosophical commitment to physician ownership — is the single most natural starting point for this model in American healthcare.
The model is not theoretical. MedMerge has hospitals live in Kansas and Louisiana. The savings are real and documented. The legal structure has been validated. The single employer platform is operational. The captive framework is in place.
What remains is scale. And PHA is scale.
Several PHA member hospitals are evaluating a trajectory toward public markets. For those facilities, MedMerge is not a separate conversation. It is the financial engine that makes the IPO viable.
Hospitals pursuing a public offering face two problems simultaneously. The timing problem: demonstrating institutional-quality financial performance before investment banks will underwrite an offering. The substance problem: most physician-owned hospitals are fully insured, meaning decades of premium leakage have produced no balance sheet assets, no retained surplus, and no compounding benefit.
MedMerge solves both.
The Publicly Traded Securities Exception (42 CFR 411.356(a)) offers a path beyond the growth and ownership restrictions of the Whole Hospital Exception. It requires the issuing corporation to maintain stockholder equity exceeding $75 million.
MedMerge directly facilitates meeting this threshold. The shift to self-funded and captive structures does not merely save money. It manufactures equity. Captive surplus, accumulated reserves, and retained float are GAAP-recognized balance sheet items that contribute directly to the $75 million requirement.
Consider a portfolio of ten hospitals. Within three to five years, the retained surplus and reserves generated through MedMerge could represent $50 million or more in accumulated assets. Without this infrastructure, the $75 million threshold must be met entirely through operating income retention or dilutive outside capital. With it, hospitals build the qualifying balance sheet through the normal course of their own operations.
Investment bankers scrutinize quality of earnings, margin predictability, and the structural nature of financial improvements. MedMerge addresses all three.
Fully-insured renewals are volatile, often increasing 8% to 15% annually. MedMerge replaces this with claims-based economics backed by actuarial rigor, allowing the hospital to manage and predict its largest non-labor expense.
The 25% to 40% reduction in insurance costs flows directly to EBITDA. For a hospital spending $8 million on these lines, this represents a $2 million to $3.2 million recurring EBITDA improvement. At a 12x public market multiple, this adds $24 million to $38 million in enterprise value per facility.
Unlike one-time vendor concessions, these advantages are structural. They derive from scale aggregation and risk-retention economics that persist regardless of carrier market cycles.
For hospitals relying on the Whole Hospital Exception, MedMerge optimizes financial performance pre-offering, creating a higher-quality S-1 narrative and a more attractive consolidated EBITDA profile. For new hospitals entering the public entity, MedMerge provides Day 1 competitive economics. New facilities plug into existing infrastructure, achieving the scale of a large system immediately.
MedMerge holds no equity in the hospitals or the public entity. No governance entanglement. It is an arms-length infrastructure services provider. This clean vendor relationship simplifies S-1 disclosures and avoids related-party complications.
The cost of leaving the infrastructure, reverting to retail rates and forfeiting accumulated captive surplus, exceeds $1 million per facility in Year 1. Departure becomes financially irrational. The public entity gets a durable, low-churn infrastructure layer. The growth story becomes capital-light. That is a narrative public market investors value highly.
By capturing PE-level economics through infrastructure coordination, MedMerge makes these hospitals unbuyable. Not through legal restriction, but because the economic rationale for selling disappears once the cost savings and float recapture are already realized by the owners. That signal alone tells public market investors the entity's performance is structural and independent.
If you want to see what the economics look like for your facility specifically,
reach out directly. No pitch. No deck. Just the math.
This document is confidential and intended for PHA board members and designated physician-owned hospital operators only.
Do not distribute externally without written authorization from MedMerge Collective.