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Winter 2013


Disruption and the Theory of the Anesthesia Business

Michael R. Hicks, MD, MBA, MHCM, FACHE
CEO, EmCare Anesthesia Services, Dallas, TX

The anesthesia business, regardless of whether one chooses to define it as the practice of medicine, nursing, or some hybrid, is in the midst of upheaval. Increasing market consolidation, mergers, acquisitions and introduction of private equity funding have made the business of managing anesthesia delivery services increasingly complex. Bear in mind that delivering anesthesia and managing the delivery of anesthesia services are two very different things.

Our unparalleled improvements in patient safety, quality, and, ultimately, morbidity and mortality make us justifiably proud of the specialty’s success and the envy of the rest of health care. One would think that this remarkable history of clinical success would provide stability for the business side of anesthesia practice. After all, the clinical product that we provide is orders of magnitude safer than when I entered the specialty 25 years ago. If anything, however, I believe our advances have actually laid the foundation for the rapid changes that we are seeing in the finance and management sides of the anesthesia business. This success now requires us to ask whether the care that we deliver and the service that we provide fit with the requirements of the health care system of the future.

The Need to Change

In reality, our current clinical successes have done nothing to diminish the increasing demands for additional service and cost containment nor stemmed the downward pressures on reimbursement for anesthesia services. Discussion of these demands isn’t necessarily something new among anesthesiologists and CRNAs. What is new, however, is that these demands are now part of the much broader discussion of how health care is funded, delivered, and integrated into evolving models of health care delivery. Unfortunately, from my perspective, many leaders in anesthesiology are poorly equipped for this broader discussion and continue to view the care we deliver, and more importantly, how we deliver it, through the lens of history. These leaders are clinging to what has worked or what is desired by our profession over what is needed or affordable by those who receive care, benefit by its delivery, or are responsible for its funding.

Based on my observations and extensive interactions in health care, working within the anesthesia sector as well as with other physicians, nurses, hospital providers, and policy makers over the last five years, not only do I suggest that many practices are at risk, but also our continued relevance as a specialty. If we do not recognize and react appropriately to environmental and market changes occurring now outside of our usual span of attention, much of what we have known to be the domain of anesthesiologists and CRNAS may instead become the purview of other professionals. Changing relationships—even convergence—between employers, health systems, payers, and surgeons, coupled with continuing demands for value-based solutions, may necessitate the creation of multiple pricing tiers, variable coverage models, and multiple types and combinations of clinicians in order to meet the economic and quality requirements in the future perioperative environment.

Much of this reasoning is outside the traditional framework embraced by anesthesia leaders, our national professional societies, and on a more immediate and practical level, our own practice groups. To complicate matters, our ability to embrace future delivery models is hindered by a historical anchoring bias by many leaders of our specialty who believe that the way anesthesia services have been delivered, and by whom, should dictate how they are delivered in the future. More importantly, the resistance to the changing market forces is driven by a desire to maintain the status quo to protect current political power or to maximize current income and return on investment by those leading and within our organizations. Lessons from the business world outside of anesthesia suggest that these forces present difficult barriers for market incumbents to overcome. Fortunately, difficult does not mean it is impossible. Successful strategy formation and implementation requires analytical introspection and an acceptance that markets, whether in other businesses or in health care, ultimately drive demanding bargains when it comes to delivering a return on investment. Also fortunately, there are some tools such as the conceptual modeling techniques of Peter Drucker and Clayton Christensen that offer us the ability to understand and possibly devise strategies for a successful future for both our practices and for the specialty itself.

Peter Drucker’s “Theory of the Business” Model

An appropriate way to frame the discussion is through Peter Drucker’s “Theory of the Business” model (Drucker, 1994). In this seminal work Drucker proposed that every business has an underlying theory, or set of assumptions, that drives both strategy and tactics. As long as the theory fits the reality of the market then the business has an opportunity to define a strategy for success (note that strategy formulation and implementation are different endeavors).

