Frenetic consolidation: The anesthesia market today & where ASCs fit in

Merger and acquisition activity in the anesthesia industry hit record levels in 2014, with around 29 total transactions. In 2015, the M&A activity remained steady with approximately 26 closed transactions. One month into 2016, the market has already seen activity. While certain factors still hinder anesthesia practice M&A, the push toward consolidation is strong.

"What may impact the level of anesthesia acquisition activity in 2016 is the inability of some consolidators to access capital, given recent challenges in both the equity and debt markets," says Jeff Swearingen, managing director of Edgemont Capital Partners. "Despite this capital markets turbulence, I still expect to see over 20 anesthesia practice transactions in 2016. The underlying business rationale for consolidation is still very much in place."

In fact, according to according to Jeff Wagner, MD, partner at Davis Hill Equity Associates, the percentage and number of consolidations in the anesthesia industry may be far higher than reported in the media as only successful M&A deals get 'press' but non-M&A consolidation deals often do not.

Is bigger really better?
The PPACA caused a massive overhaul of the way care is delivered and the way care providers are reimbursed. According to Mr. Swearingen, stakeholders in the healthcare industry are evolving and using M&A as one of several options to affect change.  

"When Aetna, Humana, Anthem and Cigna decide they are not big enough on their own, that is a sign to others — facilities and physicians — that they need to consolidate to achieve operating efficiencies, counter the negotiating leverage the mega-insurers will now have and access capital to make infrastructure investments and create capital pools under risk sharing arrangements," he says.

In terms of the anesthesia industry, hospital administrators are expecting more of their anesthesia providers than ever before. Anesthesia teams are asked to increase coverage throughout the hospital for ICU/critical care, acute pain management and other services. They are also expected to increase efficiency and quality metric reporting capabilities.

However, anesthesia practitioners are being asked to do more with less. They are often asked to provide these additional services without any increase in subsidy, which puts a great deal of pressure on local groups. It makes anesthesia practice management more complex, pushing a number of practices to consider partnering or selling to a third party.

Thus, to survive in the post-PPACA landscape of healthcare, being "bigger" may be necessary.

Anesthesia M&A that leaves a mark
Two types of transactions in the anesthesia industry tend to make headlines and move the industry toward consolidation. The first is when a very strong, large group decides to sell and the second is private equity investment.

The first type of transaction acts as a catalyst for practices that haven't considered selling or partnering.

"For example, New Jersey Anesthesia Associates, a group Edgemont advised, or Valley Anesthesia, with over 200 physicians, were big, prominent groups that decided to sell in 2015," says Mr. Swearingen. "This caused a lot of physicians to ask themselves, 'if they are pursuing a sale, is that something our group should be considering as well?'"  

The second transaction type usually involves an institutional investor like Goldman Sachs or TPG investing significant capital to acquire a controlling stake in an anesthesia practice or company. Both investors have done so in recent years.

A third type of transaction is sale to companies like CRH Medical and AmSurg. Corporate partner investors have made active advances into the anesthesia and physician services space.

Dr. Wagner notes that AmSurg's $2.35 billion acquisition of Sheridan in particular may prove a game changer.

"It is clear evidence that facility providers may be accelerating their entry into the anesthesia space," he says.  

The anesthesia market in the near future
The AmSurg-Sheridan merger is great example of how consolidation in the anesthesia landscape has affected ASCs and their partners. The pressure to provide high quality care to a greater percentage of the population at lower costs is palpable for all healthcare organizations. New care models are emerging, such as bundled payments, however some new models are turning "symbiotic partners into competitors," notes Mr. Swearingen.

In the ASC industry, large management and development companies are responding to healthcare market challenges by acquiring or employing a larger number of providers and physician services. Another example of this trend at play is Surgery Partners recent acquisition of Asheville, N.C.-based AllCare Clinical Associates.   

According to Mr. Swearingen, the emergency medicine market is a comparable hospital-based specialty that is years ahead of anesthesia in terms of consolidation. Looking to the EM market today, around 25 percent of practicing EM physicians work for a large national consolidator. Whereas, the same can be said for about 8 percent of anesthesia physicians. But this figure has jumped from under 4 percent around five years ago, showing that the anesthesia market will see similar levels of consolidation to the EM market.

"External forces, such as financial factors, quality reporting and compliance issues for example, will cause anesthesia consolidation activity to increase in the next five to 10 years," says Dr. Wagner.

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