Is Big Better?
Jody Locke, CPC
Vice President of Anesthesia and Pain Management Services, ABC
I am an anesthesiologist. The leadership of my small group of 15 physicians has been negotiating a merger with the large group in a nearby city. They have made some compelling arguments for the strategic advantages of an affiliation with a larger entity. But as logical as the rationale for merging is, so are the concerns and the questions raised by detractors. It is just not clear that all the disruption of closing out our current entity and transitioning to employment status with the big group will result in a more favorable situation for us as individuals or even as a division of the new entity. I personally worry about losing control of my practice and the clinical autonomy that attracted me to this practice in the first place. The fact is that I am still unsure how I will vote when we all get together to make a final decision.
Our mailboxes and inboxes have been full of information about all the changes taking place in healthcare. The consensus of opinion seems to indicate that the Affordable Care Act (Obamacare) will usher in a new set of priorities and focus for all health care organizations. Most observers believe that the provisions of the law will greatly encourage competition for a shrinking pool of health care dollars. The recurring theme is that now is the time to start getting ready for the changes to ensure a favorable position. The underlying implication is that those groups that fail to take the necessary precautions may well get left behind, forcing their members to look for new jobs under very different terms and conditions. My perception is that each group must either choose its own destiny, or one will be imposed on it.
The good news is that we have just renegotiated our contract with our hospital. The administration made it quite clear that they are happy with the service we provide. The only issue was whether they would increase our subsidy. We reviewed our numbers and concluded we could make do without an increase, which was exactly what the administration wanted to hear. The new agreement gives us a three year window of security but it is anyone’s guess where we will find ourselves and what kind of leverage we will have when it comes to negotiating the next agreement.
A quick survey of national trends reveals just what an outlier we are. At national meetings there is considerable discussion of the amount of consolidation taking place in hospitals and medical groups. The word is that the nation’s largest anesthesia practices have kicked their expansion activities into overdrive. Organizations like Somnia, EmCare, NAPA, Northstar, et cetera, are receiving significant infusions of venture capital to fund the acquisitions of some of the country’s largest private practices. Some very shrewd investors are betting big dollars on a very different vision of the future of healthcare. The logic seems to mirror the growth of service organizations like Waste Management, which set out to acquire all the nation’s trash companies in order to minimize costs and take advantage of recycling opportunities. It is just not clear what the end game is for anesthesia. Who benefits from a gas company strategy and how?
Proponents of growth and aggregation base their arguments on three common themes they believe predict the future of the healthcare market place. They argue that the competition will focus on cost, competitive advantage—typically described in terms of customer service—and compliance. It is hard to argue with the logic of the argument. The evidence is pretty convincing. The problem is that I chose anesthesia because I wanted to be a good clinician, to give consistently compassionate care and to enjoy the satisfaction of providing a professional service. I am struggling to reconcile these personal objectives with the impersonal economics of the market place.
Ours is a physician-only practice. As often as we have analyzed the numbers and discussed the options we have yet to agree that CRNAs fit in our concept of group practice. This may make us somewhat vulnerable on an abstract scale of cost competitiveness. Maybe our subsidy could be reduced slightly if we hired nurses but that is not what our calculations indicated. In other words, the economics of the issue were simply not sufficiently compelling to make such a profound change to the structure of our practice. The fact is that many of us simply prefer to do our own cases.
Beyond the question of the cost of our staffing model, we are very active on a variety of hospital committees where we regularly contribute to cost containment initiatives. Our billing company provides us regular reports showing operating room productivity by location and hour of the day, which reports we share in our discussions of ways to improve operating room productivity. We have made suggestions to the pharmacy committee to control drug costs and we continue to be very engaged in any discussion of a new line of business or expansion opportunities that could enhance revenue to the hospital. It is hard to imagine that this commitment or focus would change much if we were part of a larger organization although it is possible that a larger group with more experience might have some new and creative ideas to infuse in the discussions. It just does not appear that there are many significant ways for anesthesia to impact the profitability of a hospital.
Some of my partners keep asking what our competitive advantage is—as if to imply that we are missing something because of our limited experience and myopic view of the market. To be honest, we are not all perfect in all aspects of the service we provide. We have had some issues. We had to encourage one member to leave as a result of his attitude and treatment of O.R. staff, but surely we are not outliers in this. All in all, the care our group members provide is excellent. Our outcomes are consistently good. We have no malpractice claims pending. All the feedback we get from administration is positive. I absolutely believe this is because we all take ownership of our franchise and do whatever we can to make sure that our future with this institution is secure.
