Sunday, March 24, 2013

Anaesthesia practice attracts hedge fund

Dateline Macon, Georgia.  It's not the first time that this is happening in America, but the implications of it just hit me.  If you care at all about cost control in the health care field, the consequences are frightening.

Imagine you are a private practice anaesthesia group providing operating room, obstetrics, and ICU services to a major hospital.  It is a busy practice, as there is limited competition in these service lines in the city.  Business is helped by the presence of Robins Air Force base, for although there is a VA center in town, it is mainly a low-end clinic for the roughly 4000 military personnel and families.  Beyond the military people, the base hosts 23,000 civilian employees who live with their families in the vicinity.

Now, imagine that the senior partners in the doctors' group are approached by a hedge fund with an offer that sounds too good to be true.  We'll buy you out and pay you a handsome signing bonus, and we'll manage your practice for you.  We'll guarantee your employment and income for the next few years until you choose to retire (and maybe even give you a carried interest), but you're also expected to sign a non-compete agreement in case you leave sooner.  Sure, we'll do a little bit for the junior doctors in the group, too, but nothing special.

So the senior partners sell out, having feathered their own nest and having persuaded the junior partners that this is a good way to deal with the coming uncertainties of health care reform and the bother of running a practice.  The hedge fund then holds a hammer over the head of the hospital.  Among all services in a hospital, anaesthesia is the one with fewest substitutes.  By law and hospital regulation and custom, other doctors are not permitted to perform many of the procedures done by anaesthesiologists.  And this anaesthesia group has a monopoly position: There is no way the hospital can shop around and find another group of trained and ready anaesthesiologists to take their place.  If you are the hospital, you are stuck paying the price and passing it along to those paying the health care bills.

In a few years, the hedge fund flips the investment to another fund or private equity firm or perhaps sells it as part of an IPO that has rolled up several dozen or hundred of such practices around the country.  The price reflects a substantial multiple over annual revenues, justified by the monopoly rents the fund has collected.  The investors leave with millions of dollars in profits, and the follow-on investors seek to keep the monopoly rents in place to justify the multiple they have paid for the business.

Is anyone in Macon aware of this or paying attention?  How about in other medium sized cities with similar circumstances?  If it is happening here, it is happening elsewhere.  Too small--one by one--to attract the attention of the Federal Trade Commission...until it's too late.  Where are the public policy advocates?

18 comments:

Brian Klepper said...

Paul, I know many people in the Macon community. Is there a source for this post? Please let me know.

Brian

Paul Levy said...

Yes, but I do not divulge my sources.

Brian Klepper said...

Can you tell me the name of the practice? I searched on news of this, but turned up nothing. It is difficult to direct people's attention to a phantom.

Paul Levy said...

There is nothing published about this yet. You'll have to use your own contacts. Sorry.

Dana said...

Tim O'Reilly, whom I deeply respect, just retweeted this story as "The death-knell of affordable healthcare in America."

I'm not certain of that and would love to hear Brian's views on it if Paul's story can be substantiated.

hairyears said...

That's interesting. I wonder who the hedge fund manager has been speaking to in Britain, where our government has sold, by auction, a monopoly in administering anaesthesia to children in England and Wales.

Unknown said...

I imagine if the anesthesiology practice has a monopoly, then there is only one such sizable practice in Macon (Anesthesia Associates of Macon, perhaps?). In addition, if Mr. Levy is correct that this isn't the first time this has been done, then there is discussion of this model somewhere. I'm not sure why the focus on the particular instance in Macon. Maybe we could discuss the implications with the assumptions that Mr. Levy's claims are true.

I'm more interested in how the hedge fund intends to manage liability. The field of anesthesiology has made huge strides in improving malpractice records and reducing insurance costs, but it's always something that could blow up in the investors' faces.

Anonymous said...

There are robots that assist with and/or perform surgery. There is medical diagnostic software. Are there any anesthetist robots?

