eAlerts

Anesthesia Group Mergers, Acquisitions and (Importantly) Alternatives

Mark F. Weiss, Esq.
The Mark F. Weiss Law Firm, a Professional Corporation, Dallas, TX

It’s come to the point that a good part of my work with anesthesia groups involves surgery: removing an earworm—a catchy tune that continually runs through the group’s mind.

In fact, it’s always the same tune, part of The Clash’s Should I Stay or Should I Go Now:

Should I stay or should I go now?
Should I stay or should I go now?
If I go, there will be trouble,
and if I stay it will be double.
So come on and let me know.
This indecision’s bugging me.

Stay, as in should our group remain independent?

Go, as in should we sell out to someone, maybe anyone, who’ll buy us?

But as is generally the case in life, the decision is not purely either/or, black or white, yes or no. There are many alternatives. And that’s what we “operate on” as part of what I call the Future Finder^TM process.

Some Background

As you’re certainly more than familiar, there’s a storm of uncertainty resulting from the rapidity of market change in healthcare in general and in anesthesiology in particular.

Hospitals seek to employ or otherwise "align" physicians. They seek to control specialty referrals through employment models, accountable care organizations and other hospital-centric networks.

For independent anesthesia groups there’s mounting competitive pressure from large regional and national groups. And for all anesthesia providers, from the individual to the immense group, there’s the looming impact of technology.

Many believe that they will find shelter from this uncertainty through a sale to a large regional or national group, or to a private equity backed venture. Yet others are forging new routes, alone or in alliance with other practitioners, and creating their own futures.

What route is best for you?

Acquisitions

It’s important to understand the basic economic structure of an anesthesia group acquisition.

As opposed to the sale of, for example, a manufacturing business that includes inventory, machinery, raw materials and real estate, all of which can be valued and sold, the only thing that most anesthesia groups have to sell is their future cash flow.

Accordingly, the usual anesthesia practice acquisition is essentially a valuation, at a multiple, of the group’s reconstructed earnings; reconstructed because most groups don’t have significant, or any, earnings in the technical sense due to the fact that they annually distribute all of their available cash to their physician owners.

To illustrate, if the group is normally distributing $100x to the physicians when the amount of compensation required to recruit and retain is a lesser $70x, then a purchaser would, conceivably, value the group based on a multiple of the difference, that is, on a multiple of $30x.

As a part of the sale, the group’s physician owners would receive an employment contract for, in our simplified example, $70x per year, often for a guaranteed number of years.

The astute reader might realize that, all things being equal, the group has financed the purchase price by forgoing the collection of the additional $30x. That’s correct.

However, those physicians nearing the end of their active careers may be more than happy to obtain five, or six, or more times that $30x up front because they have no intention of working for more than one or two additional years.

Even those physicians who foresee many years of continued practice often favor an acquisition because it results in a shifting of risks, for example, the risks that the hospital contract might be terminated, or that collections will plummet one year into the term of a multiple year employment guarantee.

While certain risks can be shifted, sellers do assume other risks, such as the fact that continued practice, without a sale, might be more remunerative or that the lump sum purchase price received might not actually deliver a higher return than would a continued investment in their own careers.

How long the hot acquisition market will last is anyone’s guess. Certainly large groups in key markets, key being different for each potential acquirer, tend to drive higher valuations. But that’s not to say that a smaller group in a particular buyer’s viewpoint wouldn’t make a prime candidate to fill in perceived gaps in their footprint.

Alternatives

Just because the acquisition market is hot doesn’t mean that you should be interested in a sale or, even if you are, that it’s the right option for you or that any buyer would actually purchase your group.

And, for the many who seek to control their own future, no sale can deliver that ability. By definition, you will have sold off your ability to control your professional future, at least within the confines of the acquired group and maybe, depending on the scope and enforceability of covenants not to compete, within a significant geographic area. Maybe that trade-off is worth it to you. Maybe it’s not.

And, for those who believe that larger is smarter or that larger is safer, consider the example of General Motors’ bankruptcy.

There are multiple alternatives to a sale, some mutually exclusive and others additive. Let’s explore some of them.

1. Become a Much Better Competitor

Reminiscent of Garrison Keillor’s imaginary Lake Wobegon, “where all the women are strong, all the men are goodlooking, and all the children are above average,” I’ve yet to meet an anesthesia group that doesn’t claim that it provides wonderful care and fantastic service and that it has a great relationship with the hospital’s administration.

But, as Richard Feynman quipped, “The first principle is that you must not fool yourself—and you are the easiest person to fool.” So, begin with telling the truth.

Immediately start to take steps to cement your relationship with the facilities at which your group currently provides services. Correct service deficiencies. Correct personnel deficiencies. Create an Experience Monopoly^TM in regard to the level of service that your group provides to its “customers”: hospitals, referring physicians and patients. If you receive a coverage stipend, seek ways to reduce it, knowing that that is how competitors often gain a foothold.

Explore opportunities to expand your practice to encompass additional facilities. This must include additional hospitals and, very importantly, outpatient facilities. Expansion outside of acute care hospitals is essential in order to hedge against a future that will likely not be hospital-oriented.

