Anesthesiologists have a lot of questions regarding Anesthesia Practice Management Companies (PMC’s). Once a small portion of practice, these corporations represent a rapidly growing percentage of anesthesia care in the United States. It is estimated that several hundred million dollars will be spent this year to acquire anesthesia groups and gain market share. There is an incredible amount of money flowing from capital markets and private equity into Anesthesia. From a purely economic perspective, will this lead to the commoditization of Anesthesia Care and/or an improvement in the quality and availability of care? This article (first of a series) will focus on the market forces leading to the growth of Anesthesia PMC’s.
Anesthesiologists seem to be unaware that their stake in a group practice may be an asset of rising value. The general climate may make physicians feel they are part of a declining industry financially:
- A weak economic environment with fewer elective procedures
- Declining reimbursements for services
- Difficult billing and collections
- Increasing regulation- often inconsistent- at the local, state and federal level
- Demands for capital investment in new information systems for quality management, efficient billing and collections
- The threat of capitated quality-based reimbursement
- Scope of Practice and Competition
- Hospital pressures to decrease subsidies
- Medication shortages
- Liability Fears
These are some of the forces combining to pressure Anesthesiologists. PMC’s and advisors use these arguments to their advantage to convince practices to sell. They highlight the need to shift the financial risk to larger entities. They also pitch favorable capital gains tax rates and future stable incomes as sales points. While the financial benefits are debatable, they are compelling.
Where did Anesthesia PMC’s come from? Many years ago, Anesthesiologists thrived in the fee for service reimbursement arena. As the years passed, third party payers have made negotiating rates and collection difficult. Anesthesia groups have reacted by merging into larger and larger groups. The larger entities could negotiate higher rates and profit. They also had a side benefit of being able to allocate labor and resources more efficiently. This efficiency created the ability to bid for contracts with more hospitals and, ultimately, take over smaller anesthesia groups. Competition combined with decreasing reimbursement (competitive advantage) allowed bigger groups to get bigger. Big groups are able to employ non-physician managers to oversee their growth, look for more acquisitions, and grow further. Their message to new hospitals: decreased subsidies, increased services, better allocation of labor, happier surgeons, increased volume, etc. They have the resources to answer RFP’s (requests for proposals) or make direct solicitations to hospitals. Once they get to a certain scale, they attract the interest of Private Equity and shareholders. Ultimately, they become large corporations whose patient care interests theoretically must coincide with their return on equity and shareholder returns.
The largest multispecialty groups can also leverage other hospital based services in a system to pick up Anesthesia business. In some circumstances, they can eliminate profits in Anesthesia to obtain contracts for Emergency Services or Hospitalist service. Business models like this can be impossible for small groups to compete with solely based on cost.
There are several flavors of Anesthesia Management Companies. Each is important because each has its own particular abilities for growth and needs to please stakeholders:
- Large multispecialty groups such as Mednax, Emcare, and Team Health etc. These public corporations (Mednax, Team Health) issue stock and turn to capital markets for funding.
- Large single specialty groups such as NAPA (North American Partners in Anesthesia) or Somnia. These are the companies receiving large infusions of cash from private equity corporations. These companies look to increase cash flow with efficiency. With direction from Private Equity Investors, they then make acquisitions, grow to the proper scale, and facilitate a public IPO or larger buyout. 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. According to Dr. Michael Hicks of Emcare, groups of 80-100 Doctors are attracting their interest. Many bad deals are also being done because people are afraid of being “left out”.
- “Under the radar” larger single specialty groups which are at a scale to attract private financing for capital development (loans, private investment, etc), but not large enough for market interest.
It is difficult to estimate the total numbers of MD’s and CRNA’s in Anesthesia Management companies. Speaking with leaders of several large companies, the estimates range from 10-25% nationally. The estimates vary by the definition of “management”. For the smaller number, the company is likely a large company in which all providers are employed. Staffing, billing and management may be separate subsidiaries of the primary company. The bigger number probably refers to larger anesthesia groups which may still be managed by physician partners. Billing may be outsourced but management is usually in-house. Of course, there are many flavors in between.
One of the best known PMC’s is multispecialty publicly-traded Mednax, Inc. of Sunrise, Florida. This company with growing revenues is set to spend $200 million to acquire more anesthesia practices in 2012 . According to their investor report at the William Blair Growth Conference in June 2012, they had $271 million in cash flow from operations in 2011 which is available for investment back into growth.
Mednax employs more than 1,650 physicians in 33 states and Puerto Rico. It started in 1979 with neonatal, maternal-fetal and pediatric medicine. Now, Mednax estimates that nearly 25 percent of U.S. neonatologists are by now part of Pediatrix.
The American Anesthesiology division includes more than 425 Anesthesiologists out of 700 total anesthesia providers. Three recent anesthesia acquisitions of note were those of Fairfax Anesthesiology Associates in Virginia, Southeast Anesthesia and Critical Health Systems in North Carolina shortly thereafter. They have groups in Florida, Georgia, Texas and New Jersey. They believe they offer physcians a high retention rate, access to technology to improve outcomes (Quantum System), legal, regulatory and growth support.
