Is Big Better? The Pros and Cons of Practice Aggregation

George W. Kanaly, Ph.D., MCHA
President and CEO, George Kanaly & Associates, Riverside, CA

Jody Locke, MA
Vice President of Anesthesia and Pain Practice Management Services, Anesthesia Business Consultants, LLC, Jackson, MI

Empires come and go, and so, too, do the leaders that inspired their growth and managed their strategic focus. We think of Rome, Greece, Germany and England and we are reminded of visionary leaders, grand visions, great struggles and, ultimately, a long, slow demise. Why should it be any different among today’s anesthesia practices? We see so much time, energy and money being spent on creating mega-groups and large corporate entities, but do they all survive or even fulfill their original missions? These are critical questions as today’s anesthesia practices struggle to make sense of an ever-changing marketplace for medical services. There appears to be an elusive belief that big is always better, but history appears to underscore the inherent risks and perils of such a belief.

The History of Anesthesia Group Practice

The concept of an anesthesia group practice has become the norm today, but it was not always so. Even most of the oldest anesthesia group practices only date back to the early 1990s. Prior to that, anesthesia departments consisted of individual fee-for-service entities. Peter McDermit, a former ASA president, was once quoted as saying that an anesthesia group was an anachronism, because it was like herding cats.

Given the independent nature of anesthesia practice and the prevailing mindset of anesthesiologists, forming group practices in the 1980s and 90s required no small amount of patience and finesse. The concept of “group practice” was the least amount of structure one had to create to get a collection of independent providers to agree on a set of common objectives. While there were some groups formed because they saw the advantages of a unified structure, many were formed at the request of the facility they serviced. The term “shotgun marriage” was often used as a reference to the rationale for the merging of practices. These circumstances still exist today in which anesthesia groups, revered for their clinical excellence, are luckily able to retain their exclusive services agreement with their facility client. However, this is only true where the group agrees, at the stern direction of the hospital they are serving, to become a more orderly, disciplined and responsive medical business. Others, with lesser clinical acumen and galled relationships, lose their exclusives agreements frequently due to the appointment of an inadequately committed anesthesia medical director, who through sins of commission or omission, endangers this major asset relationship for all members of the group.

Forming a group practice was the only practical way to negotiate and establish contracts with facilities and payers. It was certainly preferable from the perspective of a hospital administration to deal with one entity that spoke with one voice than with a variety of individual practices. In fact, by the end of the 1990s very few anesthesia practices did not have exclusive contracts with the facilities they served. Most of these new entities represented fairly loose arrangements; and, in many cases, the individual physicians continued to get paid on a fee-for-service basis, as they always had. The establishment of common-unit compensation plans would be a later development. The need to negotiate financial support arrangements would also come much later.

It was really payer contracting that ultimately justified, changed and refined the strategy of most groups. As Medicare rate cuts started to materially alter the collections potential of so many practices. they needed a way to recoup what was being lost. Managed care contracting and the concept of cost shifting was seen as the key to survival since the fundamental challenge of all practices was to generate enough revenue to recruit and retain the necessary providers to facilitate the services required by the contract. Commercial payer contracting turned out to provide a substantial revenue opportunity, especially when successfully executed.

Market changes and the economics of anesthesia imposed a new reality on the specialty. Groups had to evolve from professional fraternal organizations to serious business entities. In 1994, the ASA, which had historically only conducted clinical meetings, conducted its first practice management conference in Phoenix. This was considered a significant development in the history of the society as it reflected a new reality: group practices needed to do more than provide quality care to survive. This and subsequent practice management conferences offered participants an opportunity to discuss common concerns, hear about new practice management strategies and put the changes that were transforming the specialty in perspective. The conference has since become one of the most well attended each year, after the annual clinical conference.

Perhaps the hottest topic among anesthesia practices in the 1990s was the issue of practice mergers. Fueled, to an extent, by the successes of consolidation, growth and public offerings in the multispecialty practice arena by physician practice management companies, such as MedPartners, PhyCor, and Pacific Physician Services, and not dissuaded from pursuing such growth by their often cataclysmic failures, this was a period of merger mania that leached into the single specialty verticals. It was inspired by the basic belief that the bigger you were, the more successful you would be in negotiating managed care contracts. It was thought to be essential in order to interact with the ever-increasing incidence of hospital consolidations into even larger integrated health systems, as well as creating the resource base for an expanding service area. Size was considered necessary in order to become more formidable and extensively qualified to win new facility coverage agreements, as well as successfully retain those already in the relationship inventory of the group.

