Where Do We Go From Here? Choosing the Right Path in Turbulent Times
Will Latham, MBA
President, Latham Consulting Group, Inc., Chattanooga, TN
The environment continues to be a challenging one for anesthesia groups. Health systems are combining, stipends are under pressure and payment system changes loom. And there is always someone knocking at your hospital CEO’s door saying they can do it better, faster and cheaper. So, what direction should anesthesia groups pursue at this time? In our recent work with several groups, the options appear to fall out as follows.
Go It Alone
After considering alternatives, some groups decide to go it alone, avoid growth and hunker down to focus on the hospital or health system they are currently serving.
Why are these groups making these decisions while the rest of healthcare is consolidating? They give several reasons:
- They see no long-term shareholder benefit from growth. They believe they will have to staff all new locations with shareholder-track physicians.
- Growing is painful. People may have to drive to new locations (gasp!) or work in other hospitals.
- Growth is a lot of trouble. Someone has to spend time to seek out new opportunities. No one is allocated time or paid to conduct such activities. Senior physicians in the group often see any changes as costing resources for which they will receive no benefit.
- They feel that their relationship with their current hospital is excellent and not likely to be threatened by outsiders (at least as long as their careers last). This is the “eggs all in one basket” strategy, and a very risky one. For some groups in rural areas this may be the only alternative, although we see a number of regional mergers forming (discussed below).
Organic Growth/New Service Locations
More energetic groups are looking at taking over new service locations. These may be new service locations in their current hospital/health system, an ambulatory surgery center (ASC) or another hospital in their region.
The potential benefits of such expansion include:
- Expansion in the current hospital/health system can keep a competitor out of the customer’s locations.
- Expansion into non-call situations can allow the group to add anesthesiologists and reduce the call burden.
- Expansion can provide the ability to “follow the work” if it shifts to other locations.
- If the group can staff the new locations with non-shareholder-track physicians, the new locations can potentially:
- Increase compensation for current shareholders.
- Create a “lifeboat” for current shareholders if a contract is lost.
This last point—staffing locations with non-shareholder-track physicians—is controversial. Many anesthesiologists believe that any physician who joins their group should be on a shareholder track. Other anesthesiologists believe that new locations should be staffed by employed physicians who are reimbursed at a lower rate (thus, providing the potential for increased shareholder compensation), and who can be replaced with shareholder physicians if the group loses a significant contract.
Groups that want to grow should also decide on one of the following paths:
- Passive: Only consider opportunities that others bring to them.
- Active: Identify target locations and reach out in a friendly way to groups serving those locations.
- Predatory: Identify target locations and reach out to hospital or ASC administration in those locations to replace the current providers. This is anathema to most independent anesthesiologists, but this is the path that many corporate-owned anesthesia groups are taking.
Mergers with Other Groups
As the rest of healthcare continues to consolidate, anesthesiologists are also looking closely at mergers. What benefits do they hope to achieve? Most groups point to the following potential upsides:
- Retain a reasonable amount of autonomy.
- Elect the group’s leaders.
- Increase negotiating clout.
- Avoid being “played” by healthcare systems.
- Expand coverage, including specialty or subspecialty coverage.
- Build critical mass for new programs and services.
- Increase likelihood of survival in light of physician retirements.
- Support rational recruitment of new physicians.
- Share leadership and management expertise.
- Achieve economies of scale and efficiencies (but only with integration).
- Take first step toward further integration.
The benefits are, of course, different for different situations. In urban environments the focus is typically on the following benefits:
- Share physicians.
- Avoid being played.
- If the hospital becomes part of a system, merge before “winners and losers” are chosen. Rational recruitment.
- Economies of scale.
- Share best practices.
- Share management.
While groups in a less urban setting are pursuing some of the above benefits, their initial merger is often the first step that sets the stage to bring in other groups.
For information on the steps involved in merging with other groups, please see “Anesthesia Group Mergers: Strategies for Success,” Communiqué, Spring 2015.
Hospital employment is typically perceived as a negative step for most groups. However, some anesthesiologists point to the fact that changing payment mechanisms may put the control over all anesthesia reimbursement into the hands of the hospital or other physicians, and that this may have some advantages. (One anesthesiologist told me, “I hope the hospital will make all those decisions. My physician colleagues in other specialties won’t pay me one cent.”)