To investors, Mednax offers incredible growth prospects2. They describe the expected growth in surgical procedures as our population ages as well as greater numbers of insured with health care reform. They feel they can capture more of the market of providers. They believe they can introduce operational efficiency to practice. Larger pools of providers lead to greater pricing power and improved contracts. A large group allows them to pool resources, overhead and investment. Incentive compensation structures replace older contracts. Required expenditures for information systems that are impossible for smaller groups are easy for them. They have developed their own quality monitoring and outcome system, for example. In their investment conferences, they have convinced their investors that the return on Investment in Anesthesia is greater than any of their other hospital based fields. That is why they are investing $200 million of their $300 million allocated for investment to growth in Anesthesia.
Team Health of Knoxville, Tennessee, is another publicly-traded PMC that offers contracts to hospitals either by partnering with existing local physician groups or by recruiting new teams of providers. Its original focus was emergency medicine. In 2011, however, it added just two E.R. groups and, instead, shifted toward hospitalist services and Anesthesia. They bought Anesthesia Services, Inc. of Denver, Colorado. Scott Kizer, the Director of Anesthesia Practice Development at Team Health, says their growth is coming more from direct referrals, hospital subsidy review requests as well as private groups who want to cash out and receive a salary. They are looking to leverage multiple specialties to become more efficient. They believe that they will be able to maintain a medical direction model in their sites with ratios of 1:3 most of the time and 1:4 sometimes and always a float person. They are making investments in proprietary software to track quality measures.
Emcare, which employs greater than 1000 Anesthesiologists and 1000 CRNA’s has grown through multiple mergers, acquisitions and divestitures. They are a private multispecialty corporation. They were started by an emergency room physician in Baylor, Texas. Success in ED’s led to CEO questions about anesthesia and subsequent contracts for care. Today, Emcare provides Emergency Services, Radiology, Hospitalist Medicine, Acute Care Surgeons and Anesthesia. Dr. Michael Hicks, the outspoken leader of Anesthesia Services at Emcare, believes in efficient billing, collections and staffing, maximizing staffing ratios and leveraging service lines.
They look to create a value proposition to undercut competitors. In fact, according to Dr. Hicks, in many cases they can afford to make no money on billing with the other services they provide. How can a pure billing company make their 3-4% service margins with a competitor like this? They have access to so many providers they can afford to pay less and expect more productivity. More importantly, they have the resources to invest for the future and try new things. They advocate using preoperative clinics staffed by lower cost Hospitalists to increase perioperative safety and efficiency. They are investing in telemetry monitoring services for Intensive Care and, eventually, Anesthesia.
In contrast to the larger publically traded companies, the private equity financed companies tend to be single specialty Anesthesia companies. Recently, North American Partners in Anesthesia (NAPA) added New Britain Anesthesia, P.C. (NBA) to its anesthesia practices. These single specialty PMC’s tend to be more aggressive about recruitment. They are more likely to respond to a PMC from a dissatisfied hospital or to aggressively pursue a contract from a dysfunctional anesthesia group. In contrast, a group that attracts a multispecialty PMC is likely to have strong leadership and a track record of superior clinical service. This is not an exact rule, but is often true.
Increased financial and practice risk, however, has led to other market trends. A bigger change according to Karl Wagner of Mednax is the growth of integrated clinical health systems. He estimates that 55% of physicians are employed in systems and the rate is growing about 30% a year. Private companies are also creating options to provide some of the competitive advantages of PMC’s to smaller private groups. The Zenith Network of ABC4 and PhySynergy are two examples that will be discussed in future articles.
The decision to make the jump to anesthesia management companies is not as simple as economic analysis. Future articles will discuss the positives, negatives and alternatives for groups interested in a sale. There will also be a discussion of the factors involved in maintaining your relationship with your existing hospital. According to Dr. Hicks of Emcare, a private practice group should not lose a contract to a PMC. Those that are complacent, refuse to change, lose money or lose interest in investing for the future will fail. Scott Kizer of Team Health adds that the situation has to be very poor before Hospitals contact Team Health. The point is that private groups who are proactive can avoid problems before they happen. If your group is at risk for losing a contract to a PMC, says Dr. Harold Pierre of AnesthesiaStat Consulting and Perioperative Management, get help. Hire a consultant who can give you insight on the PMCs and help you make a competitive bid. You don’t want to bid with a 20th century model when the PMC has a 21st century bid.
Future articles will be more practical and discuss the benefits of sale to a PMC or the pitfalls in negotiating against a PMC. It will be helpful to hear from other anesthesiologists about their experiences, both positive and negative. What was the process like? Those partners who sold your equity interest, was it worth the transition to becoming an employee? If, on the other hand, you were forced by your situation to negotiate against or become an employee of a PMC, how do you feel about it now? Please respond via email to email@example.com, or, preferably, via a blog at http://www.anesthesiastat.com.php53-27.dfw1-2.websitetestlink.com/blog/ Updates to this article will be published there as well.
Amar Setty, MD