Practice Management Companies’ Acquisitions of Anesthesia Practices
Every private anesthesia group in the United States knows that practice management companies are in the business of acquiring and operating anesthesia practices are growing rapidly. This is part of a general acceleration in health care merger and acquisition activity driven by healthcare reform and by the economic uncertainty of the last few years. Physician practices have become one of the fastest-growing targets; larger entities such as health systems, insurance companies and PMCs are buying up hospital-based specialties with a view toward participating in accountable care organizations and receiving bonuses for improving quality and decreasing costs.
Hospitalists, whose specialty barely existed twenty years ago, now number more than 30,000. Hospitalists attract the interest of venture capital and expanding corporations because of their role in managing acute inpatient care. Emergency medicine has a long history of PMC partnerships.
Anesthesiologists, as specialists in the management of perioperative care, are likewise attractive candidates for acquisition. Many anesthesiologists: (a) fear being bought, (b) are actively seeking alternative consolidation strategies such as mergers with other medical groups, (c) hope to be bought by the right PMC, or (d) have already been bought. In this overview, we will look at some of the benefits and the risks of acquisitions. In future Alerts, we will consider the benefits and risks of other forms of practice consolidation, in particular mergers with or acquisitions by other anesthesia practices.
Perhaps the best known of the various PMCs focused on anesthesiology is publicly-traded Mednax, Inc. of Sunrise, Florida. Mednax has announced plans to spend some $200 million to acquire more anesthesia practices in 2012, according to an article published by American Medical News on February 21, 2012. The article goes on to state that, "The company earned $1.19 per share for the fourth quarter of 2011, an increase from the $1.12 earned in the fourth quarter of 2010 and the $1.07 earned in the fourth quarter of 2009. Revenue grew 9.9 percent in the fourth quarter of 2011 compared with the same quarter in 2010, and operating income went up 6.6 percent."
Mednax employs more than 1,650 physicians in 33 states and Puerto Rico. Launched in 1979, its original specialty was neonatal, maternal-fetal and pediatric medicine, and Mednax estimates that nearly 25 percent of U.S. neonatologists are by now affiliated with its Pediatrix Medical Group.
Mednax's American Anesthesiology division includes more than 700 anesthesiologists, nurse anesthetists and anesthesiologist assistants. Three of its most well known anesthesia acquisitions were those of Fairfax (Va.) Anesthesiology Associates in 2007 and of Southeast Anesthesia and Critical Health Systems in North Carolina shortly thereafter. The American Anesthesiology practice lineup also encompasses groups in Florida, Georgia, Texas and New Jersey.
TeamHealth Holdings, Inc., headquartered in Knoxville, Tenn., is another publicly-traded PMC that offers business solutions to hospitals either by partnering with existing local physician groups or by recruiting new teams of providers whom it employs. Its traditional focus has been emergency medicine. In 2011, however, it added just two emergency medicine practices while buying a hospitalist group and acquiring the operations of Anesthesia Services, Inc. whose 46 anesthesiologists and 36 CRNAs serve five hospitals and three ambulatory surgery centers in the greater Denver region. In 2010, one of TeamHealth's four medical practice acquisitions was of an anesthesia group.
Most recently, in January of this year, Northern American Partners in Anesthesia added New Britain Anesthesia, P.C., a medical practice that provides anesthesiology services at hospitals and other medical facilities in central Connecticut, to its growing roster of anesthesia practices.
There are other examples, not just of publicly-traded PMCs purchasing the operations of anesthesia practices, but of private equity firms investing in anesthesia as well. Some private equity companies who now have holdings in anesthesia are Moelis Partners, the Beekman Group, Blackstone Group, DFW Capital Partners, Triton Pacific Capital Partners and Provident Healthcare Partners. Unlike PMCs with years or decades of managing anesthesia practices — or the ZENITHAnesthesia Practice Network; see the final paragraph of this article — these private equity firms may not be able to offer much operational support.
The value proposition for an acquisition is the potential revenue from a financially sound, successful practice that has a solid, established relationship with its hospital or health system but that needs the resources of a deep-pockets partner in order to grow, acquire new technology and negotiate better payments. This is a far cry from the situation where an anesthesia department is providing unsatisfactory service to its hospital, which issues a request for proposals and ultimately awards the contract to an outsourced anesthesia management company. Hospital dissatisfaction with its anesthesia staff most often starts with inadequate anesthesiology leadership. In contrast, a group that attracts a PMC is likely to have strong leadership and a track record of superior clinical service.