At the same time, tighten up your group’s internal operations. Get your governance structure in order to enable your group to make quick decisions. Review your compensation plan to make certain that it creates the proper incentives and motivators. And begin to bank capital to enable the group to expand on multiple fronts.

2. Do Your Own M&A

Instead of simply thinking of mergers and acquisitions (M&A) from the perspective of a target, consider that your group can become an acquirer.

Although you might actually consider buying another local group that is engaging in a true acquisition, there’s no reason why you need to restrain your thinking to paying cash.

Your group can combine with other groups through merger to form your own larger entity. Although size itself doesn’t secure success, it can enable your group to establish a wider geographic presence, achieve some economies of scale and potentially create stronger payer contracting power. It also serves to create leverage in connection with facility contract negotiations.

There is a plethora of ways to structure mergers, from those in which your group essentially makes itself larger by subsuming other groups into its fold, to structures in which your group and another create a new entity.

3. Alignment Models

Within bounds permitted between competitors (although the truly entrepreneurial reader will realize that there’s no need to deal only with competitors), there’s little limit on the types of non-traditional or hybrid ventures that can be constructed.

For example, it’s possible to construct co-op type ventures in which groups across geographic bounds align for purposes of reducing costs (e.g., malpractice insurance) and of amassing data that can be analyzed and used to improve their practices (e.g., through the design of protocols) as well as to demonstrate value to hospitals and health systems.

Or, as another example, it’s possible to construct management services organization (MSO) structures in which multiple groups link to centralize various management functions. There’s a mention of MSOs below, from a slightly different angle.

Note that these ventures do not have to be limited to arrangements with other anesthesia groups. Depending on the specifics, they can be cross-specialty (e.g., anesthesiology and radiology) and cross-profession (e.g., MD and CRNA).

4. Profit From Existing Capabilities and Intellectual Capital

If your group has an internal business operation with a dedicated practice manager, consider expanding that function into a separate spun off business entity that provides MSO type services to other groups as well as to your own.

For example, you can sell your manager’s and your group’s leaders’ business expertise, and you can operate a locums service with your own group’s physicians or with third parties.

Importantly, your MSO structure can be a vehicle to create initial relationships that might later be expanded to make the client a merger or acquisition target.

Conclusion

There are always more options than you’ve considered to date. There are always alternative structures to a sale and alternative strategies for the success of your practice.

Even if you’re committed to seeking a buyer, you can’t stop or even slow your efforts to develop your business while you’re searching. There might not be a buyer. If there is, you may not like the price. You might realize that you don’t want to sell. You might actually want to buy.

In closing, remember that the best strategy formulation is not a straight-line process. It’s not an on-off/sell-or-don’tsell/ merge-or-don’t-merge situation. Rather, it’s a fluid, circular process, keeping options open even as you explore a primary one, continuing to build as you continue to search for the right structure, the right deal, for you.

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Mark F. Weiss, Esq., is an attorney who specializes in the business and legal issues affecting physicians and physician groups on a national basis. He served as a clinical assistant professor of anesthesiology at USC Keck School of Medicine and practices with The Mark F. Weiss Law Firm, a firm with offices in Dallas, Texas and Los Angeles and Santa Barbara, California, representing clients across the country. He can be reached by email at markweiss@advisorylawgroup.com.

Anesthesia Practices Are Not Islands

“No man is an island, entire of itself; every man is a piece of the continent, a part of the main” begins John Donne’s famous poem. Anesthesiologists have come to realize that not only are they “a piece of the continent” that is their group, but that they are interdependent on their hospital or health system. The anesthesiologist’s and the group’s well-being is bound up with that of their institution, and perhaps with the health and welfare of other entities as well.

The hospital “continent” is under enormous pressure to improve quality and to hold down costs, and so, therefore, is the “country” that is the anesthesia department. If the incumbent anesthesia groups are not properly managing their costs and quality, the chances are that their hospitals are looking for alternatives. ABC Vice President Jody Locke’s latest article for the Communiqué, Why Utilization and Productivity Metrics Matter, walks readers through the variety of metrics available to practices that want to measure and demonstrate their value to their hospital partners. The immediate goals are to develop data that lead to more efficient coverage models in terms of both staff and operating room utilization and to identification of best practices—including productivity— among the providers. As Mr. Locke writes, “Those who have come to understand the importance of being lean and effective are gaining market share while those that refuse to accept the inevitable are losing ground and losing their franchises. Effectiveness and efficiency are the new keys to success.” The overarching goal is to produce the lean, cost-effective and high-quality anesthesia service demanded of the hospital’s anesthesia partners.

Groups can form bigger islands, or even continents of their own, by growing. Mergers and acquisitions are the more popular and certainly the more immediate strategy, but organic growth is often feasible as well, as Mark Weiss, Esq. writes in Anesthesia Group Mergers, Acquisitions and (Importantly) Alternatives—and it entails becoming a more valuable component of the hospital continent or family. Cement your current facility relationships, explore opportunities to expand the practice to additional facilities and tighten up the group’s internal operations. Other alternatives to being acquired by a larger entity include acquiring another group, creating a cooperative arrangement with other practices or launching a Management Services Organization (MSO), or even offering a practice management or locums service.