Drucker’s model entails three fundamental sets of assumptions involving the business’s environment (Why does the organization get paid?), mission (What does the organization consider to be meaningful results?), and core competencies (Where does the organization need to excel to maintain leadership?). Clarity, consistency, and focus are the hallmarks of successful business theories. Furthermore, Drucker also outlines requirements for a theory of the business to be valid (Drucker, 1994).

The first of these is a requirement that all of the assumptions concerning environment, mission, and core competencies must fit reality. So what are the typical assumptions we have made historically in anesthesia practice? Generally, our assumptions have been on the nature of the primary customer (patient, surgeon, facility, or payer), the delivery model required (physician only, care team, CRNA only), and payment methodology (fee-forservice or salaried position) to name but a few. Despite the current chatter concerning surgical homes, anesthesia clinicians today primarily get paid to safely provide anesthesia services during surgical procedures. Some practices offer pain medicine, acute and/or chronic, and a very few offer some sort of preoperative screening function. For mission, the assumption is that the primary and secondary customers, however the practice defines them, are satisfied with the service offered. Finally, the core competencies for most anesthesia practices are built around performing the aforementioned clinical activities “well enough” to maintain the current business relationship.

Secondly, the assumptions have to be consistent (“fit”) with each other. Consider the example of an anesthesia practice that works in a facility with an open anesthesia staff (their environment). The group’s mission, therefore, is to satisfy the needs of its surgeon customers and its core competencies revolve around making sure that their activities primarily satisfy the surgeons. This typically assumes a required level of clinical proficiency but also adequate availability to meet the convenience needs of the surgeons. Note that the needs of the hospital administration, payers, other physicians, and even patients may be of secondary importance in this group’s theory of its business. Fit in this case is achieved by recognizing the needs of the surgeons and ensuring that the business is built around delivering solutions to meet those needs.

Similarly, groups in closed or exclusive anesthesia staff relationships may have a somewhat different set of assumptions around environment, mission, and competencies that the reader should contemplate. Here, the primary customer of the anesthesia practice may very well be the facility administration and nursing staff. The surgeons, while primary customers of the hospital, may instead be important but secondary customers of the anesthesia group. As an aside, I will anticipate and respond to the wellworn argument that the patient is the primary concern. I agree, the patient is the primary concern on an individual basis. However, the anesthesia business is more complicated and complex than a simple summation of individual patient clinical encounters. Nearly every anesthesia practice that I have seen replaced has had satisfied patients. If the theory of the business for the practice is predicated merely on providing good patient care then it does not fit the current reality in our marketplace. This suggests to me the nature of the real customers and reinforces the validity of the argument that I make.

This last example leads to Drucker’s third and fourth requirements for a valid business theory, which are that the environmental, mission, and core competency assumptions are known and understood throughout the practice and that the theory is tested constantly. How many anesthesia practices have counted on providing great care for individual patients as the way to continued success only to find their employment situation turned on its head? I cannot improve on the words of Drucker in this regard, particularly as it relates to many of the anesthesia practices across the country that I review while performing my various roles. Therefore, I quote Drucker directly:

An organization tends increasingly to take its theory for granted, becoming less and less conscious of it. Then the organization becomes sloppy. It begins to cut corners. It begins to pursue what is expedient rather than what is right. It stops thinking. It stops questioning. It remembers the answers but has forgotten the questions. The theory of the business becomes ‘culture.’ But culture is no substitute for discipline, and the theory of the business is discipline. (Drucker, 1994, p. 101)

Many anesthesia practices, even the specialty itself, would be well served by considering this aspect of the theory of the anesthesia business. Careful analysis of some of our long held assumptions likely explains much of what is happening in the market. Many in our profession are bewildered by the recent interest in the anesthesia business by large practice management organizations and even more so the interest of private equity firms. I am not one of them. In fact, I believe that others outside our field may have a better understanding of the future of anesthesiology than many within the specialty.

