August 2, 2010

One strategy many anesthesia practices consider, in dealing with an economy that is still in the doldrums, is growth through merger with other groups. Another option is to sign up with a large anesthesia management/staffing company (“management company”) and leave the business hassles to that company. The latter scenario is more likely to be involuntary and the anesthesia practice is less likely to have a strong bargaining position. It is of vital importance in both cases to familiarize oneself with the contract being offered. In this Alert, we focus on the situation where the management company appears, unbidden, on one’s doorstep.

The opening for the management company

Problems

• Inconsistent clinical leadership in both MDA’s and CRNA’s [sic]
• Increasing costs
• Increasing surgeon and patient dissatisfaction
• Borderline un-recruitable environment
• Negative reputation in the provider community

These were listed as the problems to be solved for a client hospital in the first case study summarized on AmSol’s website. The initial phase of the solution involved Amsol’s “working with the hospital and the surgeons [to establish] an OR and anesthesia delivery model that best served the surgical community and [to establish] efficiencies for the hospital.” In a later phase Amsol recruited, separately, a Medical Director of Anesthesia and a Chief CRNA. Ultimately, according to the website, case volume increased by 15 percent; OR and CRNA utilization increased to more than 125% of the Medical Group Management Association (MGMA) benchmarks; stipends were reduced or eliminated, and the anesthesia service received high marks on surgeon satisfaction surveys.

The management company did not achieve these results by attending to the anesthesiologists’ needs and concerns. Note the wording of the first phase of Amsol’s activity: it worked with the hospital and the surgeons to establish an anesthesia service model “that best served the surgical community.” Amsol advertises that its model improves a hospital’s business in three ways: (1) cost control and revenue enhancement, (2) building case volume and (3) patient, staff and surgeon satisfaction. The anesthesiologists are principally seen as a cost center to be managed by one or both of the other parties.

Other management companies have very similar priorities. Premier Anesthesia, for instance, seeks to bring about changes that (1) decrease hospital clients’ “subsidies and costs,” (2) increase “your productivity and profitability” and (3) ensure “compliant, evidence-based best practices.” Their website also describes“three leading reasons why hospitals outsource their anesthesia services:”

1. Cost Issues
   Typically clinician productivity and OR room utilization are not optimized, thus driving up hospital costs, which adversely impacts the bottom line. …
2. Leadership Issues
   Lack of a clear business plan causes ripples effects throughout the OR. …
3. Service Issues
   Oftentimes, the anesthesia services are not aligned with the broader goals of the facility.

Somnia likewise emphasizes leadership, stating on its “Hospital Anesthesia Services” web page that it demonstrates its commitment to leadership in every hospital partnership by first appointing a strong Chief of Anesthesia and an on-site Administrator dedicated to your facility.”

Without leadership, systematic productivity gains and the crucial development of a culture focused on the customer are unlikely to occur, so we can fairly say that inadequate or “inconsistent” (cf. Amsol case study) anesthesiologist leadership is the most basic reason for a hospital to seek third-party help in managing the anesthesia service. An effective leader increases efficiency in the OR suite and instills in his or her colleagues the understanding that the surgeons and the hospital, as well as the patients and the community at large, are the anesthesiology department’s customers, who must all be kept happy.

This is not the place for another laundry list of leadership activities. Suffice it to show one way anesthesiology leadership can solve the surgeons’ and the hospital’s desire for maximizing case volume in the OR: Asa Lockhart, MD, MBA, in his lecture “You Have been Voted Off the Island” given at the 2007 ASA Practice Management Conference, said,

"Even though late starts are usually due to surgeons being late, they would be more apt to be on time if they knew the anesthesiologists and the system were going to be on time. An easy public relations fix is to get those pillow puppies to work earlier, see inpatients the night before surgery, and call your patients the night before surgery…."

Mark Weiss, Esq. writes about “Avoiding the Stall” in the July 29 issue of his Advisory e-Alert. “The Stall”™ occurs when a group or an individual feels that finances are good – and will stay that way without effort. Mr. Weiss gives the example of the pseudonymous Community Group, which had built up a very profitable practice over more than a decade and whose leaders did not see that there was much for them to manage. “Six months before the end of the renewal term, Community Group's leaders were completely stunned to learn that the hospital had chosen not to renew the deal. The administrator announced that he would issue an RFP….” To avoid being thus stunned, groups must recognize that “operating your business requires a continuous process of examining and resetting your strategic goals in synch with your changing observations of the competitive landscape, and then aligning tactics to accomplish those goals, only to then continue the process, reexamining and resetting strategy and realigning tactics.”

Part of continuously observing the landscape is knowing when your hospital and surgeons are growing unhappy. Indeed, the hospital may be the one to initiate discussions with the newcomer.

If you can, change tactics and realign your goals to meet these customers’ reasonable needs. Their needs may well include reducing or eliminating stipends the group receives from the hospital; the group’s tactics might include maintaining income through more and/or different work. Establishing a pain medicine service could be one such alternative. According to Robert M. Johnson, MBA, who was Vice President for Business Development at Sheridan Healthcare when he presented his paper “Hospital Anesthesia Contracts and Practice Management Companies: Why, When and How” in January 2007, “It is often the case that the hospitals initially play down the concern over paying a subsidy, and stress the desire to improve quality or customer service. However, the real motivating factor for their search is the desire to reduce the subsidy.”