“Even if you’re committed to seeking a buyer,” states Mr. Weiss, “you can’t stop or even slow your efforts to develop your business while you’re searching.” Bill Britton of Cross Keys Capital elaborates on this point in How an Investment Banker Can Make an Anesthesia Practice That Wants to Sell Become a More Attractive Acquisition Partner. As we know, some groups are solving the dilemma of small size and limited resources by seeking out venture capital. In his article, Mr. Britton identifies seven areas that buyers of anesthesia practices focus on, starting, not surprisingly, with corporate governance and leadership. The characteristics that make a group an attractive target are also the characteristics that make it successful. The investment banker’s perspective is one that everyone should consider.

Did you miss the death story of the Medicare Sustainable Growth Rate (SGR) formula? Attorneys Serene Zeni, Gregory Moore and Alexandra Hall explain its history and the legislation that killed the SGR, as well as what comes next, in The SGR “Fix” in the Context of Anesthesia Practice.

As health plan co-insurance and deductible amounts continue to grow, so do the challenges of collecting. “Self-pay” used to refer primarily to uninsured patients. As Neda Ryan, Esq. and Christopher Ryan, Esq. explain in Getting Paid by the Self-Pay Patient, the term now applies, too, to patients with high deductibles. Obtaining compensation from these individuals often depends on having in place the necessary policies and protocols, which are summarized in the article.

Has Someone Gotten in Trouble for Doing That? asks Vicky Mykowiac, Esq. Yes, someone has, and Ms. Mykowiac explains various problematic activities that gave rise to civil and criminal fraud actions with Lessons for Anesthesia Groups from Real Cases and lessons learned. One specific area of interest on the part of the federal government is physician compensation that may implicate the anti-kickback statute. ABC Vice President Joette Derricks reviews recent fraud alerts in Is the Office of the Inspector General Turning its Attention to Physician Issues?

We are well into the second half of 2015 and it seems that the anesthesia practice management news cycle is running faster than ever. Groups continue to morph and consolidate, as do health systems and, more recently, even large health plans. We hope that our publications continue to provide a useful service in helping our readers navigate these many changes.

With best wishes,

Tony Mira
President and CEO

How an Investment Banker Can Make an Anesthesia Practice That Wants to Sell Become a More Attractive Acquisition Partner

Bill Britton
Co-Founder and Managing Director of Cross Keys Capital, LLC, Ft. Lauderdale, FL

There are a number of factors that impact both the relative and absolute attractiveness of a practice to a potential partner/buyer. First off, it is assumed that all anesthesiologists provide high quality clinical care, but there is much more that needs to be considered when gauging whether or not a practice is attractive. Based on Cross Keys Capital’s extensive transactional experience as the most active investment banking firm representing physicians, and more specifically anesthesiologists, on the sale of their practice, we have identified seven high-level areas of focus that buyers use to evaluate the overall attractiveness of a practice.



1. Corporate Governance/Leadership. The board of directors needs to be comprised of high-quality, well respected physicians, medical directors and executives who have leadership experience in operating and guiding their group. This is a critical component when dealing with prospective buyers as a lack of leadership and structure could potentially be perceived as being disorganized, raising concerns to buyers on their ability to execute a transaction. Also, a formal board and executive roles within a practice need to be clearly defined, as well as identifying physicians who have taken on leadership or board positions within the hospital.
2. Size of Practice. Factors that determine size are evaluated individually and collectively in order to assess the overall attractiveness of a practice by potential buyers. Typically, these are bucketed into two categories: (i) operational (e.g., revenue, EBITDA, case volume, unit volume, etc.) and (ii) organizational (e.g., number of partner and non-partner physicians, CRNAs, number of facilities, number of anesthetizing locations, etc.) metrics that are then analyzed from both a historical and projected basis to assess the financial trends. 
3. Strength of Hospital Relationships. Existing hospital relationships are a key value driver for anesthesiology practices, as well as the terms and length of existing contracts. Another critical component is how long the practice has been serving the hospital and the strength of the relationships with the hospital administration and senior leaders. Obviously, tenure with a longer duration is typically perceived as a “stickier” relationship, although hospital systems have been sending their services through an RFP risk. Also, relationships with surgeons and other specialists are critical. 
4. Managed Care Providers and Payer Mix. Practices’ managed care providers and payer mix will play a significant role when evaluating attractiveness. Practices’ geographic location, diversity of managed care providers, payer rates and payer mix are critical during the evaluation.
5. Profitability of the Practice. This is a key area of focus by buyers as it dictates whether the target group is a ‘business’ or a ‘practice.’ The major profitability drivers to a practice are: (i) types of payers (e.g., government, managed care, par vs. non-par, etc.), (ii) financial support (e.g., stipends, subsidies, revenue guarantee, etc.), (iii) patient population and demographics, (iv) staffing model (e.g., care team, physician only, follow the doctor, etc.), (v) billing and coding (e.g., internal billing vs. outsourced), (vi) back office/ administrative support and (vii) data capture. All of these drivers can increase or decrease attractiveness depending on where the practices strengths and weaknesses are.
6. Clinical Quality. HIGH QUALITY is a given.
7. Growth Initiatives. Practices’ growth initiatives are where buyers evaluate the practices’ ability to scale and integrate as a business. Practices need to ask themselves: Has our practice demonstrated growth? How have we gone about it? What future opportunities do we see?

