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Winter 2015

Point-Counterpoint: Do National Anesthesia Management Companies Increase Revenues for Acquired Groups?

Michael R. Hicks, MD, MBA, MHCM, FACHE
Physician Executive, Dallas, TX

Joe Laden
Louisville, KY

Background of the Authors:

National anesthesia management companies increase revenue for acquired groups....or do they? This article presents pros and cons for both viewpoints with discussion by two leaders in the field of anesthesia practice management, Michael R. Hicks, MD, MBA, MHCM, FACHE, a physician executive from Dallas, TX and Joe Laden, a practice manager based in Louisville, KY.

Mr. Laden

Over the past several years, anesthesiologists have been increasingly willing to sell their practices to acquiring firms. In a typical transaction, the anesthesiologist practice owners agree to reduce their incomes in return for the purchase of their stock in their practice. The stock payment is usually several times the annual salary reduction. The anesthesiologists benefit by receiving funds now rather than in the future, and this money is taxed at the capital gains rate rather than at the much higher W-2 income rate.

A question has arisen as to whether the voluntary reduction in anesthesiologist salaries through these types of acquisitions will depress the overall “fair market value” of anesthesiologist salaries in a locale, a region or even nationally. This is important to independent anesthesiologists who rely on fair market anesthesiologist compensation rates when negotiating with facilities for financial support. There is an assumption that anesthesiologist salary surveys incorporate the reported before and after W-2 wages of anesthesiologists involved in these practice sales. An additional assumption is that the salaries of anesthesiologists who sell their practice in this manner remain at their agreed to lower level for the foreseeable future.

There are a number of published national physician compensation surveys from entities such as the Medical Group Management Association, American Medical Group Association, Merritt Hawkins and Medscape. However, none of these surveys are scientific and some data are self-reported by medical groups. Hence, it is not known if anesthesia groups that are acquired have participated in surveys or whether their salary data will be reported after acquisition.

Dr. Hicks

There are a number of factors that can lead an anesthesiology group to consider merging or selling its practice. These include the opportunity to trade future income potential for a cash payout today, a desire to take an equity stake in an entity with a perceived greater ability to provide income and wealth creation in the future, or on a more pessimistic level, the sense that the market for anesthesia services is peaking and that the current group’s situation—be it structure, leadership or environment— does not permit it to make the necessary changes to be successful in the future.

Regardless of the motivation, however, the owners of large sophisticated practices that do sell/merge/affiliate are replacing one form of economic gain (practice revenue distributed generally in the form of W-2 income) for other types of economic gain such as a share of the sales price in a pure cash buyout, cash and equity in the new practice, and possibly different tax treatment of funds, as Mr. Laden points out.

However, I think there are some other but less frequently discussed considerations that are important as well. First, many of the acquired platform groups, through better strategy and management, command higher commercial insurance rates than most other groups even within their home geographies. As a result, when they take a "discount" off of their pre-transaction income the end result is that their future salary stream is reset to the true prevailing market rate for their area excluding their practice. In other words, post-transaction these physicians will earn what their colleagues in other local practices earn and consider as "market" rates. I know this is almost unbelievable by many who work in smaller practices but I am certain that no sophisticated purchaser, whether in private equity or a strategic acquirer like the large physician practice management companies, is going to enter into a high dollar acquisition and create an artificially low labor expense to get a deal done. This would be a significant financial misstep and sophisticated acquirers generally don't make those kinds of mistakes. This doesn’t mean that these companies are not sometimes overpaying for acquisitions but purchase prices depend on a number of factors and labor expense is only one of them. This is a topic for another time, though.

Secondly, some acquired practices, even the sophisticated ones, immediately begin to be the beneficiaries of even better expertise, scale and technology and as a result begin to “repair” their "discounted" incomes. In other words, the decrease in income resulting from the acquisition really becomes much smaller as a result of improved contracts, scheduling efficiencies and overhead reduction while the benefits provided in terms of equity and tax treatment continue to accrue to the sellers.

