Strategy and Adaptability in a Competitive Market: Lessons from the Nation’s Largest Anesthesia Organizations

Co-Founder and Principal, Enhance Healthcare Consulting, Aventura, FL

Jody Locke, MA
Vice President of Anesthesia and Pain Practice Management Services Anesthesia Business Consultants, LLC, Jackson, MI

As of April 1, 2017, eight entities employed more than 22 percent of all anesthesia providers in the United States. The size and scope of these entities could not have been envisioned just a decade ago. How each of these organizations grew or morphed to its current size and scope reflects the dramatic changes reshaping hospital-based physician practices and the specialty of anesthesia. More relevant still is what the history and evolution of these organizations tells us about the future of the market for anesthesia services and what threats and opportunities lay ahead for the typical hospital-based anesthesia group.

Traditionally, an anesthesia group was an entity owned by anesthesia providers intent on maintaining and managing a specific niche that might include one or more hospitals and various surgery centers or doctors' offices in a given local market. Although they represented a variety of legal entities, corporations, partnerships and LLCs, they were fundamentally professional fraternal organizations designed to perpetuate a certain status quo. They operated with very lean overheads. The cost of malpractice insurance and billing were the largest expenses.

While most anesthesia groups today have exclusive contracts with the facilities they serve, the legal constraints of such agreements are considered little more than a necessary evil. The primary objective of most anesthesia practices is job security and maintenance of the owners' income and lifestyle. It is safe to say that most of the thousands of anesthesia practices across the country have not aspired to be anything more than good partners with the facilities they serve by providing consistent patient care.

Growth is not something that most practices have embraced willingly. But it has become a market reality that cannot be denied. As managed care became a critical factor in healthcare economics, most hospitals insisted that the anesthesia department function as one integrated entity rather than as multiple independent practices. This change resulted in hundreds of anesthesia group formations—some amicable, others not. Such shotgun marriages often resulted in dysfunctional entities with conflicting cultures and values. Some entities took the opportunity to develop regional mergers and partnerships. In retrospect, these were the exceptions rather than the norm. Perhaps the best example is Mountain West Anesthesia, LLC in Salt Lake City. At one point, LDS Hospital in Salt Lake City had 35 independent anesthesiologists. The administration asked them to form one group. They agreed to merge but not only at that facility. They incorporated virtually all of the anesthesiologists along an area of Salt Lake City known as the Wasatch Front, producing an organization that now includes 150 board certified anesthesiologists.

More often than not, though, the selection of a common billing solution and disagreement over new group leadership and governance structure ultimately prove insurmountable to the completion of the merger. Many merger discussions end inconclusively and a viable entity is never created.

The past two decades have seen a tectonic shift in the anesthesia market across the country. The entities profiled below represent those that, for the time being, appear to have successfully positioned themselves in the new market. While a few of these entities are still single-specialty practices owned by the practice's physician partners, the majority have been sold to groups of investors clearly intent on mining the specialty's profit potential.

Savvy and successful investors expect two things: growth of the core business and a significant return on their investment. One may wonder why anesthesia has earned such investor interest. The reality is that significant amounts of capital are being channeled into many of these organizations. Some, like Somnia and NorthStar, have developed aggressive marketing programs and a national salesforce to identify and reach out to new hospital clients. Others, such as MEDNAX and U.S. Anesthesia Partners (USAP), employ a merger and acquisition strategy aimed directly at large- and medium-sized anesthesia groups in a specific region. Large multispecialty organizations such as TeamHealth and Sheridan (now Envision) grow their anesthesia footprint by providing the intended client with additional hospital-based services in such areas as neonatology, emergency medicine and radiology.

For years, Envision and TeamHealth have responded to requests for proposals (RFPs) from hospitals and health systems. This can be a time-consuming and frustrating process that requires the bidder to make sense of limited financial and often incorrect operational information to project potential revenue and develop an appropriate staffing model. The successful bidder must find ways to demonstrate their value to the prospective partner, generate a profit within the constraints of the hospital budget or reduce the present anesthesia subsidy. Many organizations have found this to be a slow and risky way to grow the business, given the fact that many of the institutions that generate RFPs are doing so because the previous group could not operate the department profitably due to low or inconsistent surgical volume and challenging payer mixes.

This explains the current interest in acquisitions of profitable anesthesia practices. The capital requirements are far greater, but the results are considerably more predictable. By acquiring Valley Anesthesiology Consultants in Phoenix, for example, Envision expected to count on a large, stable and well-run organization to enhance its balance sheet. As most of these organizations prove the value of such acquisitions, they enhance their ability to raise additional capital from potential investors. The amount of private equity money and new investors interested in the anesthesia market seems limitless.