In order to be an attractive practice, our recommendation would be to focus on strengthening and improving leadership roles, implementing the proper governance for your group, solidifying facilities’ contracts, building a cohesive culture within the group, establishing an internal audit of coding and compliance and evaluating the merits of partnership track vs. employed physicians. We believe maintaining excellent control over these critical components will not only streamline your practice and operate more efficiently but actually will elevate it to a true business. In conclusion, because investment bankers possess intimate knowledge of the triggers for all active buyers of anesthesiology practices, hiring a banker can help you understand and identify who is the best potential buyer for your group while maximizing and protecting the value of your practice.

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Bill Britton is Co-Founder and Managing Director of Cross Keys Capital, LLC, Ft. Lauderdale, FL. He is a Wall Street trained investment banker with a track record of success in M&A and corporate finance with Morgan Stanley and Fortune 500 companies. He leads the Cross Keys Capital Healthcare Services team working with physician owned practice groups throughout the country. Mr. Britton has represented over 25 anesthesiology groups nationwide, serving as the sell-side advisor in facilitating transactions with a multitude of strategic and financial buyers. In 2013, Mr. Britton and Cross Keys Capital received the prestigious M&A Advisor Healthcare Deal of the Year Award for the firm’s advisory role in representing Broad Anesthesia Associates, LLC and Mid-Florida Anesthesia Associates, Inc. in their sale to Goldman Sachs Private Capital Investing, completing the formation of Resolute Anesthesia and Pain Solutions, LLC. He is a graduate of the Wharton School of Business. He can be reached at bbritton@ckcap.com.

Why Utilization and Productivity Metrics Matter

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

You cannot manage what you cannot measure. This is today’s business mantra and no aspect of any serious business is exempt, from productivity of operations to quality of customer service. The goal is to use objective metrics to drive down cost and improve quality. Is it any wonder that the tools that are driving the management of business should be applied to medical and service specialties like anesthesia? Much as anesthesiologists and CRNAs may resist efforts to quantify their productivity and objectively assess the quality of care provided, this is becoming the new reality in medicine. To resist is to demonstrate one’s inflexibility and to invite alternative solutions. The largest and most aggressive players in the specialty are investing millions in the tools and technology of productivity and quality measurement. Whether this is ultimately good for the specialty is another question for another day.

From OR Utilization to Provider Productivity

The concept of productivity management in anesthesia is undergoing a significant evolution. Many practices have implemented tools to monitor operating room (OR) utilization, which is an essential first step. Operating room productivity metrics define the opportunity for production in a given facility. They measure the appropriateness of scheduling patterns. An OR that consistently generates six hours of billable anesthesia time in an eight-hour day is inherently more desirable than one that only generates an average of four billable hours. In many institutions the disparity between optimum utilization and actual utilization serves as the basis for the calculation of hospital subsidies or revenue guarantees.

Once some basic calculations have been mastered, the resulting utilization metrics may prove useful in identifying opportunities for more effective operating room utilization. We all know that the typical anesthesia billing system has more and better data about what happens in the OR suite than can be found for any other single source; the question is how best to use the data? While many anesthesia practices still consider themselves captive to surgeon preferences and OR scheduling practices, others are definitely making considerable headway in demonstrating to their respective administrations that the economics of anesthesia is very similar to that of the facility. An anesthetizing location that does not generate enough revenue to support the cost of the anesthesia staff to cover it is most likely a loss leader for the hospital as well.

Practices that are serious about trying to close the gap between coverage requirements and revenue potential are starting to further fine-tune their analytical tools to assess individual provider productivity, a concept that is considered controversial in most practices. Many practices where physicians are paid based on a productivity-based compensation system, i.e., one where provider compensation is based on hours or units billed, delude themselves into thinking that such systems encourage provider productivity. In fact, such systems tend to encourage differential levels of production. Essentially they simply reward the hardest workers, but do little or nothing to encourage greater provider productivity except among providers who are already predisposed to generating more income. It is the rare anesthesiologist or CRNA, however, who cannot be made more productive and efficient with appropriate monitoring and incentives.

Those practices that are serious about remaining competitive in the current environment are also using their data to assess staffing models. Physician-only practices are re-assessing the assumption that they provide better care without CRNAs. While an Anesthesia Care Team (ACT) model is not always the cheaper solution, practices that are unwilling to seriously consider alternatives to having anesthesiologists do their cases alone are quickly being dismissed as old school. It is the nature of today’s businesses that they have to anticipate change and be able to reinvent themselves quickly to survive. Why should it be any different in the specialty of anesthesia?