When a hospital puts out a Request for Proposals (formal or otherwise), other groups and the management companies are going to let the hospital know that they can thrive without stipends. Anesthetix’s web page for hospital executives offers, in unambiguous terms, “complete elimination of stipends and subsidies.” Also important, the outsiders may convince the hospital that they are more committed to market expansion. Anesthetix advertises its “ability to develop new service lines – like our innovative Pain Management Program….”

The management company’s contracts

If you do not have the power to marshal a turnaround or to pull your group out of Mr. Weiss’s “Stall,” understand that you may soon be asked to sign an agreement with the group or the management company that has obtained the exclusive contract from the hospital. These agreements may be onerous, and you will not necessarily have the leverage to negotiate more equitable terms.

First comes the hospital contract, the terms of which you may, or may not, see. Typically the contract will give the management company the exclusive right to staff the anesthesia department in exchange for the use of technologies and processes designed to build case volume through “enhancing patient throughput,” and to control costs, principally by decreasing anesthesiologist to nurse anesthetist ratios as well as by limiting salary growth.

The contract will also give the outside company the responsibility and authority for managing anesthesia so as to increase the operational efficiency of the OR, which tends to be hospitals’ largest revenue stream. In defining this authority, the contract between the hospital and the management company may affect the anesthesia providers’ status, workload and income.  It may, for example, provide for the automatic termination of privileges upon termination of the contract with the management company – without those providers being parties to the contract or having any say in its contents.

Normally a contract cannot be binding on third parties. It is very important to understand this principle so that you will not be unduly impressed when a hospital or management company executive says that you must or must not do something because “it’s in the contract.”

The management company that is partnering with a hospital will also enter into separate, secondary contracts with the anesthesiologists and nurse anesthetists (jointly or as separate groups) that will directly describe the duties and compensation of the providers as well as the fee payable to the company for billing, accounts payable, HR functions, benefits, recruiting, staffing and practice management.

And this is where the written word and the practical reality may part ways. It is, therefore, extremely challenging and important to spell out the limits of the control that the providers are giving the management company. We have seen instances of conflict arise on such issues as:

• Whether the anesthesiologists are employees of the management company or of their own professional corporation.
• Whether they can remain independent contractors vis-à-vis the management company is not entirely a matter of choice. In an article to be published in the Summer 2010 issue of the ABC Communiqué, John Mulligan, Esq. states:

"In the context of a typical anesthesia group it would be extremely difficult to argue successfully that full-time regular staff are anything other than employees. This would be true even if the physician or other professional had a service contract which stated that he or she was an “independent contractor,” or even if the medical practice contracted with a legal entity such as a corporation or limited liability company for the services of the individual."

Mr. Mulligan warns, furthermore, that “Given the announced scrutiny which independent contractor status is receiving at both the state and federal level, what may have ‘worked’ or been ‘under the IRS radar’ in the past will not likely continue to do so in the future.”

• Whether the management company can decide, together with the hospital, on a change in the anesthesiologists’ duties without involving the group – e.g., increasing the number of CRNAs that the physicians must supervise concurrently. Is this within the scope of the contract under which the management company is to “provide business management services” to the group? Or is it within the scope of the anesthesiology group’s own contract with the hospital, if that agreement has survived the advent of the company? Does it even matter, practically speaking, if the hospital can revoke the anesthesiologists’ privileges? The hospital may be required to do so under its contract with the management company.
• The amount of the fee to be paid to the management company, and whether it represents fair market value so as to come within an exception to the anti-kickback or self-referral laws.
• Whether the anesthesiologists’ compensation for services provided to the hospital in prior years, i.e., their “stipend,” was merely a loan that could now be offset against the group’s earnings.
• Whether the management company may withhold funds from payments collected for the anesthesiologists’ professional services in order to compensate itself retroactively for the services of the CRNAs furnished before the anesthesiologists entered into the contract with the company.
• Whether the management company can require the group to give shareholder status to an anesthesiologist engaged by the company.

There are a few well-known instances in which anesthesiology groups have willingly become employees of a management company and thereby enriched themselves. Mr. Johnson’s analysis of 80 negotiations between a hospital and an anesthesiology management company showed that in only 10 percent of the cases did the company take the contract away from the incumbent group., The good news is that often the appearance of a management company ready to “eat its lunch” will motivate the group to improve its service and negotiate a new exclusive contract.

In some cases, nevertheless, a management company will succeed in its pursuit of a given hospital. The company’s view that the hospital and the surgeons are its customers, to the exclusion of the anesthesiologists, may produce longer work hours, more weekends and call, more intense nurse supervision, and reduced incomes. The anesthesiologists may be able to protect themselves through choosing the more adept contract lawyers. As always, though, the best course of action is prophylactic.

We will end this lengthy article by quoting Mr. Johnson one more time:

"After all, there is no reason why most groups cannot provide a better service at least as cost-effectively as [management companies]. They need to commit themselves to the same kinds of service objectives that the corporate players do. Individual practices should remain sensitive to hospital concerns over subsidy levels and customer service issues and if they do, should have little to fear at this … time from the presence of [anesthesia management companies]."

With best wishes,

Tony Mira
President and CEO