Jody Locke, CPC
What is the Future of Private Anesthesia Practice?
Many anesthesia providers look at the changes taking place in the specialty and shake their heads. Today's practices bear little or no resemblance to practices of 10 or 20 years ago. Who could have envisioned groups with hundreds or even thousands of providers working for one entity?
That unforeseeable future is today's reality. And what do we make of all the mergers and acquisitions? Where did all this venture capital money come from and why is there such interest in buying anesthesia practices? Is this a preview of coming attractions? Are we witnessing the end of an era and the disappearance of the single hospital private anesthesia practice? And if we are, how should providers prepare for the practice of the future?
As we noted in an article on the largest anesthesia entities ("Strategy and Adaptability in a Competitive Market: Lessons from the Nation's Largest Anesthesia Organizations," Communiqué, summer 2017), as of April 1, 2017, eight organizations employed approximately 22 percent of all anesthesia providers.
The voracious expansion continues. A practice of 100 providers was once a rarity. Now, there is one in almost every state. The original anesthesia mega-group, Anesthesia Services Medical Group (ASMG) in San Diego, with 190 providers, is not even in the top 10 today. Most of the 25 largest practices profiled at the 1994 ASA practice management conference have either grown significantly or merged with other practices.
I was the administrator for North Shore Anesthesia Associates (NSAA) in Manhasset, New York, when it was a large practice of about 50 providers (anesthesiologists and CRNAs) serving Manhasset's North Shore University Hospital. After I left, the hospital merged with Long Island Jewish Hospital, and NSAA became North American Partners in Anesthesia (NAPA), which now provides care from Poughkeepsie to Baltimore, up and down the East Coast, and as far west as Chicago. NAPA now employs more than 1,700 providers.
Across the country, we are witnessing an unprecedented level of merger activity, and there is no end in sight. Pick a state and you will see examples. One of the initial, and most notable, was the merger of anesthesia practices serving the Methodist Hospitals in Houston. Inspired by the vision and leadership of past ASA President John M. Zerwas, MD, Greater Houston Anesthesiology (GHA) set a new standard for mega-group management and influence in a local market.
The anesthesia practice at Good Samaritan Hospital in Los Gatos, California, joined an entity called CEP America Anesthesia with the intention of creating a regional practice network. The new entity, Vituity, has a substantial foot print in the Bay Area. A number of practices in the Chicago area have come together to form Midwest Anesthesia Partners (MAP). They are coming to represent all the large anesthesia practices in suburban Chicago.
Many financial and strategic factors contributed to the aggregation. There is a widely held perception that the single-facility anesthesia practice is quickly becoming an anachronism and that you cannot survive as a little fish in a big pond
Some predict that all anesthesia providers will inevitably work for some much larger entity in which they will be little more than salaried employees. Many believe that we will eventually see the end of the private anesthesia practice as anesthesiologists and CRNAs continue to become hospital employees. But will the trend continue?
Some significant trends led practice managers to the conclusion that big is better. Put another way, if you don't have leverage, you don't have power. The specialty that had historically been captive to other hospital players for its income and lifestyle started to realize that occupying the bottom layer of the medical food chain was not very secure. To paraphrase Dr. Zerwas, it was time for anesthesiologists to regain control of their own destiny.
The history of anesthesia aggregation is the history of two distinct trends that eventually merged into one powerful phenomenon: 1) similar practices in given markets exploring ways of consolidating those markets; and 2) other practices looking at the national market from a more global perspective. We can think of them as the localists and the globalists.
In the early 1990s, mergers were being consummated in Dallas, San Antonio, Houston and various other cities. The mergers focused on three issues: managed care contracting, provider productivity and market security. These were physician-owned entities striving to provide a better income and lifestyle to their physician owners.
At about the same time, a new form of anesthesia entity started making its presence known: anesthesia staffing companies, commercial ventures structured to respond to hospital requests for proposals (RFPs), a term that would come to strike fear in the hearts of established anesthesia practices. These were business entities whose business plan was to grow by obtaining anesthesia contracts wherever they became available. The anesthesia landscape started to change as hospital administrators who had become dissatisfied with their anesthesia providers explored the market with RFPs.
Premier Anesthesia was one of the first to gain national attention, but it was not the only one. Some were successful, and others not. One of the most successful started as an anesthesia practice at Memorial Regional Hospital in Hollywood, Florida, one of the largest hospitals in south Florida. Sheridan Anesthesia took its name from the street on which its corporate offices were first located. It soon established itself as a major player in the Florida market and then expanded into a significant provider of anesthesia services across the country.
