Group to Group: The Impact of Organizational Culture
The average pre-deal predictors of anesthesia group merger or acquisition success are, well, average. Economies of scale, increased opportunities, greater profits! If life, even business life, were just so simple.
Having worked with countless groups, both within and without the specialty of anesthesia practice, on mergers, acquisitions and other affiliations, it’s obvious that there are other key predictive indicators as well.
This article focuses on one of the most important soft, that is, non-dollar, indicators: the impact group culture has on the likelihood of success of the combined venture. Any merger, acquisition or affiliation that does not take into account the variance between the cultures of the constituent groups is doomed, at a minimum, to trouble, and much more likely, to failure.
It’s possible to discuss anesthesia group culture from several perspectives. For example, we might view group culture organizationally, socially, or psychologically.
But if you allow me to assume that you’re like my clients, I’ll discuss it from the perspective of success. I’ll provide a model for your use in gauging the success culture of anesthesia groups that you can use to assess the likelihood that a group merger, acquisition or affiliation will succeed. That model is The Four Circles™.
The Four Circles
Far from even being benchmarked to best practices, most anesthesia groups are mired in mediocrity. Let’s be clear about something from the start: I’m not addressing mediocrity in terms of medical competence; rather, I’m addressing the fact that most group leaders, in fact nearly all of their owner-physicians, spend so much time working in their group’s business (that is, practicing within the medical specialty of anesthesiology), that they devote little, if any, time and effort to working on their group’s business. I’m not exaggerating when I say that most anesthesia groups exist only because of a contractual relationship with one hospital. That’s not a plan for business success – it’s simply failure on the installment plan.
Having represented anesthesia groups as well as other hospital-based groups over three decades, it has become strikingly clear that there is a success- culture that distinguishes the most successful groups, what I term Strategic GroupsTM, from the great majority of the mediocre.
In fact, I have come to realize that there is a way of ranking groups based on their culture from the most reactive to the most strategic. I call this ranking The Four Circles.
Where Does Your Group Fit? Where Does Your Collaboration Partner Group Fit?
The first step in the process is to know where your group fits within the hierarchy of The Four Circles. Of course, this requires that you tell the truth.
The second is to use it as a tool to measure the cultural level of your proposed merger, acquisition or affiliation partner.
The process also provides two significant other benefits: The Four Circles can be used by a group actively seeking a collaboration partner, for example, a group seeking an acquisition target, as a filter to identify high potential targets. Lastly, and importantly, it can be used by your group as a stand-alone tool, in the absence of any interest in an affiliation of any kind, to move itself from a low level of success culture to a higher one.
In each of the following four sections, we’ll explore the culture of groups at each of the Four Circles levels.
The Reactive Group™
A Reactive Group exhibits many of
the following key cultural characteristics:
- It exists only as a matter of convenience to further each of its individual physician’s goals.
- It has little, if any, organizational structure beyond the rudiments required by law, and even those formalities are rarely followed.
- The relationship among its members may or may not be civil but the mindset is definitely “what’s in it for me?” not “what’s in it for us?”
- The group is entirely reactive to its circumstances in respect to the hospital, competition, referral sources, and the medical staff.
- Its sole purpose for existence is to provide services at a hospital—if that hospital no longer wanted to obtain those services from the group, it would have no reason to exist.
- Their services are completely commoditized. There is virtually nothing that distinguishes their services from any other group of providers within their specialty.
In many respects, a Reactive Group is worse than no group at all. That’s because a group in the reactive stage provides a false sense of security to its members, even though they are involved, to a large degree, in self delusion.
Reactive Groups are, in large part, a vestige of the system that existed in and prior to the early 1980s. During that time period, most anesthesiologists practiced independently of any group. The only linkage among them was that they shared membership in the medical staff department. Each physician was in business for him or her self. There was no vehicle for contracting in common or for carrying on any business in common.
With the onset of managed care and then its further market penetration, there became a need for anesthesiologists to coordinate contracting with those payors, and, accordingly, to tie together their business operations. Equally important as the need to contract together was the need to avoid being viewed as conspiring with one another in violation of antitrust laws designed to prevent price fixing collaboration. These pressures forced independent practitioners, who otherwise were content to continue to be independent, to form group practice entities.