By then end of the decade, there were more than 25 anesthesia practices with more than a 100 providers. These were the early mega-groups, many of which would either merge together or evolve into very sophisticated commercial entities. Practices, such as Anesthesia Services Medical Group (ASMG) in San Diego, Oregon Anesthesiology Group (OAG) in Portland, Greater Houston Anesthesia (GHA) in Houston and North American Partners in Anesthesia (NAPA) on Long Island, served as models that other practices strove to emulate. Some of them, such as ASMG, even developed consulting arms to help other practices secure more market share.

On the other hand, it is possible to grow too rapidly and without careful thought as to the service market and the legal implications of the contemplated expansion. As an example, at least one early adopter of the interest in consolidation to larger size, ORLA, Inc., immediately miscalculated. The group attempted to consolidate a contingent of the Orange and Los Angeles County California anesthesia specialty physicians. This consolidation effort raised anti-trust concerns within the U.S. Department of Justice (DOJ) due to the sheer size of the enterprise. As a possible yardstick of how big is too big, please see https://www.justice.gov/atr/response-orange-los-angeles-medical-group-incs-request-business-review-letter. This is a DOJ Antitrust Division review of one of the early joint venture expansion activities engaged in by interested anesthesia medical practices. In it, the DOJ ruled that, if the affiliation contemplated actually went through, DOJ would likely challenge it on the basis of the absence of procompetitive benefits. This DOJ review sensitized all of the participants in this project to this peril of growth; but, in particular, it severely sensitized the lead group coordinating the affiliation to the dangers of such expansion. It would require great passage of time and two additional attempts to interest the shareholders of the lead group in such expansion before a successful 2015 merger of three prestigious anesthesia medical practices was completed—achieving a group size of 130 physicians in service to nine hospitals and 30 ASCs in southern California.

Winners and Losers

The 1990s were marked as a period of challenge and aspiration. Aspiration versus opportunity because there was a lot of wishful thinking without many tangible results. Managed care was imposing new rules on all practices. The financial challenges facing the specialty seemed daunting. The ASA had commissioned Abt and Associates to evaluate anesthesia manpower needs, and the report concluded there was a surplus. For a period of years, anesthesia residents bailed to other specialties.

All across the country, providers were seriously considering their options. Group practices were being formed in every state as providers strove to strengthen their market positions, so they could get better rates. Many new groups were formed, but few accomplished much more than a stronger relationship to the facilities they served. Once formed, many groups tried to grow larger. There was the famous case of Mountain West Anesthesia in Salt Lake City; LDS Hospital asked its anesthesia providers to form a group practice. The physicians agreed but decided that, while they were at it, they would bring in all the anesthesiologists up and down the Wasatch front. The result was a mega-group that immediately drew fire from the managed care plans, which started referring to it as the Mountain West Cartel. The belief that bigger would be better often led to new challenges. For many, the initial vision and inspiration did not sustain the reality of the new entity.

It should be noted that a number of groups and mega-groups that were formed during this period would ultimately disaggregate or lose their contracts. Anesthesia Associates of New Mexico was formed as the merger of practices in Albuquerque and Santa Fe. The initial thinking was that the group could provide more security and a better lifestyle to its members. Eventually, the Santa Fe physicians broke away claiming that the administrative costs of the group were a form of taxation without representation. After carefully assessing their specific market, they concluded that swifter, quicker, nimbler was a much more effective strategy. This was just one example of practices that would break away to reform independent practices. All of the mega-groups experienced this to some extent. A fundamental challenge to all large entities is the challenge of constituency. If the individual members of a practice do not feel their voices are heard and their expectations will be met, they will leave the practice.