In my role as a leader of a national physician practice management company I frequently am invited to evaluate opportunities to provide anesthesia and other physician services at hospitals across the United States. This happens almost entirely because the incumbent group, be it anesthesia or otherwise, has become complacent, unresponsive, out of touch with its environment, and secure in the knowledge, erroneously so, that the group and group members are irreplaceable. This latter point, of feeling irreplaceable, is particularly interesting. Despite the fervent activity of companies like mine as well as the increased interest in the anesthesia sector of private equity firms, many anesthesia groups hold the theoretical tenet that their current customer, be it surgeon, hospital, or otherwise, cannot or will not seek an alternative to them. However, as all too many anesthesia practices are learning these days, if their business theory no longer fits with reality then someone whose theory does fit will soon be in place. These groups are failing and they do so largely because they did not continually test the validity of the assumptions underlying their particular business theory. Not surprisingly, most in the field take the easy answer, which is that the problem is a desire to decrease anesthesia expense in the form of subsidy reduction. While frequently a component of the correct answer to a specific question at the moment, current finances alone don’t explain all of the changes and the interest of the large entities now in the anesthesia business. To arrive at this answer we have to first look inward.

As Drucker suggests, are we asking all of the right questions? Do we really expect that time-based billing is viable in a world where everyone else—facility, surgeon, hospitalist, etc.—is on a fixed fee? Are anesthesiologists and CRNAs really necessary for deep sedation? Even for some general anesthetics? How much difference is there between propofol, a narcotic, a benzodiazepine, and a nondepolarizing muscle relaxant when administered in an ICU without anyone with anesthesia training as a participant and the same drug combinations when given in an operating room environment where our skills are supposedly required? When are our special skills and training needed and when are they just an added cost? On a more global level do our national societies and state medical boards function primarily to protect the public’s personal and financial health or to protect the profession?

Indeed, Drucker notes that the predominant initial reactions to a failing theory of the business are defensive in nature. This is as true, maybe more so, with failing anesthesia practices, the specialty, and possibly even with the medical profession itself as it is with any of the businesses that Drucker had in mind. I remain surprised at the number of groups that willingly choose to completely ignore the reality unfolding around them while harboring the certainty that with time the hospital or surgeons will drop whatever issues they may have with the group. Many of the groups that choose to respond do so by applying Band-Aids to problems (“patching” according to Drucker) or by attempting to erect barriers to entry for substitutes such as soliciting help from friendly surgeons or hospital board members. Consider this in the context of all too common complaints about some anesthesia practices such as failing to deal internally with physician behavioral issues, requests for more coverage, need for lower subsidization, and an overall lack of participation in hospital management and governance. I believe that what we are seeing in the market and within the profession begins to make sense.

Why is this so and what can be done about it? Drucker offers suggestions for solution paths that include the need for early diagnosis and a need to rethink the theory. This includes taking “preventative care” by using two approaches that are rarely if ever considered on the business side of health care (Drucker, 1994). The first of these, abandonment, is the most difficult, especially so for those of us in the culturally entrenched professions such as medicine. Abandonment, according to Drucker, means actively challenging everything about the business and asking questions as to whether the business would look, work, or be the same if were being developed for the first time now. If the answer is no, then the product, service or even the business itself should be abandoned or reconfigured to meet the current reality. Unfortunately, for almost every anesthesia practice, and to be fair any other business as well, the concept of abandonment is antithetical to the prevailing thinking and the answers that are generated to some of these questions are driven entirely by the nature of the current revenue stream.

For example, if one were given free reign to design a perioperative care system today would it function and be paid for as it is today? Would it have the same kind of clinicians used in the same kind of ways? Would the care team, if it existed at all, have anesthesiologists, CRNAs, and AAs or would it have others instead of, or in addition to, the process? Would non-physician supervision ratios or supervision itself even be a relevant topic? The easy answer for many of us, if easy is even possible, might be yes, as many can’t imagine a world with a different reimbursement mechanism or differing roles. However, the answers in reality are not easy and so this difficult and rigorous self-examination is critical. Even more interesting for me is that others entering the business are not necessarily burdened by the same history and financial constraints that we believe we have. As a result they are not locked into our business theory and the models that some in our business think are required. I will touch more on this shortly.