Unfortunately, consolidation in anesthesia is frequently portrayed in terms of "selling out" or acting out of fear. I am sure for some practices, possibly smaller ones, that may be true. However, I am certain—from multiple personal experiences—that for larger, more sophisticated groups these transactions occur not as a result of fear or even greed but as a result of sound strategic planning and sophisticated capital structure decisions. Medical practices of all types, not just anesthesia, require—now and in the future—assets that allow their leaders the opportunities to make executable decisions based on sound knowledge and strategy. These transactions in anesthesia are a path, but not necessarily the only path, toward that goal.

Mr. Laden

Dr. Hicks has made an excellent point that anesthesiologists who merge into or are acquired by a group with better commercial payer rates can benefit from the higher rates. For example, from the ASA Commercial Fees Paid survey in the Southern section the managed care rate for all payers at the 25th percentile is $58 and at the 75th percentile is $75, a 29.4 percent difference. Theoretically, if a group at the 25th percentile level in the Southern Section joined a group in that section at the 75th percentile and had 40 percent of its patient revenue with contracted managed care payers, patient revenue would increase by 11 percent overall after joining the group with higher rates.

If the patient revenue per owner anesthesiologist were $1,000,000 (see MGMA 2014 Physician Compensation Survey and MGMA 2014 Cost Survey for representative data) for example, after joining the group with higher rates the anesthesiologist's patient revenue would increase by $110,000 annually in our example, replacing much of the anesthesiologist's income that was monetized in the form of capital gain proceeds.

Whether or not physician income can be increased after an acquisition may depend on the type of organization the doctor joins. Doctors who sell must examine their employment contracts carefully and determine if salary increases and/or performance bonuses are possible and probable. For example, will the new practice owners take additional practice income for themselves or is there a mechanism for additional revenue to be shared with the anesthesiologists? It may be better to sell to an organization that has true physician representation in its management structure.

There can be many paths to increasing income after acquisition. The most immediate will occur if the acquiring organization has higher payer rates. However, the doctors need to find out if the acquiring organization actually has higher fees with their major payers. For example, a dominant local Blue Shield may not care that the acquirer has great Blue Shield contracts in other states. On the other hand, the acquiring organization may have a favorable national contract with a nationwide payer.

The acquiring organization may have plans to expand the acquired practice to nearby locations or to add a free-standing pain clinic. Depending on the deal, expansion revenue and profits may or may not be shared with the anesthesiologists who sold their practice.

Dr. Hicks

Our ideas are not dissimilar—for any group merger/acquisition/partnership the devil is in the details. My view has long been that anesthesia practices need active strategy creation and decision-making with a view of creating additional value not only for their customers but also for their own members. In the case of the intrinsic value to the practice’s members this value can be in the form of increased W-2 income, or exchange of one form of equity for another or enhanced job security. What doesn’t work, as many in the business unfortunately know all too well, is just sitting around and waiting/ ignoring/hoping that nothing changes. One thing that can be said concerning income is that when a group’s anesthesia contract is acquired in a competitive bidding process by some other entity it is nearly certain that physician incomes are not going up or even likely to remain the same.

That being said, however, there are other salary related issues in any proposed transaction. As Mr. Laden suggests, income after a transaction—now and in the future—does depend on the type of organization the physician joins. In this regard, there are several different models.

Traditionally most anesthesia acquisitions were straight cash transactions—the seller gets cash and the buyer gets the equity interest and control of the practice. The profit stream that the buyer is acquiring comes from a reduction in income to the physicians since the overwhelming majority of practices distributed all monies after meeting overhead expenses to the physician partners. The physician sellers’ logic, as alluded to previously, is that they are trading future earnings (and uncertainty) for cash in the bank today that can be used however they see fit (investment, retirement, new boat or house, etc.). All of the large strategic acquirers only did this type of transaction and it remains the most common form.