The evolution of the specialty from fraternal organizations to strategic and profit-driven business entities has the potential not only to affect all anesthesia groups, irrespective of size and location, but also to redefine how anesthesia services are provided in an environment where the ability to safely manage a patient through the discomfort and trauma of surgery is now considered a commodity.

The American anesthesia market used to be viewed through the lens of regional interests, conventions and statespecific regulations. Nurse anesthetists and anesthesia care teams were common in the South and East, but rarely used in the West. Anesthesia practices in the Mid-Atlantic region aggressively sought opportunities to provide anesthesia to endoscopists and endoscopy centers, while those in the West, specifically in California, were reluctant to take on such services.

Anesthesiologists in the East tend to have compensation systems based on a salary and bonus structure, while those in the Chicago area and California tend to have complicated compensation formulas and "eat what you kill" models. Even the concept of the need to form group practices emerged very differently across the country. The anesthesia practice at Cedars Sinai in Beverly Hills, for example, was not formed until 1994, well after many of today's largest Eastern practices had been formed.

Many of the largest entities profiled here have adopted national strategies. In addition, anesthesia management groups such as Premier Anesthesia and ApolloMD also provide anesthesia services to hospitals and ambulatory surgery centers (ASCs) in multiple states. They will talk to any hospital administration, health system or anesthesia practice if there is potential interest. About five years ago, Somnia, which had no contracts in California, a state considered averse to the use of CRNAs, secured a contract at the Kern County Medical Center by introducing the concept of the anesthesia care team to a hospital that had historically used physician-only anesthesia. The model worked. The organization now has additional contracts in California and one in Washington State utilizing the care team model.

American healthcare is in a state of reinvention and the transformation will impact every anesthesia practice. The very vocabulary of anesthesia practice management has changed. Customer service is no longer optional but an essential requirement for each anesthesia group's survival and success. Quality is no longer a subject of anecdotal evidence but a statistical discipline, reported regularly to the hospital. It used to be said that the worldview of an anesthesiologist was defined by the four walls of the operating room, and that all they were concerned about was managing each case. Now, what happens outside the OR is far more significant than the anesthesia practice's security and success.

Consistent results and quality care are a given. If you are not actively engaged in and closely aligned with the hospital's business plan and strategy, you are bound to become incidental and obsolete. That is why the large organizations such as Team- Health and Envision focus on forming partnerships and joint ventures with hospitals and healthcare systems, and not just obtaining single specialty contracts. Their goal is to be indispensable to the facility's or system's growth.

What are some of today's most successful anesthesia entities and how big have they become? The following representative, but not necessarily comprehensive, sample shows the relative size of these organizations. (The numbers of physicians and CRNAs are based on information compiled from a variety of sources over the past few months. Given the industry's dynamic nature, any of these numbers may change by the time this newsletter is published. See Table 1.)

1. Envision Healthcare: Envision Healthcare is the new name for the merger of AmSurg (Sheridan) and EmCare that occurred in 2016. Sheridan began in 1953 as Anesthesia Associates of Hollywood at Memorial Hospital in Hollywood, FL. The partners sold this practice in 1992 to a private equity firm and Sheridan Healthcare was created. Sheridan grew its practice organically and through acquisitions and ventured into emergency medicine, neonatology and radiology service lines over the next 20 years with capital from four different private equity partners. Sheridan was acquired by AmSurg, a nationally recognized leader in the development, management and operation of outpatient surgery centers, in May 2014. AmSurg merged with EmCare Anesthesia in 2016 to create Envision Healthcare.
   
   
2. EmCare: EmCare Anesthesia was founded in Dallas in 1972 and initially grew by providing emergency department staffing and related management services to larger hospitals in the Texas marketplace. EmCare expanded its presence in emergency department staffing nationally, primarily through a series of acquisitions in the 1990s. In 2005, EmCare merged with AMR, the largest provider of ambulance transport services in the U.S., and EmCare expanded into the anesthesiology service line in late 2008. EmCare was a large national provider of physician practice management services for emergency departments, inpatient physician services or hospitals, acute care surgery, trauma and general surgery, women's and children's services, radiology/teleradiology programs and anesthesiology services prior to its 2016 merger with AmSurg.
   
   
3. MEDNAX: MEDNAX was originally called Pediatrix and also originated (in 1979) at Memorial Hospital in Hollywood, FL. The hospital's neonatology group expanded exponentially across the U.S. by mergers with and acquisitions of numerous neonatology groups in the private and academic sectors. In 2007, they entered anesthesia with the purchase of Fairfax Anesthesia under the American Anesthesia division. In 2009, they expanded their children's service division to include pediatric intensivists and hospital ists. In 2014, MEDNAX acquired Surgical Directions, a specialty healthcare consulting firm. In 2015, they expanded into radiology with their $500 million acquisition of vRad, a large tele-radiology platform.
   