However, because of their history of independence combined with their distrust of their former competitors, they tended to form entities which met the minimum standards required to be able to contract together.
These groups lacked any real business engine—they were marriages of convenience only. Although technically bound together, each member continued to desire to “eat what he killed” or, rather, billed, not simply in the sense of work units, but in the sense of the reimbursement that matched those units. Obviously, that was a problem from an antitrust standpoint in that the group was required to be totally financially integrated; however, the pre-group mindset of fighting not only over cases but over cases that provided high levels of reimbursement, continued unabated.
Some of today’s Reactive Groups are the linear descendents of those early shotgun marriage groups—in those cases, there’s been little, if any, evolution in the business DNA of the group. Other Reactive Groups, although formed much more recently, often result from instances in which the impetus for group formation came not from the members themselves, but from pressure from the hospital to form a group. Although the reasons for formation were different than those that spurred the original, historical Reactive Groups, the result is the same: a number of department members being forced to “live with one another” although that is not their first, second, or perhaps even third choice, independence being the desired business non-structure.
Stories abound of the strange interaction among members of purely Reactive Groups. For example, among some of my own 1980’s Reactive Group clients, there were incidents of one group member brandishing a gun in an argument over the allocation of cases, fistfights and shouting matches among group members were common, and bizarre behavior, such as acting out by regularly exiting the doctors’ parking lot by driving through the bushes, not out the driveway.
The obvious indicator that one is dealing with a Reactive Group is the fact that its members are clearly out for themselves, and themselves alone. They tolerate their colleagues as necessary, but that’s about it.
Accordingly, they do not work together on any planning outside of their one facility arrangement. It is likely that they even view their entity as existing solely at the convenience of the hospital; if the hospital did not renew their exclusive contract there would be no further need for the group and, other than the fact that there would be an impact on a member’s income stream, he or she would not particularly care — they would simply find another relationship somewhere else.
Lacking any desire to do any business planning, these groups are purely reactive to events that happen to them, whether at the hand of the hospital or of competitors.
Additionally, because each member views what he or she does as essentially being for his or her own benefit, there is no coordination in respect of providing any level of service above the bare minimum. The group members do nothing among themselves to coordinate any level of delivery of service other than can be managed by a medical staff department.
A Reactive Group simply is, and that’s it.
The Group In Equilibrium™
The next stop in the culture ranking of hospital-based groups is the Group In EquilibriumTM. A Group in Equilibrium exhibits many of the following key cultural characteristics:
- It exists primarily to further each of its individual physician’s goals although there is some understanding that they must band together as a group in order to compete – in essence, it is a “club” with members sharing at least one common goal: keeping others out.
- The group follows the minimum required formalities to protect its structure from legal attack.
- The group members have more or less civil relationships among themselves. They understand, to a certain degree, that fulfilling their individual objectives requires that they align themselves with others.
- The group engages in a low level of planning as to its very short term future, chiefly in respect of scheduling matters. For the most part, it is reactive to all circumstances outside of its easily accomplishable, immediate concerns.
- Its sole purpose for existence is to provide services at a hospital — if that hospital no longer wanted to obtain those services from it, it would have no reason to exist.
- Their services are commoditized. There is little that distinguishes their services from any other group of providers within their specialty.
The members of a Group In Equilibrium, like the members of the groups one level lower, the Reactive Groups, are guided by a sense of their individual, rather than their group’s best interest. They do, however, understand that it is necessary for them to come together with their colleagues in order to fulfill their individual destinies. Accordingly, there’s generally cordial interactions among group members in the sense of colleagues rather than true partners.
Just as members of a club understand the need for the club’s continued existence, the physician owners of a Group In Equilibrium have a similar interest in their entity’s continuation. Success, on the other hand, is not measured at the group level, but only on the individual level. “How much did I make this year?” is the driver, not “how can the group do better next year?”
Take for example, the small anesthesia group which attracts a subspecialty trained member and compensates her on a fixed monthly basis while all of the other members of the group are compensated based upon their production. Although it later becomes apparent this shareholder’s fixed salary is $50,000 a month, in return for which she does one or perhaps two cases a day, five days a week and is generally home by noon, is a tremendous drag on the group’s finances, yet she resists all suggestions that she should devote a portion of her time after lunch to income generating activities on behalf of the group.
