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Anesthesia and pain management practice transactions: Key considerations & best practices

We've all seen the statistics showing the dramatic trends toward acquisitions of practices by hospitals, the creation of large practice organizations and the disappearance of the individual practitioner.

For example, a 2014 study by the Physicians Foundation found that in 2014, only 35% of physicians described themselves as independent practice owners, down from 49% in 2012 and 62% in 2008. And in that same study, 53% of respondents describe themselves as employees of a hospital or medical group, up from 44% in 2012 and 38% in 2008.

Additionally, there have been a number of significant private equity and publicly traded practice management companies to emerge in the past several years, which function as additional ways that physicians can access capital and expertise to grow their practices, reduce administrative burdens and realize a liquidation event for their practices. In the anesthesia and pain management subsectors, several such companies have come on the scene, such as Sentinel Capital Partners' investment in National Spine and Pain Centers in 2012, Goldman Sachs Private Capital Investing Group's 2013 acquisition of two anesthesia practices to form Resolute Anesthesia and Pain Solutions, Sheridan Healthcare's sale to Amsurg in 2014, American Securities' majority acquisition of North American Partners in Anesthesia earlier this year, and Westchester Anesthesiologists' sale to a New York affiliate of MEDNAX, Inc. earlier this year.

However, although truly independent solo physician practice is becoming more challenging, staying private may be a bit easier and more logical for some anesthesia and pain management practices, and the current statistics are consistent with this observation. For example, the American Medical Association's 2012 Physician Practice Benchmark Survey found that 68.7% of physicians in the anesthesiology specialty were owners of their practices and just 4.7% were hospital employees. Some reasons for this phenomenon include the following:

• Many anesthesia and pain management practices have successful ancillary investments, including Ambulatory Surgery Center (ASC) and toxicology lab investment that generate significant revenues for the practices and which typically would not be retained upon employment by a hospital.

• The referrals for many anesthesia and pain management groups derive from sources other than hospitals and hospital employed physicians, particularly for those groups focused more on outpatient rather than inpatient anesthesia.

• Steve Aguiar, a Managing Director at Provident Healthcare Partners, a leading healthcare investment banking firm that has advised clients on a number of anesthesia and pain management deals over the past several years, also notes that the retail characteristics of pain management makes this specialty attractive and easier to remain private.

So what are the best options available for anesthesia and pain management practices contemplating a transaction? This article will provide guidance to practices contemplating a sale to a hospital, affiliation with a Physician Practice Management (PPM) company or consolidation with another local pain management group. We will address issues for groups to consider before embarking on such a transaction as well as tips for successfully completing such a transaction.

Assessing the Practice's Options. Deciding whether to stay a small independent group and become leaner and meaner versus consolidating with another practice and becoming a larger group is a difficult decision. We put together a list of reasons to consolidate and a list of reasons to avoid consolidation. Each group must match its own desires and abilities in making its decision.

The following are reasons to grow/consolidate:

A. Access to capital to grow needed infrastructure (e.g., EHR). Without a sophisticated EHR, practices will not be able to demonstrate their value to payors as pay for performance grows.

B. Gain market share and increase physician pay. Both of these are crucial to recruiting and retaining quality physicians and physician extenders.

C. With a larger revenue stream comes additional flexibility to grow sub-specialties and ancillary services such as toxicology labs or a new ASC anesthesia model which, in turn, enhances revenue.

D. As a larger group, the practice will have contracting power with payors and vendors to even out the negotiating leverage.

The following are considerations for avoiding consolidation:

A. If you do not choose the right partner, there is risk that your practice will lose its culture and become a place at which you do not want to practice.

B. There are a number of significant regulatory issues associated with operating a physician-owned toxicology lab. There are difficult issues surrounding such labs and views within the specialties vary greatly in part due to competing public policy concerns regarding the need for increased testing to combat opioid and other addiction problems contrasted with challenges regarding overutilization of diagnostics. Practices with differing views on this issue, and significantly different methods of operating and billing relative to toxicology labs can create serious challenges for consolidation.

