The Future of Independent Anesthesia Practice

Daniel S. Reale, JD, MBA
President, Plexus Management Group, LLC, Westwood, MA

Much has been written over the past decade on the supply and demand for anesthesia services, and how it relates either to the acquisition of anesthesia practices or to the direct employment of anesthesia providers by hospital systems. These crosscurrents need to be analyzed in the context of the overall trend in physician services in the United States.

An analysis prepared by Avalere Health in June 2021 provided an in-depth view of overall trends among physician practices. Among the key findings of the analysis, which was conducted over a two-year period between January 1, 2019 and January 1, 2021, were the following:

• 48,400 physicians left independent practices and became employees of hospitals or other corporate entities, with 22,700 of those physicians moving after the onset of Covid-19.
  • 18,600 became hospital employees (11,400 made the shift after the onset of Covid-19)
  • 29,800 became employees of corporate entities (11,300 made the shift after the onset of Covid-19)
• Over the two-year study period this shift resulted in a 12 percent increase of employed physicians.
• Importantly, the study indicated that 69.3 percent of all U.S. physicians were either employed by hospitals or corporate entities as of January 2021, versus 62.2 percent as of January 2019.
• Interestingly, the study indicated that as of January 2021, 49 percent of all U.S. physicians were employed by hospitals and health systems and 20 percent of U.S. physicians were employed by corporate entities.

Avalere’s analysis well documents the national trend in the consolidation of physician practices and the increasing momentum from independent practices to employed models—clearly exacerbated by the economic dislocations associated with the pandemic. This article will examine the trends within physician practices in general and examine how these trends apply to anesthesia practices in particular.

It is difficult to obtain data similar to the above solely for anesthesia. Surveys conducted by Enhance Healthcare Consulting (EHC) does provide some evidence of employment trends in anesthesia. EHC conducted surveys of hospital C-suite executives in 2016 and in 2021. The 2016 survey results indicated that 49 percent of the respondents “actively sought an alternative to their current anesthesia provider” and 25 percent of respondents made a change. In 2021, these results were 42 percent and 87 percent, respectively. The 87 percent change in anesthesia providers in 2021 seems to reflect the underlying tumult in the anesthesia services space. The primary reason cited by the hospital executives for seeking a new provider was the subsidy level (40 percent in 2016 and 33 percent in 2021). “Inadequate service level” was cited for initiating the anesthesia review process by 34 percent of the respondents in 2016 but only 20 percent in 2021. (Note: “Desire to change staffing model” gained 40 percent of the vote in 2021 and no votes in 2016, but this may have resulted from a change in the format in 2021.) While this survey is not an exact parallel to the Avalere survey, it is indicative of the level of discordance between hospitals and their anesthesia groups. The survey also did not indicate whether the current provider group was part of a national consolidator or an independent group. The survey’s primary importance is that it provides insight into current thinking of hospital administrations and their levels of dissatisfaction. This certainly reflects a sense of continued uncertainty within the provision of anesthesia services at hospitals in the Unites States. Such dissatisfaction could suggest overall risks and potential opportunities for consolidators and independent practices as well as opportunities for groups to become employed.

Initial Efforts at Consolidation

For a number of years, large corporate entities, often funded by private equity firms, have attempted to further consolidate the anesthesia practice space. Among the consolidators are North American Partners in Anesthesia (NAPA), Mednax, US Anesthesia Partners, and Envision Healthcare. Consolidation has been going on for over a decade. I am personally aware of a large private New England group having been approached by Pediatrix (predecessor corporation of Mednax) in 2007. As one of the first consolidators, Mednax’s experience with anesthesia services is enlightening with the results of the operation of anesthesia services proving to be disappointing to the acquirer. Mednax reported an operating loss for its Anesthesiology Services Medical Group for the year ending December 31, 2020 of $716.3 million (this included the loss on sales of $663.7 million). This loss followed an operating loss for Anesthesiology Services Medical Group for the year ending December 31, 2019 of $1.23 billion dollars (this included a non-cash goodwill impairment charge of $1.33 billion dollars). Mednax’s anesthesia assets represented an investment in excess of $1 billion dollars but were sold to NAPA in May, 2019 for $50 million in cash with retained accounts receivable and a contingent economic interest in future success of these sites under NAPA. Mednax cited (in its SEC filings) some of the difficulties associated with its practice of anesthesia as the following:

“During the time that it operated as part of Mednax, and particularly since 2017, American Anesthesiology experienced multiple business challenges, including inflation in unit labor costs and other expenses, constraints to revenue growth based on adverse changes in payer mix, and a difficult reimbursement environment where unit revenues grew at levels meaningfully below unit cost.”

Mednax is an example where a company with tremendous success in hospital-based physician services, i.e., the pediatric neonatal intensive care space, had difficulty translating that success to the anesthesia marketplace for the above reasons. Mednax’s experience highlights the difficulty of large-scale acquirers successfully operating in the anesthesia space. Later in this article, we will discuss this further in the context of the independent anesthesia practice and the future of the independent anesthesia practice versus consolidation.