Consider as an example the recent forays into the provision of deep sedation by our emergency medicine and gastrointestinal physician colleagues or registered nurses into propofol sedation. Granted, these endeavors may be motivated by money initially, by increased revenue for other medical specialties, but the relevant point here is that their success suggests that our particular business theory may be failing. Likewise, consider the increasing role of medical hospitalists in the perioperative care of the surgical patient both prior to and following the actual surgical procedure itself. These physicians may well soon be the true owners of the perioperative physician title, if they are not already. Already comfortable with delegation to advanced practice nurses and physician assistants, how long is it before their comfort extends to CRNAs and managing the care of the anesthetized patient as well? This is the heart of Drucker’s second preventative suggestion, which is to study non-customers. Radical change rarely comes from within most organizations and this is absolutely true for organizations with the guild-like mentality that is so prevalent within health care.

What then is driving the current and potential changes in the anesthesia business? I think there are at least two fundamental forces driving change in the industry. One is the obvious lack of managerial and fiscal discipline within some practices which makes the response to every question and problem either a denial of responsibility for the issue or a request for more subsidy. The second, which is a subtle change, is that the nature of the very core of the care we deliver is ripe for change.

In the case of the former, clearly some anesthesia practices struggle and ultimately fail as businesses because their theory of the business has changed. Poor service or levels of financial subsidization that have been tolerated in the past are no longer acceptable and the assumptions that they are still tolerated are now invalid, as is their theory of the business. Some groups actually have appropriate theories of their business but lack the leadership necessary to perform to their theory. Partnership groups, in my experience, are particularly susceptible to this. Difficult decisions are not easily made by large committees with members that have differing agendas. When everyone is in charge, no one is really in charge. Many anesthesia practices, like other medical practices and physicians in general, equate leadership with longevity and wisdom with accommodation. Tolerating mediocre quality and service, apathy, and non-market driven reimbursement inside a practice means forcing these attributes onto the practice’s patients, facility administration, and those who ultimately pay for the care. In addition, from a financial planning perspective, it is difficult if not impossible to have a discussion about retaining capital to invest in the future of the practice because many practice partners cannot tolerate the resulting near-term decline in clinical income. Not surprisingly, this reluctance to invest in the practice is exacerbated when those in charge aren’t going to be present when the return on the investment actually arrives several years hence.

These obstacles, however, are opportunities for others. In fact, the obstacles are core aspects of their business. Practice management companies and private equity firms see great opportunity in the anesthesia business because they bring discipline to a largely undisciplined market. Undisciplined does not refer to bad behavior, although that certainly is tolerated in many practices. It also doesn’t mean unregulated, as health care is among the most highly regulated of industries. Instead, the anesthesia business is undisciplined in the sense that market forces have not heretofore shaped the business in the conventional sense in terms of product creation, profit, loss, and market share. Mediocre service in other service industries (and like it or not anesthesia is a service industry) is typically not rewarded with continued high incomes and lack of competition except, of course, when there are high barriers to entry for competitors.

This is not the case now. There are at least ten practice management companies that offer anesthesia services that have the scale, scope, and capital structure to deliver on a commitment to provide service on the national stage. Factor in large regional groups that are as yet unaffiliated, and any given anesthesia practice may have fifteen or more viable competitors for its existing business. Each of these companies purports to be capable of bringing sound business and financial management skills to bear on existing practice locations. This includes identifying whether other physicians and CRNAs will willingly do the existing work at a lower cost than the existing group. While this alone may be startling to many readers, if it’s any solace, more times than not these companies are merely the messengers that the market is changing and not the cause. Other service industries, with lower barriers to entry than health care and more transparent pricing, see more active and less tumultuous changes and on a more regular basis. No one among us would lose any sleep over changing from the US Postal Service to FedEx if we weren’t satisfied with the package delivery time.

Finally, however, for those of us that now compete nationally, particularly in companies that offer more than anesthesia management services, the more interesting opportunities are not in merely applying management expertise and financial rigor to traditional anesthesia practices, although this is certainly a very viable business strategy for the present. Instead, there are now increasing opportunities to redefine the structure of the perioperative delivery system using existing providers in potentially different ways or even different providers in novel ways. Not surprisingly, many within anesthesia view this with some degree of skepticism. What suggests that this may be done successfully?