The big groups talk about all the additional resources they bring to the relationship with an administration. They present an impressive array of charts and tables purporting to demonstrate how they monitor and evaluate the performance of every provider. Is anesthesia really such a commodity that it can be compared to the preparation of a latte at Starbucks? Is that really the ultimate goal, that every anesthetic has the consistency of a caramel macchiato? Clearly consistency of quality is important but achieving it requires considerable skill and finesse: a global set of goals and objectives must always be carefully applied to a very specific mix of patient, surgeon and procedure. I would like to believe that what makes me a good anesthesiologist is my training, my years of clinical experience and, most of all, my personal professional commitment to the art and science of the specialty.
Administratively, it is obvious that one aspect of health care that frustrates and challenges all of us is compliance. First there was the focus on billing compliance that resulted in an expensive compliance plan. Once we got used to that was had to start modifying our forms to accommodate pay for performance measures, SCIP measures and the Medicare Physician Quality Reporting System (PQRS). Now we are struggling with Meaningful Use, and the Value-Based Purchasing Modifier is just around the corner. What is next? Where will it all end? Are we really making anesthesia any safer or outcomes any better?
It is not a game that I chose to play when I selected my residency program but apparently this administrative burden is part of the cost of membership. This being said, I can definitely see the advantages that a larger, well managed practice can bring to the tedium of bureaucracy. It is a big if, though. Too often bureaucracy takes on a life of its own and we lose the swifter, quicker, nimbler aspects of our practice that got us to where we are today. Too often I get the impression that such arguments are carefully crafted to support pre-conceived notions. There is always a utopian dimension to the line of reasoning as if suggesting a different strategy and approach will automatically solve today’s challenges. If there is one thing we know as anesthesiologists it is the reality that solving one problem often results in a new one. Rarely is any situation so unidimensional. Success is usually a matter of constantly triaging options.
Just as confounding as arguments for change are those intended to thwart it. Here the motives are no less pure, and too often very self-centered. Critics often do themselves in with their clear focus on the I versus the we and the today versus the tomorrow. Nevertheless the logic of criticism does infuse the debate with a critical dose of reality, especially to the extent it focuses on compensation, constituency and contractual dimensions of the question. Responsible members must carefully evaluate and assess all dimensions of the issue. Neither should we be too optimistic nor too critical in our support of one position or another.
I must confess that when asked if my compensation will improve after the merger or if my lifestyle will be enhanced, I am hard pressed to respond with anything but a gut response. I know what I want to believe, but how do I know that itwill come true. There appears to be some evidence that large groups do have higher overhead costs than smaller groups. Our overhead is about nine percent of total revenue. Some have suggested that this could increase by a percentage or two. Securing the future with well paid staff is not cheap, the argument goes. That is fine, so long as both parts of the proposition are true. We all know that sometimes you have to invest money to make money. It is certainly true that too many anesthesiologists have a pathological fixation with overhead costs.
The real question, however, must focus on the potential return on investment. Can a larger group negotiate better payor contracts? Can it extract more money out of hospitals? Can it leverage data and experience to change hospital behavior and improve operating room productivity? Hypothetically the answer to all these questions should be yes. The experience of too many practices actually indicates a somewhat mixed picture of results. This is the hardest part of this debate: sorting out the wishful thinking from the hard evidence of experience.
The constituency question is a tricky one. While many of us want to think we should have a say and input into every business decision our group makes we all know that is not realistic or practical. Constituency is one of those mythical ideals that makes us skeptical of delegation and authority. My friends from San Diego have suggested that the big group there, Anesthesia Services Medical Group (ASMG) resolved to consolidate the power of the Board of Directors a number of years ago. The formula adopted left the Board pre-eminent in all business matters but left the individual pre-eminent in all matters clinical. They explained that a simple majority of a seven-member Board can hire or fire any shareholder without cause. They explained that this was perceived as a critical strategic decision given the dynamic market conditions in San Diego. What a leap of faith that must have been. I just don’t know if my colleagues are ready for that kind of structure. We seem to be a bunch of cowboys.
My research reveals there are more than a few groups that merged when it was quite fashionable to do so, only to decide that being merged did not, actually, make things better. A case in point involved some physicians in New Mexico many years ago. Anesthesia Associates of New Mexico started in Albuquerque and then integrated the group in Santa Fe. Over time, however, the Santa Fe physicians started to feel disenfranchised. Their perspective was that they were sending their money to Albuquerque without getting anything in return. Eventually, they filed for divorce and opted for their own local market strategy and an independent entity. They would probably contend that, in retrospect, merging was not really the best option; that they got caught up in the hype without really understanding the reality of their market and their prospects and a unified group.