Hospitals Get into the Act

As the private equity firms have moved into the anesthesia marketplace, hospital systems have also made aggressive efforts at employing groups. Hospital systems have moved to absorb all or most of the anesthesia groups at their member hospitals, e.g., MassGeneral Brigham in the Boston area, McLeod Health in South Carolina, Southcoast Health in southern Massachusetts, Steward Healthcare (a for-profit system started in Massachusetts and now in multiple states), Cedars Sinai Hospital in Providence, Rhode Island. Other systems have dipped their toes into the anesthesia services space by employing anesthesia providers as a subset of their system, e.g., Piedmont Healthcare. In our experience, the systems have paid greater amounts to support their anesthesia groups when employed as opposed to when they were independent.

Pondering a Loss of Independence

What would motivate an independent group to either sell to a consolidator or to become employees of a hospital system? First, let’s look at why a group would consider a sale to a national consolidator. Speaking with practitioners who have either entertained offers from a consolidator or have, in fact, consummated a sale with a consolidator, we have a good sense of how the economics of these transactions are structured. The consolidators essentially are paying out future earnings to the owner-providers through the buy-out process. Typically, the owner-providers income is reduced by an agreed upon formula, and that reduction in the previous compensation is paid back to the owner-providers in the form of a buy-out that is calculated as a negotiated multiple of said adjusted “earnings.” In some cases, the earn-out is subject to holdback, growth-related incentives and other potential earning enhancement opportunities. The question, of course, is how the acquirer can get an economic return by “pre-paying” these future earnings. The previously quoted analysis from Mednax provides some light on how consolidators “expected” to be able to work the post-acquisition environment to their economic advantage. For example, the consolidator would look to leverage higher commercial rates including, in some cases, going non-par with commercial payers. (The No Surprises Act may significantly reduce this potential.) A consolidator would look for labor substitution, e.g., using lower cost new graduates of anesthesia medical programs or nurse anesthetists or anesthesia assistants. The consolidators would also look to leverage other potential expense areas regarding overhead including lowering revenue cycle management costs, quality assurance costs and malpractice costs. On the providers side, the motivation is clear–prepayment of future, uncertain income. In addition, being part of a larger system may create opportunities for certain physician leaders within these groups, to take on larger roles in the clinical and business sides on a regional and national basis. Given the potential economic upside to the owner-provider, what are the downsides? Clearly, the Mednax example points to one downside—the inherent uncertainty in future prospects of the acquirer relative to the anesthesia marketplace. A second downside related to the providers could be related to the earlier discussed “hold-back” with that payment potentially being at risk depending on the success of the consolidator in the marketplace, as well as the group’s attaining its pre-negotiated objectives. The underlying contracts with the institutions could also be at risk, and depending on the terms of the employment contract, the providers ability to stay at that particular location post-termination could also be at risk. Young providers within the group, not yet risen to the owner status level, may become dispirited. It is no surprise that a provider’s motivation changes when they move from an independent practice status, with attendant incentives to work hard to become an owner and be rewarded no longer in play. 

Macro-economic factors have a significant impact on the anesthesia business. Covid and the consequent downturn in elective cases in 2020 had a major, negative economic impact across all levels of anesthesia—whether independent practice, corporate or hospital employed. The recent No Surprises Act has seen an impact on anesthesia contract rates and on payment rates for non-par payers. Covid-related retirement/employment expectation changes among anesthesia providers has resulted in increased demand for services among a smaller base of anesthesia providers. A recent review of Gasworks suggested there were over 3000 openings for anesthesiologists and over 7000 openings for nurse anesthetists. Supply and demand suggest that wages will increase. Consequently, groups that we manage are experiencing pressures for higher wages from their existing staff and from potential new hires. With the possibility of decreases in commercial reimbursement and the ever-present threat of further reductions in the already very low governmental payer rates, the primary mechanism to attain their earnings expectations is to look to the hospitals (and in some cases ambulatory surgical centers) for financial support. Already, over 80 percent of hospitals provide some form of stipend to their anesthesia providers. For the consolidators, these market forces place even greater pressure on their potential for economic returns. When a consolidator approaches a hospital for an increase in stipend, the administrators understand that an economic driver for the increase is support for the return on investment for the owners of the consolidators. This may become a factor in hospitals looking to terminate contracts with physician groups run by consolidators (or independent groups, for that matter) and choose to either select a new independent group or employ the current group.

Hospitals Looking to Hire and Acquire

In looking at hospital motivations for acquiring groups, one can see both economic and non-economic justifications. The changing demographic of the United States as a result of the aging baby boomers and the concomitant increase in the Medicare population has had a significantly disproportionate impact on anesthesia providers. (Medicare pays anesthesia at rates which are one-quarter to one-third of commercial payers.) One expert in the anesthesia revenue cycle space has estimated that the percentage of Medicare will increase by one percent per year over the next decade as the population continues to age. As indicated earlier, it is estimated that 80 percent of hospitals currently provide stipend payments. The increase in the Medicare population will place more pressure on hospitals to continue to supplement those stipends. Moreover, shortages of anesthesia providers and increased compensation create a double-whammy effect.