There is little to no planning done for the group’s future. The minimum legal formalities are followed in order to preserve the existence of the group, but, as it’s viewed by its owners as a vehicle for individual, not collective or entity achievement, planning for the group’s future, at least beyond the next year or so, is seen as unnecessary. In fact, those who suggest it are often ridiculed as dreamers. Comments from group members that “the hospital pays a stipend so they really own us” are not uncommon and are rarely challenged.
Unfortunately, the great bulk of anesthesia groups operate at the equilibrium level. They do what is necessary to keep the group afloat, preventing themselves from sinking, but doing nearly nothing to distinguish themselves in terms of a future separate and apart from the facility (usually one, not more) that they “serve.”
If that facility awarded an exclusive contract to another group, the Group In Equilibrium would disband, as it has no existence separate and apart from its relationship with that facility. Instead of being seen as a deficiency, most physician owners of Groups in Equilibrium see this lack of real business existence as a fact, and not a sorry one at that, because their primary interest is in their own success disconnected from the group’s, membership in which they simply tolerate.
On a business level, these groups suffer from the evils of benchmarking, having benchmarked to the leaders in the industry, who are, at best, practitioners of business mediocrity. Their practice skills may be at or better than national standards, but their services are still commoditized in the view of patients, many colleagues, payors, and the hospital.
The Focused Group™
The Focused Group™ represents a dramatic shift in the success culture continuum.
It exhibits many of the following key cultural characteristics:
- It exists to further the group’s immediate and midterm goals although group members are also free to pursue their independent goals within the practice specialty outside of the group.
- The group follows the required formalities to protect its structure from legal attack.
- The group members have good relationships among themselves, understanding that fulfilling their individual objectives requires that they align themselves with others.
- The group engages in a high level of planning as to its short and medium term (6 months to perhaps a year) future. It has no understanding of the interrelation among the internal and external instances and events affecting the group and its relationships and remains largely reactive to all circumstances outside of its easily accomplishable concerns.
- Its chief purpose for existence is to provide services at a hospital — if that hospital no longer wanted to obtain those services from it, it would have little reason to exist as its outside work is not sufficient to enable it to remain in business.
- Their services are commoditized. There is little that distinguishes their services from any other group of providers within their specialty.
- As opposed to the groups lower in the chain, the Reactive Groups and the Groups in Equilibrium, the members of a Focused Group understand that the group exists to further the group’s goals. For the first time in the cultural continuum, the physician members of the group understand that their self interest is furthered by aligning their individual futures with the group’s.
The fact that group members subsume their individual interests to the group’s, the scope of this alliance between individual members and the group has a clear boundary: What is in the group, professionally, is the group’s; but there is an understanding that individual members may pursue, for their own account, professional opportunities outside of the group. This is more than simply “moonlighting,” it extends to the notion that group members may devote time to pursuing active business opportunities, even ones immediately geographically proximate to the group, for their own benefit.
The Midland Group (not its real name) provides anesthesia services at three hospitals in a Midwestern urban locale. The group is fully integrated financially, has strong leadership, and the group’s members cooperate among themselves to a very high degree. One of the group’s senior members, Dr. Jones, together with a friend from another anesthesia group across town, opens a medi-spa in a shopping center a few blocks away from the campus of the hospital. The medi-spa recruits nurses from the hospital, both as prospective employees and as prospective customers. Although this puts pressure on Midland’s relationship with the hospital, Dr. Jones asserts that he has every right to pursue his own interests outside of the group’s schedule. The other members of Midland, including its managing members, do not disagree.
Importantly, the organizational structure of Focused Groups goes well beyond that simply necessary to preserve the entity’s existence pursuant to applicable state law. These groups have somewhat sophisticated management structures through which group members devote some time and effort to group management and planning. However, planning is generally limited in scope to the group’s short and intermediate future, from two or three months out to perhaps, at the maximum, a year.