Lately this has changed somewhat, however, with the advent of a “partnership” model wherein an equity position in the acquiring company comes with the cash. In this case the physicians are now trading future patient service earnings for cash and possible capital appreciation in the acquirer’s stock. These transactions still require the creation of a profit stream and this largely comes from the reduction in income of the physicians (but not below market rates as mentioned above). However, it creates opportunities that other relationships may not. Not surprisingly, it is always in the interest of the acquirer to enhance the revenue of any practice it acquires (for obvious reasons). However, in partnership models it is in both the acquirer’s and the physicians’ interest to enhance profitability since both parties stand to gain as owners of the company. Part of this gain can be provided in the form of W-2 income (“income repair”) while the enhanced profitability leads to capital appreciation of the company’s stock. This is proving to be a very attractive option in the anesthesia M&A marketplace because if the salaries are able to be brought back near or at their level prior to the acquisition then the physicians have no decrease in real income and also the benefit of an equity position that is likely to increase faster and more appreciably than their relatively illiquid ownership position prior to selling.

Of course, this is an example of a major deal point and not a devilish detail and is indicative of some of the creativity that can be exercised in creating a transaction. As is always the case, physicians, whether they are selling their practices or not, must examine all of the transaction documents including their employment contracts carefully and determine if salary increases and/or performance bonuses are even possible or probable.

Mr. Laden

Based on the complexity of the transactions that Dr. Hicks has described, it would be wise for anesthesiologists considering an acquisition or partnering deal to bring in experienced advisors who can help navigate a pathway to a favorable conclusion. While it may seem straightforward to simply take cash-in-hand, the anesthesiologist should be completely aware of his or her clinical and financial path over the next 5-10 years. If the doctor takes stock in the acquiring organization, the future plans of the organization should be thoroughly vetted by the doctor and the doctor’s financial advisors.

Dr. Hicks

A key aspect of any substantial transaction is the rigor applied to the due diligence process. Key deal points, and importantly the underlying assumptions on which they are based, demand examination as to whether they are sustainable post transaction. Some key assumptions involve whether existing relationships that the buyer and seller have prior to the transaction will continue and under what terms after the transaction is consummated. Examples pertaining to anesthesia transactions include the stability of service contracts with facilities, employment terms of the clinical staff and whether financial terms of existing relationships will remain in place or extend to newly acquired clinicians or sites of services. Relative to rate comparisons with payers, this can be problematic for several reasons, not the least of which include legal and regulatory barriers to sharing this type of information prior to a transaction. In my experience this is difficult if not impossible at the individual contract level but can be reasonably approximated at the aggregate level using third party organizations to make comparisons and then blinding the potential buyer and seller to actual payer specific contract rates.

In general, most payer contracts remain at the regional or state level but recently a few major payers with national footprints have been agreeable to national anesthesia rates. These appear to be a mixed benefit with some parts of the now larger practice getting minimal or no increase in rates but other parts being beneficiaries of significant positive contributions. At a corporate level there are ways to distribute this benefit to make such a contract appealing to the entire practice, however.

As Mr. Laden points out, some groups do not have the benefit of significant commercial rate contracts. These groups are potentially in a difficult position as they are the most likely to require significant financial support and are also less likely to be attractive merger or acquisition targets. They are also the most likely to depend on having valid compensation data during negotiations.

Mr. Laden

If there are secrecy provisions in acquisitions deals, wouldn’t this prevent the doctor and/or his group from reporting to Medical Group Management Association (MGMA) and other surveying organizations after the acquisition?

Dr. Hicks

Obviously, proprietary information should always be protected and treated as the valuable asset that it is. That being said, there are no “secrecy” provisions outside those that are found in all other competitive business environments. What may be different, however, is that the provision of anesthesia services is now a regional and national business and there are many valid business and legal reasons for not sharing revenue and expense information even in the aggregate even though this information has previously been willingly provided.