Some anesthesia practices grew because their hospitals merged. We sometimes refer to these as shotgun marriages. When Mount Carmel Hospital in Columbus, Ohio, purchased a suburban hospital that would become known as Mount Carmel East Hospital, the administration insisted just one anesthesia practice cover both facilities.
Many others came into being as a matter of strategic opportunity, including many in Texas. Three major markets saw the growth of large entities at about the same time: STAR Anesthesia and Tejas Anesthesia in San Antonio, GHA in Houston and Pinnacle Anesthesia in Dallas. As the various anesthesia practices that would come together to form GHA worked through the legal and logistical challenges of merging practices with different structures and cultures, the participants joked about what the new entity would be called. Some humorously suggested they call it DBAG for Damn Big Anesthesia Group.
From an anti-trust perspective, it was probably good that they did not go with that name. It did not take long for GHA to leverage its role within the Methodist Hospital System to become a major force in the Houston market.
By the end of the 1990s, merger mania was sweeping the country. The megagroups were focused on growth. Small practices were looking for appropriate partners. And while RFPs were the bane of existence for many struggling anesthesia practices at hospitals with poor payer mixes and inconsistent volumes, many of the largest organizations saw them as the key to growth and success.
This was a new era in anesthesia. Prior to 1994, when the ASA held its first practice management conference in Phoenix, most practices had never focused on practice management. Once Pandora's box was knocked open, there was no stopping the discussion. ASMG of San Diego led the charge, holding sessions across the country promoting a new model of anesthesia practice based on its accomplishments. In one year, they met with 40 anesthesia practices. They also spun off a separate management company called Integrated Specialists Management Services (ISMS).
Three themes inspired much of the discussion. First, many of the participants in this race to grow saw the creation of large practices as the only way to gain financial leverage in an increasingly challenging managed care market.
Second were those who saw contracting as just one piece of a larger puzzle, with obtaining and maintaining profitable hospital contracts as the key to security in a competitive market.
Third, as articulated by Dr. Zerwas, a GHA founder, was the notion that the key to group strategy was to control the group's destiny as anesthesia providers.
Most anesthesia providers were essentially captive to their hospital and surgical community for their income and lifestyle. The opportunity, according to Dr. Zerwas, lay in creating service organizations that partnered with their administrations.
Eventually, these three trends came together. Entities that had successfully consolidated a given geography started to explore the potential for expansion. All of the large national groups started as hospital anesthesia practices. Growth begat corporate restructuring and governance and management consolidation. Eventually, they developed sales and marketing arms. Before long, the only limiting factor was financial, and this void would soon be filled with huge infusions of venture capital.
Most anesthesia groups look at their businesses in terms of a hierarchy of financial opportunity: better payer contracts, better hospital contracts and the increased use of CRNAs. With regard to managed care contracts, some entities were more successful than others, although some of the successes were impressive. The real focus of most of the entities was the contracts with facilities. Little by little, subsidies were becoming almost more important than fee for service collections and a major focus of the management of these big groups. Depending on the market and its use of CRNAs, changes in staffing model were viewed as another opportunity to enhance profitability of practices.
Few empires last forever. Most Americans are aware of the fate of the British Empire on which the sun never set. So what are the growth limits of anesthesia practices? Are they geographical? Are they financial? What is the counterbalance to practice expansion? Is it competition? When does an entity reach its peak and start to recede?
In the 1990s, the physicians at Presbyterian Hospital in Albuquerque created a practice, Anesthesia Associates of New Mexico, that spanned 90 miles from Albuquerque to Santa Fe. The arguments for merging seemed compelling. The problem was that the Santa Fe doctors started to feel that this new arrangement was taxation without representation. They were sending money to the mothership, but did not feel there was a commensurate reward.
The subgroup decided that swift and nimble was a better strategy and broke off. They were not alone. A review of the nation's largest anesthesia entities today highlights the essential qualities of a successful organization. First, members must have common financial goals. The practice structure must work for the majority of providers. In other words, there must be a global sense of constituency and tangible benefits for the providers.
What is virtually every anesthesia provider's goal? It is the freedom to provide quality anesthesia care with a minimum of interference. At a retreat that defined the culture of the San Diego group, members agreed that the group was preeminent in matters of contracting and benefits while the individual was preeminent in all clinical matters. The idea was to give each provider the opportunity to work as hard or as little as they wanted. Since San Diego is basically a lifestyle city, the practice became a lifestyle practice.