The defining, and retarding, characteristic of this planning is that it is additive: improvement is seen as tied to, and built upon, existing conditions. In other words, there is a notion of the need for incremental improvement but there is no understanding of the concept of a truly transformative future.
This extends to the scope of business activities, flowing from the clearly understood limits that activities outside of the group’s immediate scope is left to the members, not to the group itself. Therefore, there is no mature concept on the group level of pursuing new opportunities. Accordingly, Focused Groups generally remain single-facility focused. And, as is the case with Reactive Groups and Groups In Equilibrium, if the group’s relationship with that hospital ended, the group would have little, if any, reason to continue to exist.
It also extends to the scope of service quality: although it might be “cutting edge” in terms of professional expertise, it remains sorely lacking in terms of any understanding of what is required to break out from perception as a commodity provider.
The Strategic Group™
From the perspective of success, Strategic Groups are the most developed. A Strategic Group exhibits many of the following characteristics:
- It exists to further the group’s long term goals.
- The group follows the required formalities to protect its structure from legal attack.
- The group members have well developed, positive relationships among themselves, understanding that they will maximize their long term interests by maximizing the group’s interests.
- The group engages in high level strategy as to its short, medium and long term future. Although it remains flexible in order to deal with the inevitable surprises, it actively strategizes and deploys tactics to influence its future.
- Its chief purpose for existence is to develop its business for the profit of its owner physicians and, as such, does not see its existence as necessarily tied to the existence of its relationship at any particular hospital.
- The way that their services are delivered is unique. Although it may well be that there are many other providers of their specialty services within the area, the overall combination of the way that the group delivers those services and the experience that they provide to the facilities, to the other members of the medical staff, to their patients, and to the community at large, has created an experience monopoly that competitors, even if they understood what was being provided, would not be able to duplicate.
The scale of growth from Focused Group level to Strategic Group status is logarithmic — it represents a transformational change in the makeup of the group.
A Strategic Group exists to further the group’s goals. Its owner physicians understand that the group’s short, medium and long-range goals outweigh their individual interests but, at the same time, understand that the tremendous value created by accomplishing those goals maximizes their own self interests.
All professional activities on the part of the owner and nonowner physicians are rendered through, and on behalf of, the group. There are no outside anesthesia-related business activities and, in almost all instances, no outside business activities of any sort, save purely passive investment interests unrelated in any way to the practice of medicine. In a very real sense, there is no longer any notion of duality — group and owner physicians are united, not opposed.
Although there are differing governance structures, for example strong-leader structures and board/ officer structures, Strategic Groups have concentrated authority. There is a clear understanding of the difference between the ownership interest that each member has and the management power which is confined to as small a group as possible. Strategic Groups are not hindered by the “consensus disease” that prevents most groups, even those at the Focused Group level, from achieving phenomenal success.
In addition to overseeing day-to-day management, the group’s leaders devote significant time and effort to planning for the group’s short-term future as well as to strategizing in respect of the group’s medium and long-term future. Strategy differs from planning in that it is not a process of incremental growth; rather, is a process of envisioning a future and then using the leverage of that goal as if it were a magnet to pull the group toward its much greater envisioned result.
Inherent in this strategic management is an understanding that nearly all aspects of the group and its activities impact upon its future and, therefore, they can be manipulated to achieve the group’s goals. Consider the following example:
Garden City anesthesia group provides services at multiple facilities.
Through an ongoing, intra-group program of tracking case data by surgeons, case type, payor-class, and reimbursement, the group is able to track and trend both individual surgeons as well as participation in various hospital service lines.
When this continuous data analysis revealed that one of the facility’s new programs was resulting, for the group, in an overwhelming number of charity cases, the group formulated a strategy to deal with both the immediate situation as well as to achieve other goals. The group then developed interrelated tactics to implement each of the strategic thrusts.
For example, among the group’s concerns were, of course, the financial cost to the group of unintended additional charity care. The data developed by the group demonstrated that the hospital’s new service line was working to incentivize the participating surgeons to actually seek out low to no-pay cases. Better reimbursed cases were being crowded out of the schedule. Therefore, this required a strategy to either obtain significant financial support in return for continued participation in the new service line or to limit or kill the new service line.