All of this speaks to an inevitable paradigm shift within the specialty. It used to be that a good practice was defined by busy operating rooms and a favorable payer mix. The anesthesia group’s destiny was ultimately in the hands of the surgeons and administration. Why should this be? Why should practices not use their experience and data to suggest practical solutions for process improvement? This is exactly what is happening as anesthesia providers climb up the medical food chain to take more control of their own destiny.

Operating Room Utilization

As is true of so many common analytical challenges, the data that is most useful to the goal at hand is probably not immediately available to the practitioners. Establishing useful operating room productivity metrics requires some forethought, consistent quality control and a very flexible toolset. There are many confounding factors. Knowing what data points to include and to exclude is essential. Business intelligence must always result in actionable indicators.

While it is possible to generate some primitive utilization metrics without actually capturing the anesthetizing location, these will have only limited utility in the long run. If you truly want to measure what is happening in each operating room and be able to use this information to modify hospital behavior, the room number must be captured by the billing system, which in many cases is a challenge in and of itself. Consistently capturing the room number requires a clear list of locations, a place on the anesthesia record for the location to be captured and consistent collection by the billing staff. Without rigorous quality control for this process, most practices will miss 10 to 15 percent of the cases in their utilization calculations.



The next step is to define reasonable and realistic subsets of the practice. Including and averaging too large a sample of data may invalidate the value of the metrics produced. Special consideration must always be given to the needs of specific service lines, especially in larger facilities. Obstetric activity is usually the first carve-out. Cesarean sections may be included to the extent that they are scheduled in operating rooms as surgical cases. Specific facility requirements must be identified and delineated but of much greater significance is the ability to identify lines of business for purposes of benchmarking and comparison. The following is a typical hierarchy of lines of business: 

• Inpatient operating room
• Outpatient operating room
• Endoscopy
• Cardiovascular (heart room)
• NORA (non-operating room anesthesia)

At issue here is the need to assess performance on a “same-store” basis. Comparing utilization in an endoscopy center to a heart room, for example, would be of little relevance or utility. Some of the factors that make comparisons useful include type of cases performed, coverage and call requirements and staffing options. Table 1 demonstrates how the overall results may appear unchanging, while significant differences for a single OR may surface from one quarter to the next.

Defining Useful Metrics

Knowing what metrics to calculate can be a little daunting as there are many options. The key, though, is to use normalized data. Typical production data is divided by clinical day. In other words, we are interested in cases, units, hours or collections per day. If there are five operating rooms, some of which are used five days a week and some of which are only used infrequently, we only want to tally days of actual use for purposes of calculating metrics. It is also useful to limit the timeframe being evaluated. Since 75 percent of all activity typically takes place between 7 AM and 3 PM, the most reliable data only includes activity for week days during this time frame. Typically cases that start before 7 AM or run later than 3 PM are truncated for purposes of calculating the hours applicable.

The following are some general considerations to guide the selection of an appropriate metric or metrics.

• Cases are easy to tally and provide a clear reference to the schedule. The problem is that since there is such variability in acuity of care and case times it is difficult to draw any meaningful conclusions about utilization from normalized case tallies per day.
• Billed ASA units may provide a very useful metric in that they reflect both time spent and acuity of care. Units are also the primary determinant of financial performance potential. The only challenge here is that if the intent is to share this data with administration, hospital folks tend not to understand how anesthesia charges are calculated. 
• Hours per location day may not reflect the acuity of care but they do equalize the actual time spent in a billable or production mode, and, as such, can be very useful in assessing both OR utilization and provider productivity.
• Ideally, one would like to be able to assess the financial yield per location day, but this is actually more challenging than might appear. The problem lies in determining when the cases performed are paid in full. Lagging collections performance is one approach but then one may not be measuring current performance levels.

A key issue in the development of performance metrics is the critical distinction between OR utilization metrics and provider productivity. The two are often related, but each must be assessed independently. Anesthetizing location utilization focuses on average and normalized metrics by venue. Let us suppose that a given hospital with ten main ORs consistently produces 5.6 hours of billable anesthesia time per day shift. This value allows us to compare the utilization of this suite of ORs to other practices and benchmark data. If the numerator is eight hours then this represents 70 percent utilization (5.6 divided by 8 hours). Generally, the target for a well-managed OR is 80 percent. With this number we can assume there is some upside potential for improved utilization. Where is the opportunity, though? Comparing individual operating rooms might shed some light on the question, especially if one or more of the rooms are consistently underutilized. It might also be useful to compare activity by hour of the day. Maybe there are holes in the schedule that could be better managed. These are all utilization options which assume that anesthesia is just one of a number of stakeholders in determining utilization.

The ultimate goal here is to identify lines of business and anesthetizing locations that are efficient and profitable. One could also say the goal is to categorize each location as sustainable or unsustainable. Typically, the goal is to identify underperforming venues that require financial subsidy. Truly useful metrics should support and justify closing rooms or modifying coverage requirements. Truly useful provider productivity metrics should allow for the identification of best practices and inefficient providers. When used appropriately and judiciously, utilization and productivity metrics can greatly reduce the need for financial support and enhance the independence of an anesthesia practice.