Some physicians say that if the hospital totally controls the reimbursement of anesthesiology groups, the anesthesiologists may become de facto employees, and therefore, the group should negotiate employment while it still has some leverage.
Selling out has been the “hot topic” over the past several years as national firms dangle shiny objects (cash) in front of anesthesiologists. When I think of these “opportunities” I am reminded of Timothy Ferriss’s quote from The 4-Hour Workweek, “Most people will choose unhappiness over uncertainty.”
The details of the valuation and sale processes of this alternative are beyond the scope of this article. However, Exhibit 1 provides a number of questions that group members should ask if they consider this alternative.
While it is true that the acquiring company will pay the physicians cash for their practice, it may provide clout to negotiate for contracts, and may offer tools and techniques to help with new payment mechanisms, the primary downside is a loss of autonomy. The acquiring company will likely tell you that they will not interfere with the issues that are most important to the anesthesiologists, such as scheduling, staffing and internal governance. However, they will have the final say on issues, especially those that have any type of financial impact. Further, if, at some point, profitability is threatened, will they stick to this “hands off” approach?
As you consider this alternative, it is important to remember that the person you talk to about an option may have incentives not to tell you the whole story. You typically expect this from the “sales” people, but not from other physicians. However, many employment contracts for those who have sold out include non-disparagement clauses (in which the physician can be fired if they say something bad about the company), and few physicians want to go home and tell their spouses they have to move.
Further, there are rumors that physicians who have already sold their practice may receive an incentive payment if they participate in convincing your group to join their organization. While the physician in the acquiring organization may not have either of those incentives, the best path is to take everything you hear from people associated with the purchasing organization with a grain of salt even if you went to medical school with them or they are your best friend. Okay, if it’s your mother, you can probably trust her.
Further, many of the professionals associated with selling the practice have strong incentives to promote a sale:
- Valuation firms make money helping you determine how much money to negotiate for.
- Investment bankers make their money only when a transaction occurs.
- Lawyers and accountants love the opportunity to help you examine the alternatives.
However, these concerns are often overshadowed by the chance for immediate financial gain (people really like cash). After noting these concerns at a recent conference, almost every followup question was how to optimize the valuation process so that the group members get the highest price.
If you do decide to look at this option, keep the following in mind:
- Just considering this option will put a major strain on group cohesion. Physicians will disagree on whether to pursue a deal and how the deal should be structured. Paranoia and mistrust will grow. If you decide not to pursue a transaction, it will likely take years to repair relationships.
- Once you are acquired, every physician becomes an independent player. Our discussions with members of groups who have been acquired indicate that almost all cohesion goes out the door.
- Your hospital may say “no,” i.e., not assign the contract to the acquiring firm. It’s probably better to find this out before you spend hundreds of thousands of dollars analyzing a purchase offer.
- Before you get too far into the process, Google and read the cautionary tales of the following enterprises:
What’s the best strategic direction for your group? As every consultant is trained to say, “It depends.”
It depends on your local situation, your feelings about autonomy, your group’s energy to pursue initiatives and many other factors.
This is why many groups devote time and resources to developing a strategic plan. This is a group endeavor. Details about the benefits of and steps in this process may be found in “Hope Is Not a Strategy: A Primer for Anesthesia Groups on Strategic Planning,” Communiqué, Fall 2016.
Will Latham, MBA is President of Latham Consulting Group, Inc., which helps medical group physicians make decisions, resolve conflict and move forward. For more than 25 years Mr. Latham has assisted medical groups in the areas of strategy and planning, governance and organizational effectiveness, and mergers, alliances and networks. During this time he has facilitated over 900 meetings or retreats for medical groups; helped hundreds of medical groups develop strategic plans to guide their growth and development; helped over 130 medical groups improve their governance systems and change their compensation plans; and advised and facilitated the mergers of over 120 medical practices representing over 1,200 physicians. Mr. Latham has an MBA from the University of North Carolina in Charlotte. He is a frequent speaker at local, state, national and specialty-specific healthcare conferences. Mr. Latham can be reached at (704) 365-8889 or firstname.lastname@example.org.