Today, two types of large anesthesia entities predominate: those that still function as anesthesia group practices and those that operate more as staffing companies. The first focuses on physician management and control. OAG, ASMG and United Anesthesia Services, PC are examples.
The second type of entity has a financial focus, such as Envision, NAPA, TeamHealth or Somnia. Physicians work for these entities because they know how hard they have to work and how much they will get paid. Employment is more like traditional employment with a private company. The difference is that, usually, a smaller pool of managers shares in the profits.
Most anesthesia providers will say that their goal is to be compensated fairly for their work and to have enough room in their schedule for a home and personal life. Some practices have been more successful at this than others. One factor that can become a challenge to large practices is demographics. Many practices have been undone by younger providers with more aggressive strategic plans.
Identifying the best structure for an anesthesia entity is no small challenge. Historically, most anesthesia practices were loose confederations of independent providers committed to protecting a franchise and maintaining the status quo. At first, the notion of ceding control to a limited number of board members for hiring and firing and other business matters represented a huge cultural challenge. However, once the precedent was established, most groups realized that this governance was essential. As groups grew, it became obvious they could not manage a 40- or 50-provider practice the way they managed a group of 10 or 15.
Anesthesia providers are, by definition, independent. Former ASA President Peter L. McDermott, MD, once quipped that managing an anesthesia practice is "like herding cats." Anesthesia providers want someone else to handle business matters, but to play a role in major decisions. Therefore, maintaining a sense of constituency in a large entity can be a challenge.
There is almost no large anesthesia entity today that does not have at least one subgroup that believes it would be better off breaking away and managing its own practice, like the Santa Fe group. Some entities are more successful at managing the dissidents than others.
What do the members of these groups hope to gain as a result of their employment? Usually, it is income and lifestyle, qualities that each anesthesiologist defines differently. When a physician or CRNA joins a large group, they have certain expectations. Their satisfaction will depend on how well the group meets their income and lifestyle expectations. If the provider starts to feel that they were sold a bill of goods, they will eventually look elsewhere
One thing we can say about today's anesthesia providers is that they are more mobile than ever. In the current environment, providers vote with their feet. High turnover can undermine a large staffing company's credibility with its client hospitals. In the fanciful memories of many older providers, things were simpler. You worked hard in high school to get into a good college and be accepted by a reputable medical school. Competition was stiff for the best residency slots. It took years of struggle to get a good hospital position, but once you were there, you were there until you retired.
Today, this career path is the exception rather than the norm. We've seen the advent of the "starter practice," and job security often seems out of reach. We often tell residents that the challenge is to pick the horse that will go the course. The reality is that you may ride many horses before you reach the end of your career.
Ultimately, the business of anesthesia is about having more, and more profitable, contracts. In today's competitive market, groups grow and shrink based on their skill in this area. Many hospitals change anesthesia service providers every few years. Getting a contract can be quite different from making a contract work. Getting a contract is simply a matter of defining a set of terms, the most important of which are financial, to which the hospital agrees.
There is a saying, though, that when it comes to hospital contracting, anyone can get the number right today, but will it be right tomorrow? A hospital contract is a balancing act that involves gaining access to enough revenue to hire enough qualified providers. Three factors undo many contracts and cause private groups to fail: poor management, eroding payer mix and scope creep. In many cases, a combination of all three causes the hospital to pull the plug.
Hospitals expect someone to be in control so that what is agreed to can be consistently delivered. Many practices do themselves in because they do not interact with the administration as a team. Increases in Medicare and Medicaid populations will undermine financial viability for groups that do not negotiate flexible arrangements that anticipate reasonable changes in volume and payer mix.
The biggest challenge facing groups today is scope creep, in which, little by little, the administration asks for more service without providing additional compensation. It is a universal problem that few organizations have figured out how to address effectively. And so it is that gaining a new contract can be a mixed blessing: an opportunity to enhance and secure the practice or a huge mistake.
Just as we have seen consolidation in other industries, so, too, should we expect it in healthcare. To the extent that larger entities can provide a better product cheaper, the consolidation will continue. The real question, though, is when is big too big? Is there a tipping point? Very few practices seem to have found it. Most of the largest entities get to a point where they trade contracts back and forth with the other large entities.
So what is the anesthesia trump card? It is the quintessential service specialty. Smaller private practices that are willing and able to provide a better service, custom-tailored to the customer's specific needs, will always have the edge over large national entities that are bureaucratic and formula-driven.
Every practice that is considering selling out to a larger entity should ponder one question: what is its value proposition? Would the members rather be masters of their own destiny or someone else's? There will always be a place for the small, innovative practice that understands the importance of good customer service.
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.