At the same time, the issue of financial support in respect of the service line intertwined with the larger issue of protecting the group’s current level of financial support from the hospital.
We designed a multi-pronged initiative which included published studies, press releases, in-person meetings with administrators and other influencers including those surgeons whose profitable cases were being cancelled or delayed. Of course, the political support developed though this effort will be of value not only in respect of the instant, charity care service line, but also in terms of increasing leverage in respect of the renewal of its exclusive contract with continued large financial support.
Strategic Groups increase leverage in other ways as well.
Strategic Groups understand that simply being wedded to providing services at one facility creates the perception, the entirely correct perception, in the mind of the hospital’s administrators that the group’s mere existence hinges upon the successful renewal of its exclusive contract. As a result, the hospital’s bargaining strength is dramatically increased.
As a result, Strategic Groups actively develop relationships with multiple facilities. When this strategy is fully developed, the group can simply walk away from a proposed new or renewal facility contract that does not meet its criteria.
Lastly, Strategic Groups develop significant time, resources and training to assure that they create an experience monopoly which is branded to the group. Although there are other anesthesia providers in the area, the overall combination of the way that the group delivers those services and the experience that it provides to the facilities, to the other members of the medical staff, to its patients and to the community at large, has created an experience monopoly that competitors, even if they understood what was being provided, would not be able to duplicate. As a result, the group becomes the only logical choice to provide services at the facility. It has broken free of the bounds of commodity status.
Why Four Circles Analysis Is Crucial
Note that few groups fit nicely within a specific Four Circles category. Most groups have a foot in each of two neighboring levels of group culture. Understanding these cultural distinctions is vital to the success of any planned consolidation of anesthesia groups. Any merger, acquisition or affiliation that does not take into account the variance between the cultures of the constituent groups is doomed, at a minimum, to trouble, and much more likely, to failure.
Consider the following example:
Your group of seventy eight anesthesiologists, let’s call it Unified Anesthesia of Catalina, primarily exhibits the traits of a Strategic Group. It provides services at four facilities. It has strong leadership through a small management committee and an empowered managing partner. The group has developed and communicated a strategy for its long term future. All group action is filtered though that strategy. Unified operates on an entirely unified basis, one element being a compensation plan that applies across all
locations and practice subspecialties.
Unified has identified the opportunity to provide services at a community hospital approximately 20 miles distant. It’s presently served by a group of twenty anesthesiologists, sixteen of whom are partners in the “Main Street Group.” Main Street’s lead partner approached your group interested in merging Main Street into Unified in order to, as he put it, “achieve economies of scale.”
Through your initial due diligence, you learn that on an organizational level, Main Street’s partnership operates on consensus basis. They have not held a partnership meeting for years, with close to total agreement among the partners required before any action is taken. Although the partners have very cordial relationships, it’s clear that “votes” (actually veto power) in this sense are based on what’s best for the individual partner. They have engaged in very little planning, even in respect of their exclusive contract with their facility, which has a one year “evergreen” term that they’ve simply allowed to roll over for the past eleven years. Six of Main Street’s partners also work at several surgery centers in the area (and demand control over their hospital schedule in order to do so) – they work at those ASCs independently of the group and of each other, yet they traded off of their affiliation with Main Street in obtaining those opportunities. Main Street is, at best, a Group in Equilibrium.
In evaluating this merger opportunity, you must consider the difficulty of transitioning Main Street’s partners into Unified’s governance, scheduling, and compensation model structure. Is it even possible? Would Main Street’s partners be granted a transition period to conform, including transferring all of their practice activities into Union, and if so, how would granting it impact existing relationships within Unified? What if they never conform? Could Main Street’s physicians ever successfully be moved into positions at other Unified facilities or would they “infect” its operation?
Those are simply a few of dozens of similar, and dissimilar, issues that must be considered in respect of the cultural aspect of the potential merger. Of course, there are also many other facets of merger analysis.
The key point of this article is that the level of culture development success within your group and within any potential merger, acquisition or affiliation partner is at least as important as any other factor of merger analysis. In fact, even if the “numbers” are right, even if there are tremendous “economies of scale,” attempting to combine groups of widely varying Four Circles ranking is an extremely difficult, if not impossible, undertaking.