Potential Benefits of a Sale to a PMC
An anesthesia practice considering partnering with a PMC will want to explore whether the deal affords some or all of the following potential economic and professional advantages:
* Opportunity to monetize growth and success already achieved (senior members of the group)
* Opportunity for increased income based on performance incentives and/or greater utilization of CRNAs and AAs
* Income and employment security (depending on the structure of the deal)
* Independence from hospital financial support (stipend)
* Leveraged negotiating with payers
* Management infrastructure
* Investment in information technology and data collection/analysis
* Size-related cost efficiencies and purchasing power
* Access to better employee benefits (retirement, health, disability, etc.) at lower cost
* OR management expertise
* Access to risk management, quality management and compliance programs
* Leadership development and compensation opportunities
* Implementation of evidence-based standardized protocols and best practices
* Educational opportunities
* Physicians can focus on practicing medicine
Risks of the Sale
Not every purchaser of a practice is an experienced PMC with the management systems and infrastructure that will enable the group to thrive. The purchaser may have sufficient cash or credit to make the acquisition but it may be a firm new to anesthesiology or even to medicine, with none of the ongoing operational or financial support to keep the practice thriving. The biggest risk of the sale is the nature of the purchaser itself. For a rundown of the many questions the anesthesia group should ask about a potential purchaser, we refer the reader to the excellent paper "What You Need to Know Before You Sign the Contract" prepared by Judith Jurin Semo, Esq. for the 2012 ASA Practice Management Conference. Among these questions are the following:
* Who is the purchaser? Does it have experience in operating anesthesia practices? What is its governance structure? What proportion of its business will the practice constitute? If the purchaser is new to anesthesia, how can the purchaser be ‘sold’ to the primary group customers (meaning the facilities at which the group provides services) as a reliable provider?
* Does the purchaser have the resources to pay the initial cash price as well as any subsequent installments?
* What are the purchaser’s long-term plans? Is this a private equity company that plans to "flip" the anesthesia practice?
* Who will run the group once it is acquired?
* How does the purchaser propose to compensate the group on an ongoing basis? Via a bonus pool? Distributed how?
Even assuming that the purchasing PMC has ample experience and resources, the rationale for the acquisition is to make a profit. There is also a significant risk, therefore, that anesthesiologist compensation will decline over time correspondingly, even if the purchase price is a multiple of annual revenues rather than the more typical single year’s revenues.
It is also possible that compensation will drop initially but increase later as economies of scale are realized. David Whitten, CEO of Anesthesia Medical Group, PC in Nashville, pointed out cogently in an interesting discussion of PMCs on the MGMA-Anesthesia Administration Assembly listserv on February 22, however, that "we should not assume that it is a given that anesthesiologists' compensation is or will be reduced upon being acquired." Mr. Whitten noted that the efficiency with which the practice is run, the ratio of anesthesiologists to anesthetists, the availability of individual productivity incentives, and the net present value and tax treatment of the acquisition dollars may all operate to protect the incomes of at least the owners of the practice. By and large, these are changes that will yield one-time or declining benefits. Acquisition by a PMC may sometimes be an anesthesia group’s best defensive strategy, but it invariably involves sharing profits with another entity.
Candidates for acquisition will want to make use of the most knowledgeable and sophisticated consultants (probably independent, but possibly employed by the practice) in determining the short- and long-term implications for compensation. They will also want to examine such subjective factors as the fit of the various corporate cultures, including the cultures of other anesthesia practices that the PMC may be operating, and their comfort level with the transfer of some control away from the local level and to the larger entity’s management.
As Franc Galinanes of North American Partners in Anesthesia stated in his excellent article Anesthesia: The Increasing Consolidation of our Industry, published in the Summer 2011 issue of the Communiqué,
Aggregation as a defensive measure is no stranger to medical practices. We’ve seen significant consolidation in pediatrics, OB/GYN, urology, large multi-specialty groups and, now, anesthesia. Be it through a merger, joining a larger group, sale to another entity or through other methods, the paradigm is shifting away from the small independent practice towards larger cohesive anesthesia management companies and groups.
Recognizing this shift and the advantages of size, a number of anesthesia practices are consolidating by merging with each other, rather than by selling their operations to a PMC. ABC is working to provide another option and has just completed the formal registration of the ZENITHAnesthesia Practice Network. Zenith is a not for profit corporation that will offer participating groups “cohesion” and as many of the benefits provided by PMCs — group purchasing options, data aggregation and benchmarking, peer-to-peer discussions, relationships and learning opportunities — as Zenith’s physician leadership chooses. The future Zenith Board of Directors may decide to take the steps toward integration that will allow collective negotiations with payers and other third parties. This would give Zenith member groups the types of competitive advantages afforded by the best PMCs and "practices without walls" — while they remain legally independent organizations.
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