Educating Administration

Most anesthesia groups make a common mistake in assuming that their hospital administration understands the economics of anesthesia; most have no clue about what makes for a profitable anesthesia practice. As in any activity intended to modify behavior, the key to success is to educate stakeholders. They must come to understand and appreciate the anesthesia perspective. This does not happen overnight and it does not happen without a commitment to serious communication. Those practices that only sit down with administration every couple of years to renegotiate the terms of the exclusive contract are at a serious disadvantage. If an anesthesia practice wants to be seen as part of the solution and not as part of the problem it must be creative and proactive in its interactions with hospital staff.

The chair of one of our clients was feeling particularly besieged by regular requests to add anesthetizing locations that he knew would not generate additional revenue consistent with what the staff required. He had a report designed that tracked actual hours of billable anesthesia time against coverage hours by anesthetizing location by month. In other words the report showed how many hours he was expected to staff and then what the resulting billable anesthesia hours might be. In doing so the chairman created his own productivity metrics that, basically, measured the effect of scheduling on anesthesia profitability. Utilization percentages varied by lines of business; it was a large practice that was expected to cover more than 30 locations a day. It took a while for administration to buy into the methodology but month after month the chairman would simply drop the report on the COOs desk. Eventually the administration saw the wisdom of the approach and over time took the information into consideration as it made strategic planning decisions affecting the operating rooms. The administration started to accept and understand the chairman’s position that he would not staff any location that would not generate 45 base and time units per location day.

Educating hospital administration requires finding a common language and vocabulary. Take a simple example. Hospitals tend to tally cases and hours of OR time. Anesthesia providers tend to track units and minutes billed. In anesthesia revenue potential is a function of units billed, but most hospital administrators have no idea what base and time units are and would be suspicious of any metrics based on them. While anesthesiologists tend to default to dollars generated, this is not such a good starting point because most administrators believe that anesthesia is overpaid. The challenge, then, is to find a common frame of reference that has meaning and relevance to both parties. Once this is established the hospital staff has to have time to get comfortable with the data and validate its accuracy. This can be a very frustrating process for providers used to making life and death decisions in ten to fifteen seconds in the operating room.

Once a dialogue is established then it is important to focus the discussion. Service providers gain the trust and confidence of administration by starting small. Identify problems for which solutions can be suggested. Demonstrate the value of the assistance. Small wins lay the groundwork for bigger changes. There is a saying in sales that “each yes gets one step closer to the big yes.” So it is in working with administration.

Too often anesthesia practices fail to see their staffing and coverage challenges from the administration’s perspective. This can be a huge obstacle to behavior modification. As Steven Covey writes in Seven Habits of Highly Effective People, “seek first to understand.” In business, the best solutions are always the ones in which all parties benefit. Collaborative problem-solving is always more effective than unilateral demands for support.

Here is a typical example. An anesthesia group went to administration with a request for a $1.5 million subsidy. The group was starting to fall apart. Poor management had resulted in a very unstable practice. Given that there had been no meaningful dialogue with the practice, nor any indication as to just how much the practice was struggling, the CEO called in a consultant to verify the calculations and make recommendations. The consultant confirmed that it would take at least $1.5 million to cover the costs for providing care based on the current coverage requirements. The real value of the consultant’s report, however, was a discussion of hospital coverage requirements. Ultimately, the necessary subsidy was greatly reduced when the hospital reduced its coverage requirements. Had the anesthesia practice started with this or had they been providing the hospital regular reports showing their utilization metrics, the consultant would not have been necessary. Basically, all the consultant did was bridge the communication gap.

Today’s successful anesthesia practices are built on partnerships with administration: the more communication, the better; the more sharing of data, the better and the more collaborative problem-solving, the better. Knowing what to share and how to share it is not always easy, but it is an essential survival skill that must be mastered in the current environment. Most hospital administrators do not want to change anesthesia solutions, nor do they want to have to bring anesthesia in-house, but many simply come to the conclusion that they have no choice. This is the new reality that all groups must come to terms with.

A Leaner and More Efficient Anesthesia Practice

The real problem in anesthesia is that staffing models tend to be defined based on historical and cultural models that may not fit the current requirements. There is a great divide in the United States between physician-only practices and ACT practices. Western anesthesia practices tend to be physician-only practices and so this model has become the norm. Why a practice in Philadelphia believes that the anesthesia care team is the best way to deliver care while a similar practice in Pasadena has never seriously considered using nurses is one of the great mysteries of the specialty.

Another curious and defining factor for an anesthesia practice tends to be its lack of business focus. Most consultants and observers would agree that the typical anesthesia group is more of a medical professional fraternity than a clearly focused business entity. One of the most obvious results is that physicians are vetted and then hired to become members of the fraternity. They are assumed to be competent and productive until found to be otherwise. Most have no clear mechanism for monitoring and evaluating shareholders and partners. And the biggest and most divisive challenge any practice faces is the need to discharge a member.