How big can anesthesia groups realistically get and still function well? The really big staffing companies seem very corporate and quite different from the kind of practice we have now. Just as osmotic pressure defines the size of a cell, there appears to be a delicate balance of factors that determines the optimum size of a medical practice. The organization survives to the extent that it serves the needs and expectations of its members. Historians often speak of the ebb and flow of empires; why should it be any different with anesthesia practices. I wonder how many of today’s mega group will become tomorrow’s case studies. Without a compelling vision and some strong glue to hold the organization together it will inevitably disintegrate. My perception is that if there is no compelling business strategy to enhance the security of all the members in the market, it does not matter how big the group is.
What concerns me most is the fine print. No discussion of practice mergers and aggregation would be complete without a serious review of the role of the law, lawyers and contracts. Hours can be spent crafting a deal, only to have legal counsel rip it to shreds over a number of legal technicalities. A long list of issues must be addressed and considered before the final documents can be written. Anti-trust often tops the list, at least initially. Is the proposed merger even legal given the potential impact on the market? Fortunately, most mergers can satisfy the necessary requirements but this does not mean the issue can be dismissed out of hand. I have been advised by reliable sources that a qualified opinion letter is always useful, and worth its price. Specifically, I have been told that most mergers will typically be subjected to a business review if there is any antitrust concern. This is why it is preferable to address this issue up front.
No less important is the question of entity structure and name. Who is merging with whom? Which entity will be the survivor and how will the disparate provisions and governance structure of the one be incorporated into the other? Every group that seeks to merge goes into the process believing that it brings significant value to the table and wants to be recognized for its contribution to the new entity. The practical reality of anesthesia mergers seems to indicate that this is another of those ideal principles that often gets compromised as the deal gets put together. On one level this makes perfect sense. If an entity is well structured and managed and strong in its market position, why should it have to restructure every time it merges with another group? There are limits to this, however: a 75-member group covering a large geographic footprint may require an entirely different structure and management than one somewhat smaller that covers a single hospital or one tightlydefined geographic area.
I am especially concerned about billing. We happen to be very happy with our current billing vendor but the entity we are in discussions with has its own billing office. I have suggested that an audit be conducted as part of our due diligence but this request appears to have been dismissed for reasons that are not entirely clear to me. My concern here is that a large entity with a compelling vision of the future should have an infrastructure that matches the vision.
I have been assured that we will not have to pay a buy-in and that after one year we will all be made shareholders in the group we are merging with, but I have yet to see an agreement that confirms this. It is not that I am questioning what I have been told but it would be nice to see it clearly spelled out in writing. The last thing I would want is to lose my status as a result of this transaction and be reduced to just another salaried employee.
I understand that these kinds of negotiations must be managed by a small group of authorized representatives, that it is unrealistic to think that all members can participate in all discussions, but the reality of a negotiating committee making significant decisions for the membership as a whole can be very nerve-racking. It has certainly given rise to considerable concern and debate within our group. Listening to some of our debates I could not help but be reminded of the advice often given to wagon trains crossing the great plains: when you circle the wagons remember to have all the guns pointing out. It is amazing how when the discussion starts to hit home and the potential for change becomes more imminent passions start to run high. I often sense that the more our leadership suggested that we should just trust them, the more concern this has evoked among many of my partners.
So how will I vote? I am not sure. I am inclined to go with the majority—I have no desire to be seen as the holdout nay-sayer—but my training as an anesthesiologist has taught me to be cautious and skeptical. The hardest part for me is trying to envision the unfolding developments that form the basis of the argument for merging. I have been in this business long enough to have lived through similar scenarios many times. How many times have new threats to our practice unleashed the doomsayers when in most cases the initial hype far exceeded the reality of implementation? We have survived so many changes to our practice. We are still here doing what we do at a good hospital with the security of a good contract.
I know that getting beyond that reality is both my challenge and our opportunity. I remember reading a book on strategic planning that I found in an airport bookstore by Nate Booth called Strategies for Fast-Changing Times. He suggests that we must all balance two principles as we navigate change. First, he suggests, we must always remain true to the great truths of life. For me this means never giving up my professional commitment to compassionate care for my patients. He also suggests that very often the beliefs and strategies that have gotten us to where we are today will not get us to where we need to be tomorrow. Both perspectives make perfect sense to me. His point is clear. We must all find ways to use the changes taking place in our environment to our own advantage. We all have an obligation to study the issues, evaluate the options and be willing to commit ourselves to new approaches. It is not enough to sit on the sidelines judging whether change is good or bad, but rather to take responsibility for the successful outcome of our metamorphosis.
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.