Barry Carol said...

Anesthesiologists are one of four physician specialties which patients generally have no role in choosing. The other three are radiologists, pathologists and ER docs. If we had bundled pricing for surgical procedures and price transparency so both patients and referring doctors can easily determine price and quality differences among competing hospitals in the region, I think that would help to foster competition among providers.

In many cases, it might be worthwhile to send patients out of the area for surgical procedures with insurance covering the cost of transportation for the patient and a spouse or companion as well as hotel accommodations, food and a rental car for the spouse or companion. Payers aren’t stupid. They should be able to develop ways to create countervailing power to counteract attempts to extract ever rising monopoly rents. No?

Gary Levin said...

I have a personal colleague source who practices at this hospital...no problem finding and divulging informaton our source. Should have it by tomorrow.

Anonymous said...

While a current example, the concept is old news in anesthesiology circles. Follow the dollars to North American Partners in Anesthesiology in NY, Anesthesia Medical Group in Nashville, or Greater Houston Anesthesiology in Texas.

Anonymous said...

How is this substantially different from the large national groups that compete for house staff agreements now? Team Health, EmCare, etc for ED services come to mind. Eventually these commodity services compete on price and are interchangable. This group would have a short-lived advantage.

Anonymous said...

The disturbing thing to me is the disconnect between the investment community, who sees profits in health care for the coming years (recommending buying their stocks, predicting increase in jobs, etc.); and the rest of us who have been fervently discussing the need to deliver health care more cheaply. It goes beyond a 'who's right' discussion to set up a status quo of profit-makers who will join hospitals and Big Pharma to viciously defend their profits to our legislators, further hampering meaningful change.

Only in America.

nonlocal MD

Paul Levy said...

Dear Anon 6:19,

It would be a short-term advantage if you think it is possible for another firm to recruit a new team of MDs for this specialty in this community; but realistically, what is the chance of finding such a group of people from disparate locations and put together an alternative proposal for this hospital?

David Joyce MD said...

This whole scheme rests on one thing, that the junior physicians in the group, those who probably do most of the work will take a bad deal at the onset. One can only get so much more from fees, the bulk of the earnings for the hedge fund will have to come from either increasing volume or under paying providers. Give the decision makers (senior partners) a sweet deal, under pay the workers (junior physicians)that is where the money comes from. How does this work? It works because almost all physicians would not recognize an RVU if the had one thrown at them and are totally unable to understand a production based employment contract. That is the problem, and hedge funds will exploit that to the detriment of the community.
http://www.es4p.com/practice-setting-and-employment-contracts/

Anonymous said...

Anesthesia Associates of Macon isn't the group. Too small. Only 8 physicians.

mark said...

Amazing to first read the thinking that cognitive medicine rather than procedures should be better reimbursed and then to see this last piece related to hedge fund buy outs. While the former makes more sense in terms of less costly and likely improved health care, the latter seems to be the current trend. Hedge funds and for profits are buying up providers and hospitals and will no doubt increase volume and find new sources of increased revenue by converting out patient services to more highly reimbursed hospital based services. How many times the cost of health care has to multiply before anyone of consequnce takes notice is confounding. It's a rush to the trough-or fiddling while Rome burns.

Steve Weissman said...

Paul, I fail to understand how the hedge fund/anesthesia group "holds a hammer" over the hospital's head. As you stated, the anesthesia group gets a low subsidy from the hospital. By joining a larger group, their negotiated rates increase and they can lower or eliminate the subsidy. To give a subsidy, hospitals require disclosure of financial information so it cannot be "fudged" by the group.
The physician group is reimbursed only by third party payers. If the reimbursement is too low, or if the hospital requires the group to cover poorly reimbursable or inefficient service lines that indirectly benefit the hospital, then the hospital kicks in with a subsidy. By enabling anesthesiologists to form into larger groups, as all other healthcare entities are doing, the hospital potentially benefits.