It is these factors that make the concept of monitoring provider productivity so challenging and even controversial. It is the rare anesthesiologist who accepts the notion that he or she needs to be monitored and measured. Nevertheless, it is a basic principle of sociology that social control requires identification of the actors. One cannot improve provider performance and effectiveness if one cannot objectively evaluate and compare providers for the same types of work. Herein lies the challenge and the opportunity for the practice that has just received word that there is no additional money in the hospital budget for a larger stipend and that the hospital actually wants to reduce it.

Can the monitoring and measurement of provider productivity make a difference? It has actually been the key to success for most businesses. Good business is about creating maximum value. Since payroll is an anesthesia practice’s greatest expense it is the area where the greatest gains can be achieved. It is clearly the belief of the nation’s largest anesthesia groups that the goal to long-term viability lies in driving down the cost of care, which must inevitably mean more leveraging of physicians through the use of CRNAs and more closely monitoring individual physician productivity and quality metrics. See Figure 1 for an example of the results of measuring individual provider productivity by both average hours per day and utilization.

Managing Change

The specialty of anesthesia has evolved through three phases. For most of its history, anesthesiologists were generally busy enough and the payer mix favorable enough that there was no need for financial support from the hospital. As the environment for the hospitals became more competitive and anesthesia practices were being asked to provide more coverage and services, many groups were able to negotiate stipends or revenue guarantees. Currently more than 75 percent of all anesthesia practices receive some form of financial support from the facilities they serve. Now this is changing. The number one line item most hospital administrations and hospital systems want to reduce is the amount paid for anesthesia.

It used to be that a successful practice was defined by its gross receipts. Enough money solved all problems. Through most of their history anesthesia practices have focused on generating revenue. They did this through payer contracting, their management of billing offices or outside billing vendors and the negotiation of hospital subsidies. By most estimates all three options hold only limited potential to support practice balance sheets. Now the focus is starting to shift to the expense side of the ledger. Those who have come to understand the importance of being lean and effective are gaining market share while those that refuse to accept the inevitable are losing ground and losing their franchises. Effectiveness and efficiency are the new keys to success.

Strategic planners love to remind us that more often than not the beliefs and strategies that have gotten us to where we are today will not get us to where we need to be tomorrow. It would appear that anesthesiologists would be well advised to give this some serious consideration. As anesthesia becomes more and more of a commodity, its monetary value diminishes. Understanding this and finding ways to offset the decline are why metrics matter.

If you are not currently monitoring your own operating utilization metrics and measuring provider productivity and you are an ABC client, feel free to request a free analysis from your account manager. If you are not an ABC client and are curious how your metrics compare please contact our consulting team for a proposal and analysis. ABC has a vast repository of benchmark data for OR utilization and provider productivity for you to benchmark your practice.

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 Jody Locke, MA serves as Vice President of Anesthesia and Pain Practice Management for ABC. 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 will be a key executive contact for the group should it enter into a contract for services with ABC. Mr. Locke can be reached at Jody.Locke@AnesthesiaLLC.com.

The SGR “Fix” in the Context of Anesthesia Practice

Serene K. Zeni, Esq.
Clark Hill, PLC, Birmingham, MI

Greg Moore, Esq.
Clark Hill, PLC, Birmingham, MI

Alexandra A. Hall, Esq.
Clark Hill, PLC, Birmingham, MI

It is not by chance that the discussions leading to the SGR “fix,” the Medicare Access and CHIP Reauthorization Act of 2015 (H.R.2), signed into law on April 16, 2015, began with an anesthesiologist, Republican Congressman Andy Harris, MD. The manner in which the Sustainable Growth Rate (SGR) would be fixed was particularly relevant to anesthesiologists who get roughly 31 percent of commercial payment when they bill Medicare, according to Jane Fitch, MD, chair of anesthesiology at the University of Oklahoma Health Sciences Center in Oklahoma City, in an interview with Anesthesiology News. Understanding H.R.2, therefore, is necessary to understand how anesthesia practices will be reimbursed in the future.

To understand the rationale underlying H.R.2, it is necessary to start with the basic assumption that providers need to shift away from the fee-for-service model and that there is not already a focus on quality by the practitioner without forcing the issue through reimbursement. It will then appear that H.R.2 guides the payment system in the right direction. While the underlying concepts of quality seem simple to integrate into reimbursement, H.R.2 ignores the cost and complexity involved in instituting its measures on a provider level. Even after a provider invests in the cost of compliance, H.R.2 is broad enough that a provider can miss the mark on what it takes to qualify for an incentive or higher reimbursement.

I. The Immediate Fix

Before Senate approval of H.R.2 on April 14, 2015, Medicare payments for physician services were annually adjusted upward or downward by a conversion factor determined by the SGR. The SGR intended to ensure the expense per Medicare beneficiary did not surpass the gross domestic product (GDP). However, due to the slow growth of the economy, SGR would have cut reimbursement for physician services by 21.2 percent by April 1, 2015.

H.R.2 avoids this massive decline by freezing the current conversion factor to zero percent through June 2015, which means physicians will maintain their current compensation for services provided. The conversion factor will increase to .5 percent as of July 1, 2015, and continue at .5 percent every year through 2019, which will gradually increase physician reimbursement every year rates are recalculated. From 2020 to 2025, the conversion rate will return to zero percent, leveling reimbursement during that period.