Clayton Christensen’s Theory of Disruptive Innovation

Clayton Christensen’s work on disruptive innovation is useful for shedding light on this strategy (Christensen, 1997). For those unfamiliar with his work, Christensen has written extensively on disruptive innovation and why wildly successful businesses can ultimately fail despite continual, sometimes dramatic, improvements in their products. This usually happens because the improvements in products (and services in the case of anesthesia), unfortunately, reach a point where they outstrip the requirements of many of the existing customers. Conversely, disruptive innovation frequently results in products that are initially inferior to the general market and of limited utility to the mainstream customer. Over time, however, the disruptive technology improves to the point where it begins to meet the needs of ever increasing numbers of an industry’s customers, leading eventually to a new market order. Apple iPods are a wellknown example of this phenomenon.

Health care, interestingly enough, has been an industry that has not historically been as susceptible to this type of disruption until relatively recently (Christensen, Grossman, & Hwang, 2009; Hwang & Christensen, 2008; Herzlinger, 2006). However, I believe that this is changing in extraordinary ways. Advances in pharmacology and technology are rapidly changing how, where, and to whom we can deliver care. Remote monitoring capabilities are already changing the care for some of the most critically ill patients in hospital ICUs (Gawande, 2012). How long before this technology is deployed in operating suites? How long before the traditional perioperative team and processes are replaced? I can tell you it is sooner than most of you think.

Quite frankly, we have reached a point in anesthesia where some of our capabilities outstrip the needs of many of our patients. Does every patient undergoing general anesthesia require the one-on-one presence of an anesthesiologist? Clearly not. Does every patient receiving sedation require an anesthesiologist or CRNA? Again, clearly not. Does adding or substituting propofol to the sedation regimen now change the answer? Many of us in anesthesia certainly have strong feelings on the issue but our colleagues in emergency medicine, gastroenterology, radiology, and pediatrics have similarly strong and opposing feelings. Most importantly, how long do others pay for services they don’t need?

Finally, I hope that the reader recognizes my dual attempt in this is to provide some opinions and also to provoke meaningful discussion. I am proud to be an anesthesiologist and proud to work with my physician and nursing colleagues in the field. I live in Texas and here we have the saying, “It’s just business” that is used to explain that my profiting at your expense isn’t personal. However, it is never a pleasure to see the lives of colleagues upended. Nevertheless, there are market forces at work and, if anything, they will accelerate. Understanding and applying the basic tenets of business, challenging the conventional wisdom, and seeking opportunity and innovation are all now mandatory for the practice of anesthesia. My experience caring for patients and my experience as an executive tell me that these changes are really just beginning in the business of anesthesia and that our days of being protected by the four walls of the operating room are ending. We must answer the tough questions about who we are and where we fit in the new paradigm of health care. Embracing this will allow us to change and grow as a specialty, staying viable and useful to those we serve.


Bibliography

1. Christensen, C. M. (1997). The innovator’s dilemma: when new technologies cause great firms to fail. Harvard Business Press.

2. Christensen, C. M., Grossman, J. H., & Hwang, J. (2009). The innovator’s prescription: a disruptive solution for health care. McGraw-Hill New York.

3. Drucker, P. F. (1994). The theory of the business. Harvard business review, 72(5), 95-104.

4. Gawande, A. (2012). Big med. The New Yorker.

5. Herzlinger, R. E. (2006). Why innovation in health care is so hard. Harvard business review, 84(5), 58.

6. Hwang, J., & Christensen, C. M. (2008). Disruptive innovation in health care delivery: a framework for business-model innovation. Health Affairs, 27(5), 1329-1335.


Michael R. Hicks, MD, MBA, MHCM, FACHE is a physician executive based in Dallas, Texas. He leads the anesthesia division of a national physician practice management firm as well as managing a large regional physician-owned anesthesia practice. In addition Dr. Hicks is a consultant for a national hospital and ambulatory surgery center company. He can be reached at michael@hicks.net.