   
4. USAP: USAP was formed with backing from the private equity firm Welsh, Carson, Anderson & Stowe, one of the early investors in Sheridan. They put together a team of former executives from MEDNAX and Sound Physicians and entered the anesthesia market in 2012 by acquiring Greater Houston Anesthesiology and Pinnacle Anesthesia in Dallas. They have expanded in Texas and beyond, and now have physician partners in large anesthesia groups in Denver and Orlando. USAP acquired Anesthesiology Consultants, Inc. (ACI) in Las Vegas in 2016 and Physicians Anesthesia Service (PAS), a 120-plus provider group in Seattle, in February 2017.
   
   
5. NorthStar: NorthStar was founded in 2006 by an anesthesiologist and CRNA in the Dallas area. They have expanded primarily through organic growth by winning RFPs with a CRNA-centric anesthesia care team model. NorthStar was acquired by private equity giant TPG in 2013 and has increased its merger and acquisition activity, paying particular attention to the Midwest. They acquired AmSol in 2014, Detroit-based Anesthesia Staffing Consultants in 2015 and Chicago-based Continental Anesthesia in 2016.
   
   
6. NAPA: NAPA was formed in 1982 at North Shore University Hospital in Manhasset, NY by 25 anesthesiologists who have all been independent practitioners. The practice grew with the addition of CRNAs. Then North Shore Hospital merged with Long Island Jewish (LIJ) Hospital and other Long Island hospitals. Group leadership convinced administration that North Shore Anesthesia Associates should provide anesthesia services to all North Shore LIJ hospitals. The administration agreed and NAPA was formed. NAPA has remained a single specialty provider and has twice sold to private equity investors intent on seeing the organization continue to grow.
   
   
7. TeamHealth: TeamHealth began in 1979 as an emergency medicine practice in Knoxville, TN. They now have more than three decades of experience in physician services and have grown from a small company to one of the largest integrated care providers in the country. Today, 19,000+ clinicians offer staffing, administrative support and management across the full continuum of care, from hospital-based practices to postacute care and ambulatory centers. TeamHealth entered the anesthesia market in January 2010 with their acquisition of Anesthetix. In 2015, TeamHealth acquired IPC, a large hospitalist company. That same year, TeamHealth rejected a $5 billion offer to be purchased by AmSurg. The company was taken private for the second time by the Blackstone Group in early 2017.
   
   
8. PhyMed: PhyMed began in Nashville in 1994 when two anesthesia groups merged to form Anesthesia Medical Group (AMG). They grew within the Tennessee market and became PhyMed when they were acquired by private equity firm Excellere Partners in 2012. In 2014, they were acquired by their present investor, The Ontario Teachers' Pension Fund. This infusion of equity helped them acquire practices in Pennsylvania and Maryland in 2015 and expand into pain management and critical care.
   
   
9. Somnia: Founded in New Rochelle, NY in 1996 by two anesthesiologists who own and operate this company today, Somnia manages anesthesia services for hospitals, ASCs and office-based surgical practices in more than 13 states with more than 500 anesthesiologists and CRNAs. Somnia has expanded nationally in recent years and has introduced the anesthesia care team to a number of large West Coast facilities.

Table 2 provides some insight into the diversity of service lines that these entities now cover. It is significant that while all of these companies provide anesthesia services, some also provide other services to broaden their relationship with the facilities they serve.

A review of the history, scope and current size of these entities raises a number of questions about the future of the specialty and how individual practices across the country need to position themselves to survive the inevitable market changes.

The first question is whether bigger is necessarily better. Can these mega-entities really get paid more and do they really need less subsidy support? When one considers each organization's distinct strategies, one may conclude success is less about size and more about strategic plan and focus. Ultimately, as the average group practice looks in on these entities, the question one might ask is "What about the rest of us?" Is the battle already lost? Is absorption inevitable or does an understanding of what these organizations have achieved provide useful insight into a necessary set of survival skills that all practices must adopt?

The Value of Size: Consolidation, the wave of the present in healthcare, also appears to be the wave of the future. There are fewer payers today than 10 years ago. More and more hospitals are now part of large networks. It appears inevitable that anesthesia practices need to seek similar opportunities to maintain access to their facilities and exercise reasonable leverage in their negotiations with facilities and payers. The evidence shows that most of the largest anesthesia entities have higher contract rates with payers than their smaller competitors. Many would also argue that they have achieved greater security by virtue of their size and scope.