Hospitals may believe that, through employing anesthesia groups, they can exert more control over staffing models and coverage arrangements, as well as obtaining higher reimbursement rates from commercial payers, so they can theoretically provide a lower support to an employed group—as opposed to the stipend required by an independent group. Our experience in working with groups that were formerly independent and are now employed suggests otherwise. In fact, we have seen the required support paid by hospitals in order to cover their anesthesia services go up many multiples over what they were paying the independent groups. This, of course, may relate to the inherent incentives of a private group to work more hours than an employed provider. An employed provider has less incentive to work the additional hours unless they are paid for those additional hours. An independent provider will work additional hours because of the benefits of operating at a “reduced” staffing level, i.e., the ability to not hire an additional body but absorb that work within the existing complement of staff translates into additional compensation that can be shared with the core provider group. It will be interesting to see how the recent movement to employ anesthesia provider groups continues into the future given the potential for unforeseen additional costs associated with the employed model.

Of course, there are other motivations for a hospital wanting to acquire the anesthesia group. The hospital may believe they can lower the overhead costs, such as taking revenue cycle in-house or by being better able to leverage less for outside revenue cycle companies. The hospital may be able to lower other administrative costs, such as benefit costs and administrative overhead costs by absorbing those types of administrative services into its existing infrastructure. Moreover, the hospital may be able to implement policies that may not be cost effective for a private group (e.g., flip rooms) but would be very attractive to surgeons in the hospital as part of a hospital’s policy to increase its surgical case load.

The market forces, including provider supply/demand dynamics, demographic changes, the No Surprises Act repercussions and recent “failed” consolidations, will require continued observation in assessing the future direction for anesthesia services. Will increased costs to the hospitals after employing the independent groups create a backlash and potential reversal of this practice? Similarly, as with Mednax, will some of the larger consolidators realize that the return on investment is not in the anesthesia space? We have recent evidence of another large consolidator agreeing with some of the acquired groups to relinquish contracts to those groups and waive their non-competes. These recent examples suggest there may be more underlying economic turmoil in the acquisition model than has been apparent heretofore. The core motivations for independent groups continuing their independent status exist as much now as they did before with their ability to control their revenue streams, select their colleagues, create a positive culture and select the types of locations they prefer to practice. In addition, those physicians have the ability to work the most flexible staffing models, the ability to control their vacations to the greatest extent and control care team environment and call burden in ways that are determined by the group and its members. From our working with independent practices throughout the United States, the level of internal satisfaction in independent groups continues to be largely positive. As discussed earlier, the healthcare market has seen earlier waves of acquisition of physician practices. In the nineties, these were primarily driven by hospital systems and their physician practice management companies. The earlier efforts were largely unsuccessful. Most recent consolidation of physician practices is now often led by health insurance companies, such as United Healthcare, Humana and BCBS of Texas. As discussed, the private equity firms have made a full commitment to consolidation of a broad range of physician practices. It is unclear where anesthesia services will fit given some of the issues discussed herein.

The overall trend in the healthcare marketplace is for increasing employment of physicians either by hospital systems or by large corporate entities. This trend has accelerated during the pandemic, not surprisingly as a result of the increased amount of uncertainty surrounding the drop in patient volume and attendant incomes. This movement has translated into the anesthesia provider services as well. As noted, the large health systems have moved to employ physicians on a large-scale basis. We have also seen, perhaps, the beginning of a negative trend resulting from those consolidations (e.g., Mednax and other national providers) fully abandoning anesthesia or selectively abandoning anesthesia sites. Other hospitals have slowed plans to employ anesthesia groups as they see the increased costs associated with an employed model. In the meantime, salaries for independent and employed anesthesia providers are increasing significantly due to staffing shortages. For the independent practice of today, there are multiple avenues of support including external practice management companies that can assist in maximizing economic return to the group through commercial contract negotiations, expert revenue cycle management and expertise in hospital negotiations. Will this be a repeat of the nineties where the momentum of physician practice consolidation was reversed as a result of dissatisfaction with the resulting practices? We do not know. It is a trend we will continue to watch while this process unfolds. The old adage seems to apply to the ongoing anesthesia practice environment: “May you live in interesting times.”

Daniel S. Reale, JD, MBA, President has been with Plexus Management Group for 17+ years. His responsibilities include overseeing the expansion of managed physician practices. Mr. Reale has 30+ years of experience in managing healthcare services and biomedical operations. Previous experience includes a public, biomedical company that develops medical devices for urological and oncological applications, a biotech company responsible for the development and opening of manufacturing operations for an autologous colon cancer vaccine and a venture-based company outsourcing hospital blood-banking and blood collection services to hospitals throughout the United States. His education includes both a Juris Doctor degree from Northeastern University, Boston, MA; as well as a Master of Business Administration degree from the University of North Carolina at Chapel Hill. He can be reached at dreale@PlexusMG.com.