For example, to whose benefit is it for a large anesthesia practice to openly report to the world its compensation or that it has superior reimbursement rates? Will doing so help those who have managed their practice so as to achieve superior rates or will it lead to a tougher negotiation environment during the next round of negotiations after groups with lower rates have used the data to improve their own rate structure? In my experience the quality of information reported to MGMA and other organizations is a mixed bag. Some practices that have better financial performance choose not to participate as there is little to be gained by releasing that their rates are superior to others and in fact are only providing competitors a rate target for their own negotiations. In this context it can be argued that smaller groups desiring better rates can either join one of the larger sophisticated groups, create their own version of the same or develop the expertise to get better rates on their dime and their time.

That being said, I understand the value of surveys in general. However, their utility was greater and their need more acceptable in a prior era when groups were small, local and minimally managed. In this era of national competition their use may indeed be problematic. For example, the payer rate issue does indirectly come up in Request For Proposal responses as hospitals and health systems want to understand why there may be differences in subsidy requests among competitors for a service contract. In fact, I have been asked several times if I really had the correct subsidy numbers in submitted pro forma budgets as our submitted subsidy proposal was so different (lower or higher) than those of other bidders.

Mr. Laden

As anesthesia groups consolidate through acquisition or merger, it appears that salary surveys may become less useful than in the past. Anesthesiologists may need to find other methods to validate their compensation in situations such as arranging financial support from healthcare facilities. Perhaps the true test of fair compensation is the amount it takes to attract quality anesthesia providers to a particular geographic location. This will vary with the desirability of the geographic area, the current scarcity of anesthesia providers and job specifics.

Dr. Hicks

This is an example of the nature of the changing competitive landscape. Many anesthesiologists and practice leaders are troubled by this and with some justification. However, it is a Catch-22 situation. Many of the groups with high income clinicians are loathe to report this data for the very reason that they are above the reported averages and it is to their benefit to have the world believe that they make less than they really do. As a result I believe the national surveys can be fairly inaccurate and this includes the data produced by the ASA.

Unfortunately, in my opinion hospitals as well as practice leadership frequently frame the discussion incorrectly. It is even more perversely framed by outside consultants who blur the compensation requirement to hire an incremental or additional clinician (the clinician at the margin from an economic perspective) with the cost of an entire clinical staff. I have even observed national consultants attempt to (mis)use MGMA and other data to justify grossly underweighting the services of anesthesiology subspecialists that are few in number and high in demand. Similarly, the data are also used to benefit some groups when they request subsidy increases in order to add additional clinicians who can be and are added for substantially less than the amount of the requested subsidy increase.

In fact, it may be helpful for the group to let the hospital believe that anesthesiologist incomes are actually lower than they really are. In some cases, excluding academic anesthesiologists, few if any anesthesiologists make as little as some surveys suggest. In summary, I have certainly encountered hospital leaders who try to use those data in the way Mr. Laden describes. My response has been to suggest to them that we both do a recruiting search and see how many clinicians express an interest in their proposed compensation rates. Sometimes it works and sometimes it doesn’t. I will say that it is more difficult for the anesthesia group to fight this off when they have no other options for work.

Mr. Laden

It appears that anesthesiologist salary adjustments after practice sales will not be reflected in national physician compensation surveys because:

  1. Compensation reporting to the national surveys is inconsistent or inaccurate, and
  2. Anesthesiologist salaries may not be reduced for long after practice acquisition due to shared revenue expansion initiated by the acquiring organization.

The current trend toward fewer small independent anesthesia groups will most likely continue, especially if there is increasing downward pressure on hospital financial support for these groups. Surgery should continue its increase due to the aging population and technical innovation. I believe the future is bright for anesthesiologists even though many may experience changes in their financial and organizational structures.

However, even if all anesthesiologists are eventually employed by hospitals, practice management companies or mega-groups, I believe there will always be a need for anesthesiologist salary surveys just as there is in most major industries.


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

Joe Laden has worked for independent anesthesiologists as a business practice manager for over 30 years. He is a wellknown member of the Medical Group Management Association (MGMA) and of the MGMA’s Anesthesia Administration Assembly. He can be reached at