Timing Is Everything: Divining the Wisdom of Anesthesia Aggregation in the Current Environment
Jody Locke, CPC
Vice President of Anesthesia and Pain Management Services, ABC
The specialty of anesthesiology is experiencing an unprecedented level of merger activity and practice acquisitions. The idea of two or more practices joining forces to secure their market position or enhance their strategic options is hardly a new phenomenon. The past few decades has seen the emergence of some very large anesthesia organizations that have dramatically changed the landscape in their respective markets. Once a pioneer in large group practice management, the Anesthesia Service Management Group (ASMG) and its 150 plus physicians in San Diego has become a model to emulate and refine. By some accounts, we have already reached a point where fewer than 100 organizations employ more than 15 percent of all anesthesia providers, but this is only a rough calculation, made especially challenging by the recent infusion of venture capital money that is inspiring an impressive list of practice acquisitions across the country. This dramatic rethinking of the very nature of an anesthesia practice as not just a way of satisfying the requirements of an exclusive contract with a particular hospital or surgery center but as a serious business organization bent on increasing market share raises some very fundamental questions that are inspiring lively debates in anesthesia board rooms across the country. Essentially there are three options open to any hospital based practice.
The first option is to stand firm and find ways to define the group as a niche practice uniquely qualified to meet the specific expectations and requirements of a particular facility. There is no shortage of anesthesia practices that could well meet this criterion. Independent rural hospitals tend to be a case in point. Specialty hospitals that have very unusual service requirements may also be candidates for small, monogamous practices. What does not fit the bill is the practice that simply chooses not to be a competitor and which chooses not to focus its energies on the highest level of customer service. In the current environment, going it alone can be a very risky strategy. With increasing frequency, unsuspecting physicians are coming to appreciate just what it means to be the recipient of a Request for Proposal (RFP). No three letters evoke such anxiety.
Second, groups that don’t have a plan or a strategy of their own may consider selling out. Practices that have never invested in the development of a strong administrative infrastructure may choose to affiliate themselves with entities that have more evolved business structures. The underlying logic here follows a classic line of reasoning: if you can’t compete effectively on your own, then merge with a practice that has proven its ability to be master of its own destiny. This safety in numbers approach may offer many advantages, but it can also prove to be less than ideal, especially if the price of admission includes a serious buy-in or material loss of constituency. Nothing is more perilous than negotiating from a position of weakness.
It is the rare group that has the courage or conviction to follow the third option—to take the lead in creating a new competitive mega-group. It is always easier to find a proven solution than to craft one from scratch. The leadership must believe they have a significant strategic advantage to leverage. Maybe they are the preferred anesthesia practice within a strong hospital network. Maybe they are a practice that has invested in their administration and infrastructure. It is also possible that they have an in-house billing service they are hoping to offer other anesthesia groups.
While many practices talk about leading the pack, it is the rare group that is successful. The challenges can be significant. What worked in one practice is not always transferable to another. The vision of one leadership is not always the vision of another, especially when that vision is tested by the practical realities of governance, compensation and ownership. The political challenge of getting multiple practices to agree on one billing solution is often the fatal flaw in the equation. Even those that do agree to merge do not always stay merged.
A review of today’s largest practices,all of which are the result of at least a few mergers, reveals three essential criteria for success: rationale, structure and infrastructure. Large groups survive and thrive because their members have confidence in their vision, leadership and management. This is not an easy combination of qualities to achieve and the law of entropy definitely applies to anesthesia practices: there are more factors working against their survival than for it.
Rationale and Structure for a Merger
As is true of any business proposal, the vision comes first. How will the group distinguish itself in the market place; how will it get and keep customers and what will its value proposition be? There has to be a clear and compelling rationale for the merger that makes sense and which can be simply articulated by all participants. It is not enough to claim that a bigger group will get better rates or reduce its cost of doing business, however important these may be perceived to be. Strong leadership and vision can often finesse the objections but ultimately if there is no consensus, the new entity will forever be encumbered by its history and diverse cultures and outlooks of its members.
The proposed structure can also prove critical. This is where lawyers earn their fees. This is much more than a simple question of C-Corp, S-Corp, partnership or LLC. These are just labels. The form and structure of the entity must support its function. It is a delicate balancing act to find the right structure that will make new members feel comfortable enough to join but which will give the entity the legal leverage to achieve its business objectives.
Infrastructure is critical and the final necessary prerequisite. Too many practices are simply too naïve about the breadth and depth of their administrative infrastructure. The administrative team or its surrogate must have the resources and experience to smoothly integrate new shareholders and employees. Seriously disgruntled employees can derail even the most compelling plan.
A newly emerging and already quite substantive entity, Midwest Anesthesia Partners, Ltd. (MAP) is the brain child and offspring of Park Ridge Anesthesiology Associates, Ltd. (PRAA) and Lake County Anesthesiologists, Ltd., significant practices based at Lutheran General Hospital in Park Ridge, Illinois and Condell Hospital in Libertyville, IL. Well-known preeminent anesthesia groups in the area associated with one of the prominent hospital systems, Advocate Health, their leadership believes the time is right to leverage their combined position in the local market. Preliminary numbers indicate that MAP could manage more than 150 physicians and CRNAs by the end of the year. The enthusiasm of MAP’s president, David Rosen, MD, inspires at least three obvious questions: Why now? What does MAP hope to accomplish? How likely is the group to succeed?
