An Insider's View of the MAC-Sheridan Deal

  • Fitzgerald, David, MD
| Jan 20, 2014

Medical Anesthesia Consultants (MAC), one of the largest anesthesiology groups in California, recently formed an affiliation with Sheridan Healthcare. While transactions such as these are common back east, news of this transaction was received in California with feelings of fear, anger, curiosity, threat, or all of the above. “Cashing out and moving to Costa Rica??!” was hand-written on a holiday card to a MAC physician from a former residency classmate from another group in California. Unfortunately, that may be the perception of the transaction that MAC underwent; it’s simply a fast track to retirement. However, if one scratches the surface and looks a little deeper, there are really more important components than financial to an alliance with a larger entity. A transaction such as this is simply not a path to retirement. The financial component is only one aspect of a mutually-beneficial relationship between two entities. The first question to answer is: What motivates a group such as MAC to actively seek out a partnership with a large national group?

Physicians, being highly competitive and independent, tend to model their practices more like a club than a business. In fact, many physicians choose certain modes of practice within medicine as a way to remain independent and minimize their involvement in the business world. MAC, like most physician groups, also operated more like a club than a business. Physicians were allowed entry into the “club” after a year or two of employment. They were offered equal ownership at a share price that was set and unchanging. When physicians left the group, the shares were repurchased at the same price. MAC operated in this manner and it was a model that worked well for MAC over the years.

Over the past several years, MAC’s leaders began to question the sustainability of the club model. We realized it was only a matter of time before we would have to compete head-to-head with a large, national multi-specialty company. The Affordable Care Act will pressure hospitals to reduce costs, improve performance and place more demands on their hospital-based specialists. Health care systems have already begun contracting with single business entities for service coverage across multiple hospitals. They have also begun to contract with business entities that can service more than one hospital-based specialty. Then, there are the added demands of monitoring quality metrics and producing reports for hospitals and health plans requiring an investment in infrastructure that may be difficult and onerous for small independent groups to absorb.

The question became how to create a strategic business plan that provides stability to our providers and hospitals, and leads to growth. MAC’s leadership believes there will be a handful of large organizations providing the majority of hospital-based services. Would an independent group be able to hide out and keep a boutique “club” practice? Possibly, but MAC wasn’t going to wait and see. We decided to become part of a large entity on our own terms.

One obvious and logical way to grow is by merging with other anesthesia groups and hospital-based specialists. We began having a series of meetings with physician groups in California. As anyone who has been involved with a physician group merger knows, the process is very time-consuming and often, but not always, unsuccessful. We found that the groups we met with were outstanding physicians and very successful at managing their group practice. However, frequently their governance structure did not allow for quick decision-making.

MAC offered some groups to begin the next steps in a formal affiliation. The answer was nearly always the same: “We need to meet with our shareholders, and we’ll get back to you.” It’s close to impossible to make difficult and timely decisions with a committee larger than nine. In contrast, an elected Board of seven physicians with the authority to deal with nearly all business matters governs MAC. That enables MAC to operate more like a business and less like a club. More importantly, the delegation of authority created the opportunity for MAC to be nimble and make decisions quickly.

The inability to move merger discussions forward led us to look at alternatives. We decided to initiate a formal process using a professional advisor, who completed an extremely thorough assessment and presentation of the options available to MAC. Ultimately, the MAC Board of Directors was responsible for evaluating the options and deciding if any warranted presentation to the shareholders for a vote. After a very intensive yearlong process the MAC shareholder’s unanimously decided to affiliate with Sheridan.

The most important reason to align with a larger entity is strategic. Even a group the size of MAC could not meet the demands of a health system requesting multi-facility contracts or cross-specialty hospital coverage. MAC didn’t have the access to capital to join groups together and create the infrastructure to meet the new challenges.

It is important, however, to take a deeper look into the components of the deal itself, which are both financial and strategic.

The first component, which unfortunately, for many outsiders, is viewed as the only component, is financial. The financial benefit from aligning with a larger group may be realized in two ways. The first way is merely a hedge for future income. The arrangement accelerates future income to the group in a lump-sum payment and locks in a compensation formula for five to ten years at a lower rate than the current level. If one is pessimistic about the earning power of physician anesthesiologists and believes their income may fall below their current level, it makes perfect financial sense. The group receives upfront cash and a guaranteed compensation for a negotiated period. In exchange, each physician must make a commitment to continue to work after the transaction is completed.

The other long-term financial benefit is managed care contracting. The larger national groups generally have contracting expertise few smaller practices enjoy. Across the country, many groups have chosen to become aligned with larger national practices without the up-front payment or change to their current compensation. The affiliation is solely for the benefit of the management expertise. For some groups, simply affiliating with a larger group has resulted in providing long-term income stability from better reimbursement contract rates and the other benefits of being aligned with a large multi-specialty national player.

Why Sheridan?

The choice of Sheridan relates to the strategic aspect of the merger. The possible suitors range from private equity funds to large multi-specialty groups owned by the public markets. In general, the private equity funds have little or no understanding of the business of anesthesia or physician group management. Affiliating with private equity would result in greater retained ownership and control for the physicians, but, in MAC’s view, the tradeoff was of much greater risk. The large publically-owned organizations are less risky since they have the proven management track record. On the other hand, affiliating with a public company would result in no ownership. For MAC, having an ownership stake in the company was critical. Ownership was a core value of MAC and one that we wanted to survive through the transition.

For MAC, Sheridan offered the best compromise between the private equity funds and the larger publicly-owned organizations. The fact that Sheridan’s core business is anesthesia gave us comfort they would provide valuable operational insight. Their operating history (founded in 1953) and over twenty-year tenure of many of its physician and business executives gave us confidence in their knowledge and experience to navigate the many changes in healthcare. Their culture of matching physician and business leaders allows MAC to continue to work closely with physicians who understand our business. Lastly, MAC was successful in negotiating an equity stake in Sheridan. In summary, Sheridan met our goals of aligning with a proven, financially sound organization that would clearly bring expertise to the table and add value to MAC. At the same time, MAC is able to maintain an ownership stake in a larger enterprise and continue to operate its practice in an independent manner.

As physicians try to navigate through the challenges of Health Care Reform, we should remember that we have power as the ones who provide direct patient care. Unfortunately, physicians squander that power in order to maintain a perceived independence. All of us have the same goals: high-quality patient care, income, job security, and a satisfying professional work environment. The question is how to attain those goals.

MAC is not claiming that we have all the answers. Any business decision is based on information and speculation. MAC surmised that this was the best path to optimize income, job security and professional satisfaction. Not to simply cash out. So for now, Costa Rica will have to be a vacation destination, not a retirement option. MAC still has more work to do.

Dr. David Fitzgerald is a CSA member and the President of Medical Anesthesia Consultants

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