C. Likewise, pain management is one of the four highest volume-generating specialties for ASCs, and consequently many pain management physicians are investors in ASCs. But for practices with competing ASC investments, challenges can arise, which are addressed more fully below.

D. As a group grows, it becomes less flexible operationally with a larger bureaucracy and stricter policies that must be followed by all.

E. As a group grows, its clinical operation becomes more standardized and there may be less flexibility in the clinical decisions made. It may make it difficult for experienced physicians to adjust to these new practices.

F. Groups considering consolidation should also consider potential issues that may arise in trying to combine anesthesia and pain management components under the same group. "For most anesthesia groups, pain management is a small part of the business," notes Eric Major, a Senior Associate at Provident Healthcare Partners, "Typically the large anesthesia players are not interested in independent interventional pain practices." Aguiar agrees, noting Provident Healthcare Partners has seen groups divesting pain divisions after unsuccessful consolidations. "If you're trying to manage both anesthesia and pain management, you need to manage them in different manners," Aguiar points out, "In the anesthesia field, the management and capital resources are typically focused on landing large hospital contracts, while on the pain management side, the providers and marketers need to be in the community building referral relationships to drive volume into the clinics and ASCs."

G. Each practice must ask themselves, will the new model be sustainable long-term?

In addition to thinking through the considerations for and against consolidation, a group should compare and contrast the most likely possible acquirers.

A. Typically, the hospital as acquirer/employer offers the following benefits and drawbacks:

1. Access to referral networks, although in the anesthesia and pain management context, given the heavy source of referrals from certain surgical specialties, ASCs and patient word-of-mouth, this benefit may be less impactful;

2. Access to payor networks;

3. Potentially less flexibility/freedom in day-to-day clinical and operational actions;

4. Potentially additional security with respect to base salary and longevity of employment situation but less upside potential;

5. There has been a shift (to the positive) in philosophy and general physician psychology about hospital employment/hospital animosity; and

6. Due to both Stark Law compliance concerns and other regulatory concerns on the part of the hospital, anesthesia and pain management physicians will typically not be permitted to continue to own in their previously-held labs and ASCs, and thus such employment typically involves foregoing future revenues from those ancillary businesses.

B. Private-equity backed or other physician practice management (PPM) company as acquirer/employer offers the following benefits and challenges to consider:

1. Potential front-end high purchase price; especially if your practice is a new platform for the acquirer, and especially if your practice has an ASC or lab investment.

2. Typically less local referral source/purchasing/payor contracting power;

3. Potentially more flexibility in day-to-day operations and clinical decisions since clinical leadership will likely remain in place;

4. Opportunities for expansion and leadership in PPM company and practice; and

5. In some instances, more management/administrative functions are available as the PPM company ramps up and needs help.

Major also adds that, depending on the region, ASC management companies may make sense as potential acquirers. Such deals would be generally structured like private equity deals and present many of the same benefits and challenges.

Aguiar notes that, in determining the right partner, "Groups should understand what their base of physicians is looking for, specifically their mix of business, referral sources, and concentration of payors."

Although hospital employment or sale to a national PPM company may be an attractive option for many anesthesiology and pain management groups, the remainder of this article addresses key considerations for groups that may wish to remain private while growing regionally and strategically through a merger or other consolidation with one or more other groups. We will address issues for anesthesia and pain to consider before embarking on such a merger, including the most effective ways to accomplish a successful merger.

Issues to Consider Once Private Consolidation is Selected. Once a practice has decided to otherwise consolidate with another practice, the two (or more) practices should discuss the following issues:

A. Governance. How will the new practice be governed? Will there be a board and executive management made up of members from both practices? What powers will the board have? What powers, if any, will be reserved to the owners?

B. Compensation. How will physicians be paid? Will each receive a base salary plus a bonus? Will all compensation be equal for each owner or will there be an "eat what you kill" structure? How will ancillary revenues be shared (medical director, vascular access, labs)? How will non-owner physician employees be paid?

C. Physician Shareholders, Employment and Termination. How will owner employment agreements be drafted? What are the basic employment terms for each owner? How will the buy-in and redemption pricing for practice ownership be determined? How can a physician quit the new practice or the new practice terminate an owner?

