In our first article we focused on the basics of anesthesia practice management companies. In this article we’re going to evaluate the specific topic of private equity groups and anesthesia. We will discuss the basics of private equity and their desire to purchase Anesthesia groups. Finally, we will discuss the steps you should take to either pursue a sale of your group or avoid one.
In the past year there has been a remarkable increase in the amount of money allocated for Anesthesia. Initial estimates at the beginning of the year have ballooned from $1 billion to over $5 billion as new funds have entered the space. As one advisor stated, this is part of an “absolute land grab”. This money will be used to purchase and grow Anesthesia Management companies, which then purchase Anesthesia Groups. These investors believe a few fundamental ideas
- There will be an aging population requiring increased surgical services
- Ongoing cash flows from operations can be made more efficient, will be stable, and can finance future acquisitions
- Economies of scale will provide competitive advantage and lead to larger buyouts
Many factors are involved, but this is part of a general trend to acquire as many small physician owned entities as possible. They believe the efficiency of scale can lead to better billing, compliance and profits. They also believe that the proper scale will lead to a buyout by a larger entity. Remember- a small group is meaningless to a billion dollar company. 100 small groups are worth a lot, however. They can also pool the risk of dysfunctional groups or tenuous hospital relationships (much like Mortgage Backed Securities in 2008!). Alternatively, they can focus on high quality groups that can be utilized for long-term cash flow. Remember, they can make money in two ways: investment appreciation or efficiency and long term cash flow.
“Private Equity” is a poorly understood concept for many. Much of this is by design. They are famously secretive and not bound by many disclosure rules of the SEC. Generally, their business climate, one of private markets, profits from the “inefficient marketplace”. Basically that means that they can “buy-low” and “sell-high” in markets with limited pricing information (unlike a “public stock market” for example). This secrecy is pervasive and extends to numerous non-disclosure clauses in their contracts.
There are many flavors of private equity. Their motivations and goals vary, however their ultimate objective is the same- to make money. They essentially start with a group of managers who seek to invest money given to them. This money initially comes from wealthy investors. They may obtain additional money though loans. The larger ones may actually be public companies or have access to investment from Capital markets. They often use a large amount of debt (leverage) to finance their investments. The leverage amplifies the returns of the investors.
It’s very important to know where the money comes from and the funds strategy. This affects the nature of their investment, the types of groups they want (distressed vs. stable), and the length of time they are investing for. Funds are notoriously secretive about this information. You need to a good advisor who has access to the information or can decipher it from previous sales or from an understanding of the parent company.
Each parent company has their expertise. Some specialize in early stage growth and low market capitalizations looking to grow to 10 million. The next set looks from growth from 10 to 100 million. The final set looks to grow a company from 10 million to over a billion and typically look for an initial public offering as the big payout to shareholders.
The majority of deals involve a sale of the practice to a management company (financed quietly by Private Equity). The value is ascertained through active negotiation and consultations. Factors contributing to the value include:
- Strength of relationship between hospital and group
- Value of contracts with third party payers
- Growth of overall market in area
- Growth of surgical volumes
- Age of group members and expected years of practice
Steps for groups interested in a Sale:
Many groups have structures that make them ideal for sale. Perhaps there are a large number of controlling partners nearing retirement. These people are highly motivated to “cash out”. This has been the majority of the initial phase of sales. This leads to a big payout for owners ($500, 000- 1million) followed by a markedly reduced salary for a number of years. In this set of sales, junior partners and employees may feel cheated. In addition, there can be resentment over the long-term increase in practice burdens (inefficiency, increased services, new compliance requirements, new electronic records/billing systems, etc.) required of the new company.
It is critically important that groups enter the process well advised. It is easy to get “screwed”. Dr. Harold Pierre of AnesthesiaStat Consulting, an expert at negotiations says: “Seek good counsel to avoid the pitfalls that have spoiled recent investigations:
- Excessively high expectations of practice value
- Infighting among partners
- Fear or resentment from employees
- Perception of infighting by the hospital, CEO, Surgeons or staff. If they believe you are sacrificing quality and service for personal profit, they will resist.
With the proper planning and execution, a sale can be done in the proper way. Make sure to develop the benefits of your new partnership (access to resources, etc.)) That will make your group successful and happy for years to come. Do not focus on the money—greed kills most deals!”
The buyer is usually looking to make money within 3-5 years. If cash flow changes, there will likely be programmed salary reductions to improve the investment. Partners may be obligated to accept these reductions. Attrition by employees may force partners to pay money out of pocket to make up for the salaries of new hires!
Steps for Groups who wish to resist a sale:
Most providers have never known anything but private practice in an uncompetitive environment. The world is changing however and antiquated practice structures may be ill equipped to compete against lower cost groups/practice managers that look to take over contracts. There are benefits to independent private practice that you should fight for:
- Autonomy in billing, management and staffing
- Ability to maintain relationships with Surgeons and Staff
- Greater flexibility for the future
Your group probably already practices high quality, high efficiency care. Other articles will discuss this in more detail, but here are the basics of recognizing, expressing and showing the value of your services:
- Increase the profile of your group with active meetings with the CEO and representation in committees
- Estimate the value of your initiatives in reducing cost, increasing quality or improving satisfaction among patients, colleagues and staff. This could be critical!
- Create new initiatives to improve safety and quality such as blood transfusion protocols, acute pain protocols, etc. Get help from consultants to estimate cost savings and create surveys to save prove your value.
- Expand into new areas such as office based practice
- Explore other options. PhySynergy is one of a handful of companies, with alternative. They offer a management company, which offers electronic systems, billing and possible efficiencies. In return, you have a commitment or buy-in to a corporation with equity and possible growth.
In the first phase of consolidation, the “low hanging fruit” of anesthesia groups included the motivated ones with high-level control, which were relatively easy to acquire. In this next phase of consolidation, you will see more complicated group structures or partner ages enter the mix. We believe that this new environment will create different opportunities and pitfalls for anesthesia groups. It also offers groups more options. Those truly interested in maintaining local control while benefitting from the opportunities of a larger entity may be able find a buyer. Greater control may give greater choice of staffing and daily scheduling in negotiating with hospitals in creating and managing the value of your group. . Those looking to profit with equity in the new company in exchange for a smaller initial payout may also have an option.
We believe the transition will accelerate with the purchase of Greater Houston Anesthesia by U.S. Anesthesia Partners(USAP-backed by private equity group Welsh, Carson, Anderson & Stowe). John Zerwas, president of the American Society of Anesthesiologists, will now be on the board of USAP. This is one of many recently formed ventures that will reshape the business of Anesthesia practice.
It is difficult to evaluate the prices of the transactions. While the transactions are not published, some trends are showing up. According to some advisors, it looks like prices are reaching a plateau. It is hard to know if there is a downturn ahead or if they will stay flat for a while. It appears that groups will need to look into more than just price for negotiations. Local control, equity, leadership and better terms of “divorce” may be more important.
Amar Setty, MD
CEO AnesthesiaStat Consulting and