How does an anesthesia practice become a mega-group? For years, anesthesia practices have been entertaining merger discussions with groups in their markets. Anesthesia Services Medical Group (ASMG) in San Diego achieved its current size simply by consolidating the market in San Diego County. The story of Oregon Anesthesiology Group (OAG) in Portland was probably modeled to some extent after ASMG. Growing to the size of an Envision, however, requires an entirely different strategy.

The question of growth also presents a fundamental cultural challenge. Most anesthesia practices are essentially professional associations with limited business or professional management. One cannot manage a practice of 100 or more providers the same way one manages a practice of 10 or 20. Until practices are willing to invest in professional management and accept the organizational and management requirements of a large organization, they will never make the transition.

Those who manage these large organizations have come to learn that size does not guarantee success. They have also come to appreciate that the goal is not just the ability to obtain higher rates from payers. Those who truly understand the dynamics of the current environment recognize that security and predictability are far more important than short-term financial gains.

The Value of Strategy: Size, therefore, is useful, but not necessarily a predictor of success. In a competitive environment, strategy ultimately distinguishes winners from losers. Many observers of today's environment would argue that it is the ability to custom-tailor each service agreement to the unique and specific needs of the customer that is critical to long-term relationships. Consider IBM, with its corporate bureaucracy, which is fading into obscurity, while Apple continues to thrive. Each of the entities profiled here has formulated a strategic game plan that it believes will position it for growth and success. This did not happen by accident. Corporate goals and priorities must continuously be evaluated and refined to meet changing market conditions. This unceasing attention to goals and priorities is often the distinguishing feature between these large organizations and typical hospital practices.

Inevitably, finance drives strategic thinking. To the extent that most anesthesia groups historically have existed to optimize collections and shareholder compensation, they have not been willing to make the kinds of investment in infrastructure and leadership necessary to facilitate growth and the development of new business lines.

One of the most significant aspects of anesthesia's evolution in the U.S. is that it is no longer just a service limited to managing patients safely through surgery. Hospitals are looking for strategic partners. The anesthesia practice should have more and better data about what happens in the operating room and delivery suite, and must share what they learn with their hospital partners to prove their value. Today's anesthesia care team practices have enormous potential to help hospitals manage their operating room suites more effectively. Quality is no longer a matter of anecdotal conjecture, but must be empirical and measurable. While many anesthesia practices used to take their relationship with administration for granted, today's successful practices recognize that they must be willing to make a serious commitment to partnership and to become indispensable to the facility's strategic plan.

The Future of the Market: What does the future hold for the rest of anesthesia? Is it inevitable that all anesthesia providers will ultimately become employees of a small number of national organizations? How big can and will these organizations grow? These answers are unknown.

One thing we know for sure is that today's healthcare market is unpredictable. For the past seven years, healthcare providers have been assuming that the Affordable Care Act (ACA or "Obamacare") would provide market structure and anticipated the implementation of accountable care organizations. Now there is talk of an ACA repeal, but no one knows what form a replacement will take.

What we do know is that the cost of healthcare continues to rise and that the cost of care is a major political issue. The market will have to find more efficient and cost-effective ways to deliver needed care. Organizations with the best value propositions will inevitably prove the most successful. Size is not an essential prerequisite, but it clearly helps. The bigger the organization, the greater the resources and the broader the scope of services it can offer. Any organization that is not willing to invest in professional management and the development of the technology to enhance its quality and scope of services will inevitably lose out to those that do.

Howard Greenfield, MD, Co-founder and Principal of Enhance Healthcare Consulting, is a board certified anesthesiologist with a thorough understanding of the financial and clinical needs of both hospitals and anesthesia providers. Throughout his career, he has worked with hospitals and providers to align incentives and develop cost-effective and timely solutions for OR management. In addition, he has expertise in optimizing anesthesia group and OR performance by working collaboratively with hospital administration, surgeons, OR nurses and anesthesiologists nationwide. He was a founding partner of Sheridan Healthcare and served as chief of anesthesia at Memorial Regional Hospital, Hollywood, FL. Dr. Greenfield received his training at Temple University School of Medicine and Jackson Memorial/University of Miami. He can be reached at hgreenfield@enhancehc.com or (954) 242-1296.

Jody Locke, MA serves as Vice President of Anesthesia and Pain Practice Management Services for Anesthesia Business Consultants. Mr. Locke is responsible for the scope and focus of services provided to ABC's largest clients. He is also responsible for oversight and management of the company's pain management billing team. He is a key executive contact for groups that enter into contracts with ABC. Mr. Locke can be reached at Jody.Locke@AnesthesiaLLC.com.