D. Allocation of pre-merger Liabilities. What liabilities from the existing practices will be assumed by the new practice?

E. Practice Office Locations and Staffing. The physicians will need to make decisions regarding continuation/termination of each office and staff member.

F. Practice Non-Compete. Will there be a non-compete? If so, what will the scope and duration be?

G. Unwinding the Consolidation. Will some subset of all the physicians have the ability to unwind the new practice and go back to their old practice structure? If so, how long will this right last?

H. Name and Branding of Practice. What will the new practice be called?

I. Practice Cultural Comparison. How do the physicians currently practice? Are the two groups compatible or is one group willing to conform to the other group's practice methods?

J. Transition to EHR Systems. How will the two practices' EHR systems be combined? This is very technical and can be costly. Experts need to be consulted early.

K. Outside Joint Ventures

1. Does either practice or its physicians participate in an ASC or similar surgical business?

2. If so, what restrictions will be placed on the non-investing physicians?

3. What opportunities will there be for the other physicians to co-invest?

4. If physicians from both practices have investments, how will the merger impact the two competing ancillary businesses?

L. Impact on ASC or physician-owned hospital partnerships. The combination could be stalled or prohibited by an ASC or physician-owned hospital joint venture agreement that includes certain types of noncompetition restrictions. These documents must be reviewed closely to determine what effect, if any, they have on the new practice.

M. Similarly, practices vary greatly in how they allocate profits from such labs, and there are strict rules regarding these ancillary services. And for many pain management physicians, these ancillary services provide a significant source of additional income beyond personally performed professional services. Thus a comparison of the practices' compensation methods should absolutely include close consideration of these ancillary lines.

How to Effectuate Your Consolidation. We have identified 6 stages to successfully effectuate a consolidation. These stages are:

A. Stage One: Determining if staying truly private is right for your practice and identifying other practices for consolidation.

B. Stage Two: Accessing the right fit of the practices:

1. Discussions with the target practices regarding culture, basic financial aspects, noncompete restrictions and the other issues mentioned above.

2. Accounting analysis of each practice to make sure each is financially secure.

3. Aguiar notes that any work that a practice can do on the compliance side will help significantly. "Pain management deals generally take longer due to some of the headlines around this specialty," Aguiar states, "practices can help themselves by addressing compliance concerns, especially on ancillaries and billing and coding, up front."

C. Stage Three: Sign Letter of Intent ("LOI"). An LOI is typically a non-binding agreement containing the following key terms.

1. Key consolidation plan and timetable.

2. Key terms discussed above to which the parties agreed.

3. Exclusivity period in which neither practice will discuss a sale or consolidation with any other party.

4. Commitment to expend funds to further investigate and negotiate consolidation documents.

D. Stage Four: Diligence and Documentation

1. Mutual practice diligence, including billing and coding audits to know what each practice is buying.

2. Benefits comparisons must be done and a decision made on what benefits to offer going forward and how to terminate current benefits.

3. Determination of a powerful brand name and logo

4. Document negotiations. The parties must negotiate the following key documents:

a. Merger/Consolidation Agreement

b. Operating/Shareholders Agreement

c. Form of Owner Physician Employment Agreement

d. Form of Owner Non-Physician Employment Agreement

5. Third party negotiations with landlords, lenders and vendors (amongst others) must take place to make sure these relationships are either transferred to the new practice or treated in a way that does not break any agreement with such parties. Valuable sports team affiliations should also be carefully examined to ensure that such relationships can continue after the consolidation.

6. Physicians must get credentialed with payors and hospitals in their capacity as owners/employers of the new practice.

E. Stage Five: Closing the consolidation on a set date and time to make sure you have an agreed upon effective date and start of the new practice.

F. Stage Six: Post-closing transition issues must be worked on to ensure a smooth transition for each physician to begin practicing through the new practice.

Scott Downing, Amber Walsh and John Harig are attorneys in McGuireWoods' healthcare practice in Chicago.

The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.

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