Criteria for Success

In her book, Confidence, Harvard Business School professor Rosabeth Moss Kanter identifies three qualities that distinguish successful businesses and sports organizations. They are:

• Accountability
• Collaboration
• Innovation

Although she did not specifically focus on medical groups, her criteria provide a very useful litmus test. Clearly today’s successful practices are all founded on these three basic principles. At issue is how they are defined and how they practically guide the functioning of the practice.

Accountability

Accountability is a very general term and subject to much interpretation. Many will suggest it simply refers to transparency and will think there is accountability if they can see the financial records of the practice. While this is true, it is not the whole story. According to Dr. Kanter, true accountability involves not just an accounting of what is, but the setting of expectations and the measuring of results. Consider an anesthesia practice. What are the expectations of its customers? Are the expectations clear and consistently understood? Do providers know what is expected of them and are they held accountable?

Provider accountability is an interesting concept in an anesthesia practice. If you are an appropriately credentialed provider, then you are assumed to be accountable for your actions and performance. No one monitors an individual provider’s performance unless given a reason to. It is the nature of anesthesia that much is left to the training, experience and judgement of the individual provider. Providing anesthesia is not like making coffee at Starbucks, where the creation of each drink is perfectly scripted for consistent results. Every anesthetic is a unique clinical experience. Some will talk about provider productivity as if there were a way to measure and improve it, but the fact is that anesthesia providers tend to be as busy and productive as their schedule allows them to be. In the current environment, it is other measures, such as customer service, that groups are more interested in. How one evaluates these non-productivity measures is the real question.

If you are coaching a baseball team and you want to win the pennant, you have to coach each player to his maximum potential. This analogy should apply to anesthesia practices which are always thinking about how to maintain their exclusive contract with the hospital, but it doesn’t. The only real coaching anesthesia providers get is what they give themselves. We tend to measure providers based on the absence of negative or adverse events, not on positive achievements. This is not a strategy focused on excellence, nor one that would greatly enhance the representation of the practice.

From a hospital perspective, accountability means something quite different: the ability to terminate and remove incompetent providers. The administration wants a practice that speaks with one voice and which can make good on its commitments and enforcement of its policies. It makes hospital administrators crazy that so many anesthesia practices cannot effectively manage themselves and their providers.

There is no question that accountability is an essential element of a successful practice, but the practice must be able to define and implement it in a way that is meaningful to the providers and the group’s customers. As Dr. Kanter puts it, accountability must be something that enhances confidence in the organization. So long as this can be achieved, it is an essential element. It is the nature of today’s medical market, however, that the policies and criteria that work today may not work tomorrow. As is often said in strategic planning, very often the beliefs and strategies that got us to where we are today will not get us to where we want to be tomorrow.

Collaboration

Sports teams win championships when they play as a team, when there is good collaboration between the players. The same is true of businesses. Each team must understand its role and collaborate with each of the other teams to produce a consistent product with maximum efficiency. And so it should be with medical practices.

Many small practices that service a single facility epitomize a collaborative model. Like-minded providers cover for each other and make sure they provide a consistent service. In fact, many small groups self-select based on factors such as where they trained, religious views or other common denominator. From an organizational perspective, they tend to make decisions based on a consensus model like the old New England town meeting model. More often than not, this structure and mode of governance has resulted in very stable and conservative practices. They tend to eschew data and complicated performance metrics. They believe they provide a good service because of their responsiveness and attitude and, in many cases, they are right. Typically, their mode of compensation is lump and divide; they share in the work and the profits or losses.

It has often been said that what it takes to manage a small practice of up to 20 providers does not work so well when the practice begins to grow to 30 or 40 providers covering multiple facilities. This is the fundamental challenge of growth. The form of the practice must be modified to accommodate the function of the practice. There is no specific roadmap for the process of merging multiple practices into one entity; and, based on a review of the nation’s largest anesthesia practices, the key ingredient is leadership. Someone must motivate and guide the process. Most of today’s most successful practices attribute their success to the vision and guidance of a recognized leader. One example that stands out in the history of large group management is John Zerwas, MD, who led his Houston partners to create Greater Houston Anesthesia.

Actually maintaining a collaborative approach to the management of a large practice is almost a paradox because to manage a large group effectively one must consolidate the governance so that business decisions can be made expeditiously and based on consistent criteria. The New England town meeting model simply does not allow this. This, then, is one of the fundamental challenges of a growing organization: balancing the need to maintain a focus on executing a clear strategic plan with the needs of all the providers to feel a sense of constituency.