II . Not Catchy Enough For The Headlines

Where providers may get lost is in the actual details of reimbursement after the SGR fix is implemented. The complex reimbursement model achieved by H.R.2 did not make the headlines when the public was pressuring the Senate to sign the bill into law.

As of 2026, H.R.2 incentivizes providers towards “quality” as opposed to volume consistent with the overall trend in health care. For this purpose, H.R.2 requires use of two conversion factors, which will apply to practitioners (including physicians, physician assistants, nurse practitioners and clinical nurse specialists and certain other qualifying professionals) depending on whether they are reimbursed under a “qualifying” alternative payment model (APM). A provider qualifies by furnishing a particular threshold (depending on the year, starting in 2019) of his or her services under an APM or an entity participating in an APM that falls under one of these payment systems as defined under the Social Security Act: (1) innovative payment models; (2) the shared savings program; (3) a demonstration; or (4) any demonstration project required by federal law.

The reward for “qualifying” is reimbursement with a year upward conversion factor of .75 percent. The caveat is that he or she must also use certified electronic health record (EHR) technology and specific quality measures and either bear financial risk for participation or be a patient-centered medical home. A conversion factor of .25 percent will apply to professionals participating in non-qualifying APMs, leaving the fee-for-service model available, but, theoretically, less attractive.

H.R.2 sunsets payment incentives under the physician quality reporting, value-based payment modifier, and meaningful use programs by 2018. H.R.2 establishes in its place the Merit-based Incentive Payment System (MIPS) in 2019, merging all three programs into one. MIPS is structured to evaluate overall provider performance by scoring performance in various categories and giving each category a proportion: “quality” (30 percent), “resource use” (30 percent), “clinical practice improvement activities” (15 percent), and “meaningful use of electronic health records” (25 percent). Each measure is largely dependent on provider reporting and studies with an additional incentive for “exceptional performance.” The provider’s MIPS score will factor into her reimbursement rate.

III . Just When You Thought You Understood “Meaningful Use”

H.R.2 reestablishes the current standards for data sharing. H.R.2 mandates and permits data sharing (even selling) in multiple contexts. Of course, H.R.2 continues to promote data privacy and security while expanding access to unidentifiable patient information.

The extent of data sharing encouraged by H.R.2 increases the data security risks already prevalent in the healthcare industry. For example, H.R.2 sets a goal of achieving interoperability of EHR systems by December 31, 2018, and prohibits deliberate blocking of information sharing between EHRs from different vendors by redefining meaningful use. This requirement may pose a challenge to providers given the Secretary’s power to adjust meaningful use penalties and decertify EHRs if not achieved.

The data sharing provisions of H.R.2 will generate further complications for professionals already struggling to comply with HIPAA and HITECH.

IV . The Provider Fix

Regardless of one’s perspective on H.R.2, the practitioner must nonetheless prepare for its impact. Even if a provider chooses not to participate in Medicare, third-party payers are more than likely to follow suit and the precedent established by H.R.2 will be inescapable.

The unpredictability of the value add or decline of H.R.2 is creeping into different contexts of provider arrangements. For example, recently drafted employment contracts accommodate the contingency of a decline in reimbursement by shifting the burden of such decline from the employer to the employee.

Anesthesiologists will need to reevaluate their current efforts to comply with quality measurements, data protection and value performance. They will need to look at current and potential relationships with other providers and ensure such relationships account for the potential decline in reimbursement in the long term. H.R.2 did not simply solve the SGR problem. Rather, it created numerous long-term challenges that providers will need to truly understand to protect their bottom line and determine their professional success. It also perpetuated the many challenges already experienced by anesthesiologists in other payment reform contexts, such as failing to answer how quality is measured in the context of anesthesia practices. Despite the law starting with a conversation in the presence of anesthesiologists, the law only temporarily favors anesthesiologists and only creates more ambiguity in the long term. 

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Serene K. Zeni, Esq. is of counsel to Clark Hill, PLC, representing health professionals and organizations to establish and maintain quality, risk management, and compliance programs in a variety of settings. Her services range from simple contract review and negotiation to supporting the launch of a new organization in the healthcare field. She can be reached at szeni@clarkhill.com.

Greg Moore, Esq. chairs Clark Hill’s Health Care and Behavioral Health Care Practice Groups. Mr. Moore is a frequent speaker and author of numerous health law articles who has focused his career on representing and counseling providers of all types and sizes including: behavioral healthcare companies, facilities and networks, behavioral healthcare information networks, medical groups, federally-qualified health centers, trade associations, nonprofit and for profit hospitals, international and domestic medical tourism companies. He can be reached at gmoore@clarkhill.com.

Alexandra A. Hall, Esq. is an associate in Clark Hill’s Health Care Practice group. Ms. Hall practices in all areas of healthcare law and represents a variety of health professionals and organizations. Ms. Hall has also supported healthcare providers in the Recovery Audit Contract and Medicare appeals process, conducted primary research regarding Medicare compliance and reimbursement issues, and assisted clients on regulatory and licensure matters. She can be reached at aahall@clarkhill.com.
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