What is the Optimal Size for an Anesthesia Practice?

SUMMARY: Today we explore is big really better? Many a practice has dedicated considerable time and energy to the discussion of merger and expansion options. This question is more relevant now than ever; the specialty is more at effect of dramatic and dynamic market forces than few ever anticipated. Plotting a secure and financially viable path to the future has never been so challenging or perilous.

Is big really better? Many a practice has dedicated considerable time and energy to the discussion of merger and expansion options. Some have been successful in their quest to build a significant market footprint, while others have seen their hopes dashed unceremoniously by unappreciative administrations. The fact is that the question is more relevant now than ever; the specialty is more at effect of dramatic and dynamic market forces than few ever anticipated. Plotting a secure and financially viable path to the future has never been so challenging or perilous.

The ABC client base is representative of the specialty, as a whole, with practices of all sizes across the country. While the average practice consists of 38 providers, the median is 20, representing nine physicians and 11 CRNAs. The difference is explained by the megagroups of 100 or more providers. While it is true that the average group size has increased over the years, megagroups are the exception rather than the rule.

A Historical Perspective

There was a time when a group of anesthesia providers were happy to have a contract to provide services at a facility with consistent volume and a favorable payor mix. Conventional wisdom held that if the average physician could generate 50 to 60 billable ASA units per clinical day, then the practice would do well and there would be no need for a subsidy. The size and scope of the practice was defined by the needs of the surgeons and obstetricians. The objective was to provide a consistent service with a team of qualified employed providers. Success was defined in terms of predictability. Some practices were obviously more profitable than others because they had more favorable payer mixes, but most anesthesia providers were relatively content, as long as they were consistently busy.

This model started to unravel in the 1990s. Medicare and Medicaid rates were frozen at significantly discounted levels. Commercial payers became managed care conglomerates, and anesthesia practices became consumed by the need to become aggressive negotiators. The ASA held its first practice management conference in early 1994. It was a seminal event where speakers portrayed a new and dynamic market for medical services. Many of the dramatic changes that have impacted so many practices across the country can be traced back to the early 1990s. Until then, there were only a few large anesthesia practices and Anesthesia Specialists Medical Group in San Diego (ASMG) was a model many chose to emulate. Merger mania could be seen across the country. There was a prevailing view that a group practice had to be big to be successful. Size became the most significant distinguishing factor. By the end of the decade, 25 practices employed close to 30% of all providers.

A closer analysis of the practices that have grown the most reveals two prevalent strategic themes: security and profitability. The successful practices recognized that market security was the first priority and they strove to provide the most consistent quality care. Some, such as Oregon Anesthesiology Group in Portland, developed sophisticated 360-degree review processes to ensure they were providing the highest level of customer service. While many aspiring megagroups focused on their ability to negotiate optimal payment rates, this was often a chimera that opened them up to antitrust challenges.

Many lessons have been learned by tracing the history of these early megagroups. Some continue to prosper, in much the same way as they always have. Others have profited from the availability of venture capital funds and morphed into larger commercial entities such as North Star, Envision and NAPA, while still others are no more. History has taught us that few empires last forever. If the customer does not believe it is getting the best service for the best price, the relationship is doomed. Hubris can be fatal. There used to be a very large anesthesia practice in the Boston area called Anesthesia Associates of Massachusetts. It controlled the lion's share of the market until hospital administrators decided that they would have more control if they simply employed all the anesthesia providers. In another city, a very large group was the sole provider to a major health system until the decision was made to switch to another provider. Growth is obviously not a guarantee of security, in fact, a group's desire to strengthen its market position may actually be its undoing, as customers feel threatened by its size and power. In other words, it is not about size, it is about the quality and effectiveness of management.

Talking Strategy

So, what is the best strategy? The short answer is, it depends. Terms and objectives have evolved.

Clearly market security is an overarching priority. Many practices have succumbed to Requests for Proposal (RFPs). Hospital administrators appear to be increasingly willing to consider alternatives such as switching anesthesia providers or employing the providers themselves. It has become clear that security must be defined on a practice, or site by site basis. While many practices struggle with the renegotiation of their facility contracts, and especially with the justification of subsidies, it turns out that their success or failure hinges on the quality of their relationship with administration. Customer service is the buzz word of the day. Anesthesia practices are expected to do much more than safely manage patients through the trauma of surgery; they are expected to be team players in the facility's attainment of its strategic plan.

It used to be, that defined solely on the basis of revenue potential, a practice was profitable if there was enough revenue to recruit and retain an adequate staff of qualified providers. Downward pressure on payment rates and expanding coverage and service requirements have changed the paradigm. As practices struggle to create value for their customers, cost management has become the tantalizing challenge most practices must grapple with. The two most vexing words in the practice management vocabulary are "scope creep".

Looking to the Future

And so it is that big, is not necessarily better. Successful practice management in the current environment is a multi-disciplinary exercise for which many anesthesia providers are simply not prepared. This explains the need for paid administrators and management consultants. It also explains why so many practices lose their contracts or sell-out to larger entities. The reality of today's market challenge is best expressed by the following aphorism: if you have seen one anesthesia practice, you have seen one anesthesia practice.

If you would like to reach out to us concerning this topic, please contact your account executive or go to info@anesthesiallc.com.

With best wishes,

Tony Mira
President and CEO