The degree of true collaboration an anesthesia practice demonstrates has a clear impact on the strength of its contracts with facilities. Customer service is inevitably the primary focus of all hospital administrators. In the military they used to remind sailors that loose lips sink ships. Disgruntled or independent-minded providers can have the same deleterious impact on a hospital contract. There is no question that the larger a group grows, the more difficult it is to maintain a consistent esprit de corps. You know the organization is too big when disaffection becomes disruptive.

Innovation

We tend to think of technology companies when we talk about innovation. According to Walter Isaacson, author of a biography of Steve Jobs, both Bill Gates and Steve Jobs were legendary innovators whose innovations changed our relationship to technology. Obviously, we are not talking about creating organizations on the order of Microsoft or Apple when we talk about anesthesia practices, but the current healthcare market is extremely competitive. It used to be that most anesthesia groups were relatively immune to the competition that was impacting their hospital administrations, but this is no longer the case. Hospital administrators look to their anesthesia partners to provide consistently superb customer service, to work collaboratively with the OR staff, and to bring new services to the table that would enhance the service offering of the facility.

It goes without saying that anesthesia practices should have more and better data about what actually happens in the facility than any other department, or even the hospital administration. The question is whether and how they use this data to bring additional value to the facility. There has been much discussion about the potential for improving OR efficiency and productivity. Examples of best practices in this area are few and far behind, but this remains an area of great opportunity. As one anesthesia chairman once put it, the goal of the anesthesia practice should be to identify problems and propose solutions. Implementing process improvements that result in greater efficiency of operating utilization goes directly to the facility’s bottom line.

Ever since the implementation of pay for performance (P4P) measures, there has been considerable focus on clinical and quality metrics. This has given rise to the concept of the perioperative surgical home, a concept that is the subject of much interest in the academic worlds, but which is not so enthusiastically embraced in the private practice world. The problem is an inherent challenge to today’s anesthesia practices: being asked to provide more services without any commensurate increase in revenue potential. Again, there are very few examples of practices that have parlayed their anesthesia clinics into measurable improvements in either the quality of care provided or the overall profitability of the facility. The reality is that morbidity and mortality statistics for the specialty are so good already. It has been said that the average patient is at greater risk driving to the facility than undergoing general anesthesia. Today’s challenge is to bring new ideas to the facility that enhance its competitiveness and the profitability of the practice. Clearly, though, what the history of innovation has shown us is that someone always finds a way to build a better mousetrap. This is the elusive carrot dangling in from of all practices. Quality anesthesia care has become a given and not a defining feature of superior groups.

How do we know when a practice is truly innovative? What determines our perception? Innovators are risk takers. Even though anesthesia providers constantly deal with the unpredictable—the specialty has been defined as hours of boredom punctuated by moments of sheer terror—they tend to be incredibly risk-averse ad this impacts their ability to secure the future of their practices. The reality is that in times of rapid change, the beliefs and strategies that got one to where they are today will not get them to where they need to be tomorrow. This tends to distinguish the doctor from the businessman and explains why so few practices actually achieve the full potential of their initial vision.

To Dr. Kanter’s list of three critical features of successful organizations, we add a fourth essential: competent leadership. Anesthesia groups often fail to realize the value of qualified physician leadership in the arc of business development. Annual elections of Directors with staggered terms may fill the requisite Board of Director seats. However, when the officers of the Board are elected, the specialty is now well beyond the collegial “you take a turn as President or CEO” that may typify many groups. The ability to identify, empower and properly value physician leadership is critical to success in general operations, but it is an absolute imperative if the group is in growth mode. Trust and confidence in leadership is essential. The competency and effort of a capable leader should be embraced and given stability and continuity. All too often, good leaders are placed in office and then scorned and criticized by their constituency. During or after the heavy lifting of change management, they can be set aside out of petty jealousy and fear of an individual amassing too much power or due to the acts of a hallway cabal that just wants different leadership for the sake of change, regardless of its negative impact upon the enterprise. This way of thinking is of no value and can severely and permanently damage the prospects of the group for sustained and beneficial growth.

