Anesthesia Providers Are Selling Their Practices... Now What?
Should a hospital be concerned if it finds out its anesthesia providers have just sold their practice, or that they are actively trying to sell it? This is a great question. Here’s another: How will the acquisition of the practice by a third party impact the hospital’s anesthesia service?
The acquisition of anesthesia practices has dramatically picked up steam over the past two years. A number of factors are driving this trend:
Equity: Venture capital and other types of equity investors are pouring money into acquiring and consolidating practices to create larger practice networks. The business strategy is to quickly consolidate practices to create a franchise practice, with sufficient revenues to package it as an IPO, a new product line and revenue stream for an existing healthcare company to buy, or to sell to another anesthesia company looking to scale up in size.
Sellers: It’s a seller’s market. A significant percentage (65%) of surveyed physicians responded that they are either interested in or are actively pursuing selling their practices. Anesthesiologists are just like their physician colleagues. With numerous buyers in the market paying attractive prices, many anesthesia practices are for sale and are being bought.
Time is of the Essence: The selling spree is also being driven by buyers and anesthesiologists who are worried that they might miss out on this financial window of opportunity – anesthesiologists want to cash out – especially if partners in the group are in their late 50s and 60s. This may be their last shot at the proverbial “golden ring” to cap off their retirement funds.
Another question many healthcare executives are asking is: Does the anesthesia practice acquisition pricing model make economic sense? That leads us to examine the true value of any business that, as a standalone business basically loses money and needs a subsidy from its customers to make ends meet; in this case it’s the hospital underwriting the shortfall.
The Practice Acquisition Pricing Model
Pricing: The practice purchase price is determined by creating a Practice EBITDA, by the providers agreeing to reduce their compensation to achieve a mutually agreed upon EBITDA.
Multiple of EBITDA: The partners and the acquirers negotiate a multiple to be used to calculate the purchase price. Influencing factors are the size of the practice, its strategic value, location and/or prestige of the practice hospital’s clients. The practice multiple ranges from 2 to 6 times the EBITDA.
Example: Practice A wants to sell to XYZ company, the practice generated $8M in collections and there is a $2M subsidy. Total revenue for the practice is $10M. There are eight anesthesiologists and 30 CRNAs. The practice carves out a $3M EBITDA by reducing provider compensation. The purchase price would be $3M EBITDA x multiple of 3 = $9M purchase price. The real question is, is the practice worth $9M and did the hospital’s subsidy create the purchase price?
Unintended Consequences of the Transaction:
Reduction in Provider Compensation: To support the purchase price and to maintain the EBITDA, all the providers will be working for less pay. The senior partners, whose payout from the proceeds of the sale is disproportionately more than the junior partners, are pleased with the transaction. And by the way, the senior partners will probably be retiring in a couple of years, leaving a group of disgruntled junior partners making less money and doing more work.
Staff Turnover: The disgruntled junior partners and the CRNAs may decide to leave the practice for greener pastures before the senior partners retire, leaving them with the difficult job of recruiting replacement providers at below market compensation rates.
Productivity and Low Morale: Lower compensated anesthesia providers may be less motivated to put in the necessary time, energy and effort to maintain a high level of stakeholder – surgeons, perioperative staff – satisfaction with the anesthesia service. Low OR morale may lead to higher provider turnover rates, which leads to higher personnel cost.
Declining Surgical Volumes and Revenues: There is a direct correlation between low performing anesthesia services and declining surgical volume and revenues. If a surgeon has the ability to choose between two hospitals – one having a high performance culture versus a low performance culture — the surgeon will prefer to do their cases at a high-functioning, user-friendly OR where they can do more cases in less time, with comparable or better patient outcomes.
Short Term vs. Long Term Perspective: Most equity consolidators have a three- to five-year investment window with an end game exit strategy – cash out. Their focus is to create scale as quickly as possible, and operations is typically not their primary concern or strong suit.
Most often the consolidator has little interest in investing additional capital in operational enhancements – such as new management tools, processes, technology – to improve the anesthesia services performance. Such investment in time, energy and money does not fit into their business equation or their timeframe. The strategy of short term investors is to let someone else build the appropriate business and clinical infrastructure to create a high performance, quality-driven anesthesia service.
So, should a hospital be concerned if their anesthesia provider practice is sold? The answer to this question is not a cut and dried yes or no. It depends upon the acquirer and its business strategy, care model, leadership team and infrastructure to support the acquired practice, and how much they paid for the practice.
When assessing and evaluating the acquisition impact for a hospital, the hospital’s management team should view the acquisition through the filter of whether the acquisition accomplishes and achieves the “Triple Aim” of healthcare: improved patient outcomes, improved stakeholder experience and reduced cost.
Once the hospital’s management team completes an assessment, and if the team has concerns about the transaction’s impact on the hospital, the hospital in most cases has the contractual right to assign or not assign the provider’s contract to the acquisition group. If the management team decides not to assign the contract to the buyer, they should explore other options to ensure long term stability for their anesthesia service.