The timing of the formation of MAP is no accident. It is directly related to the implementation schedule for the Patient Protection and Affordable Care Act (ACA). There are always necessary and sufficient causes for launching a new practice initiative. PRAA’s long history at Lutheran General and its reputation in the community were necessary prerequisites but until the ACA was signed into law there was no one specific and sufficient motivation to dramatically restructure the practice model. MAP founders believe, and they are certainly not alone in this belief, that three factors set the stage for the passage of the law and that these will continue to be the factors that will drive future developments in health care.
Any discussion of health care starts with the cost. The national cost of health care has been one of the fastest growing items in the Federal budget for years, despite tight price controls on Medicare and Medicaid rates. The cost of healthcare is the number one cause of personal bankruptcy. Increasingly businesses have had to opt out of health care coverage due to spiraling premiums. Numerous provisions of the ACA are intended to address the cost of health care and availability and affordability of health insurance.
One of the fundamental concerns with the current system is that it rewards physicians for providing services whether necessary or helpful or not. This tradition of fee-for-service medicine has been the basis for the entire medical payment system for as long as anyone can remember. The standard bible of all billing personnel is the AMA’s CPT® book that numerically codifies all medical services so that payors can develop fee schedules and payment criteria. The system has become so complicated that it spawned yet another reference, the Correct Coding Initiative (CCI) to identify which procedures can reasonably be billed with others. It started as a good idea and a very logical way to ensure that providers got paid for the services they deemed appropriate for good patient care. The system has clearly encouraged the development of hundreds of new modalities that have contributed to an ever higher standard of care. The problem is that for all the good it did, it has also encouraged providers to exploit the system through creative coding and unbundling. The ACA includes various provisions for pilot projects and other initiatives to change the incentive from fee for service to fee for outcomes, or pay for performance (P4P).
The second major driver behind the ACA is a concern with the quality of care provided. By most accounts, Americans pay more for healthcare than most industrialized nations but our outcomes and quality rank us well below the leaders. This problem has inspired a concerted effort to implement and expand the use of Electronic Medical Records (EMRs). There is considerable consternation across the country as hospital administrations and health systems move forward with EMRs. Not all providers accept that capturing more details about each patient interaction will necessarily improve the quality of care and outcomes. Most observers believe, however, that the underlying theme here is already quite clear. Physicians must do a much better job of substantiating the quality of care provided and whether the desired outcome was achieved. The belief is that this will become a significant factor in the payment calculation. This intense focus on the justification for payment is at the heart of the new diagnosis coding system (ICD-10) that is scheduled to be implemented next October.
At the heart of MAP’s strategic plan is a belief that only organizations of a sufficient mass can afford to develop the infrastructure necessary to reposition anesthesia practices to compete aggressively in what is anticipated to be a far more competitive market for health care. Ultimately, every hospital administration that must select a new provider group hopes to base its decision on cost, quality and a belief that the entity is positioning itself for the future of health care.
MAP is a partnership of corporate members. The intent is to provide sufficient freedom and flexibility for groups that want to join to maintain their corporate culture and integrity while achieving economies of scale. Essentially, the structure encourages individual member groups to continue to focus their energies and efforts on customer service for the facilities they serve. The role of the partnership, by contrast, is to negotiate with payors for optimum payment rates, provide corporate and support services and to market the entity as a whole.
Thus far the strategy appears to be working. Interest in the partnership has been intense.
The formation of this new entity raises a number of interesting questions about why, when and how markets for anesthesia services change. In some senses, MAP is late to the game. Cities like San Diego and Portland have been experiencing the market impact of very large anesthesia groups for years. The NAPAs of the world are a more recent phenomenon. Why did it take so long for such an entity to coalesce in the Chicago market? There are two prevailing theories. The first focuses simply on economics. Chicago practices have done fairly well compared to those in the rest of the Midwest. While anesthesia compensation levels have not been the highest in the country, they have been very competitive. There have simply not been the kind of dramatic market forces imposed by managed care plans that have distinguished places like Philadelphia and Houston, where other very large entities were organized a dozen or so years ago. Even now the initiative inspiring MAP is more pro-active than reactive.
The other factor is far more subtle. For reasons that are unique to the local market one management firm, Merus Management, has enjoyed the trust and respect of a significant percentage of the area’s anesthesia practices for years. In effect, Merus has provided a level of service and practice management that other practices have felt they needed to create for themselves. It comes as no surprise that the formation of MAP is the logical next step in the evolution of Merus’s influence in the market.
So what does the future hold? The founders of MAP are cautiously optimistic. They would be thrilled if MAP represents 200 providers by the end of 2014. In their view the logic of consolidation is selling itself. They are also realistic enough, however, to understand that the group must deliver on its promises. This will be the ultimate validation of the concept but what they would say is that if you get enough people believing in the future of MAP and willing to work to make it a strong force in the Chicago market, it will be.
Jody Locke, CPC, serves as Vice President of Pain and Anesthesia 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. He can be reached at Jody.Locke@AnesthesiaLLC.com.