How Big is Too Big?

There must be a purpose and a reason to grow a practice because the cost of growth can be significant. In addition to the previously mentioned “big two” reasons—revenue contracts and facility contracts—there are other very tangible reasons for growth. These include enhanced geographic deployment in markets of interest or opportunity through group solicitation of new coverage opportunities, as well as invitations from individual or system owned hospitals, and ASCs to propose services. With new medical business opportunity comes opportunity for better integration of regional resources among ideologically aligned and like-minded colleagues who can see either the offensive or defensive value of practice aggregation relative to other prevailing forces in the market of influence.

Combinations can also present opportunity for cross pollination of ideas and differing approaches to routinely similar governing or operational issues, significant cost reduction, creation and standardization opportunities for highly evolved clinical protocols. This is especially true in practices engaged in service-based global pricing. Group size similarly enhances access to better and less costly services such as billing and collection, professional liability and excess liability policies, group health benefits, vision, dental and other life insurance benefits, short-term disability insurance, long-term disability coverage designed to layer on top of any individual coverage already in place, and group umbrella policy protection for personal assets among the many possible benefits.

Medical and business expense reimbursement plans can be created and maintained in a manner which is compliant and beneficial to the combined professional staff. Additionally, group size can support much more sophisticated strategies and vehicles for pension contributions. With size also comes the ability to access nationally ranked attorneys, insurance brokers, pension design advisers, as well as tax and accounting expertise, that will enable the most favorable and compliant practices for operations and wealth protection for the principals.

However, without a doubt, the bigger the organization, the more time, energy and money it will take to simply manage the practice. While there are some successful examples of pre-COVID virtual operation of anesthesia medical groups, they are usually few and far between. These practices utilized carefully selected and vetted and intensively controlled but outsourced vendor, agent and adviser cadres. This is designed to minimize or eliminate the internal employee contingent, and ensure that the practice had access on a spot use/need basis to the best expertise and qualifications available to solve the inevitably complex issues that arise in the modern anesthesia medical group. Either way, whether internal or outsourced, all of today’s large practices have had to make a significant investment in their administrative infrastructure. In some cases, the combined cost of billing and administration may approach 10 percent of net revenue. If this additional cost does not result in greater market security and enhanced shareholder or partner income, it may not be worth it. Many a subset of large practices has broken off, claiming that the cost is simply too high.

Ultimately, it is about confidence. By growing the practice, has it increased the level of confidence among employees and customers? If providers start losing confidence in the company they work for, then this is a problem. If customers lose confidence in the organization to provide a consistent service, then this is an even bigger problem. The long-term success of a practice is determined by the strength of its contracts with facilities. It used to be that a professional services agreement with the facility was somewhat of a legal formality. Now that most involve some level of financial support, it is much more of a competitive environment, and we see administrations canceling what had been long-term contracts all the time. Losing contracts is, therefore, the ultimate signal that the practice was too big and had lost its ability to provide a competitive service.

The question, then, is not is big better, but what is the right size that allows the practice to be consistently managed so that its employees and customers believe in the future of the relationship. Arriving at the right size is not guess work. It requires serious analysis, business discipline and organizational commitment. It requires the interest and ability of the owners to participate in intensive and critical self-assessment of the group, its resources, market position and surrounding with respect to potential clients, as well as other providers of anesthesia services. This is often a feature lacking in anesthesia medical groups, as many have great pride in their clinical expertise but very little understanding of the true nature and full potential of the business they have created or the need to visualize and nurture its potential growth curve to create their desired future.

George W. Kanaly, Ph.D., MHCA, is President and CEO of George Kanaly and Associates, Inc., a healthcare management and consulting firm. He has broad multispecialty and single specialty medical group practice background with extensive and successful anesthesia group practice management and operations experience in the highly competitive Southern California service market. He is an avid half marathoner and loves to fly fish. He can be reached at george@georgekanalyandassociates.com.

Jody Locke, MA serves as Vice President of Anesthesia and Pain Practice Management Services for Anesthesia Business Consultants. 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 is a key executive contact for groups that enter into contracts with ABC. Mr. Locke can be reached at Jody.Locke@AnesthesiaLLC.com.