At AnesthesiaStat, we have been following the Anesthesia Group buyout frenzy for some time now. The big Practice Management Companies(PMC’s) and Investment Banker advisors have seen a very active marketplace. What is left? The market for the largest “platform groups” is almost done. Most major groups have been bought or will soon be. Now, the next stage is well underway. In this phase, small and medium sized groups will be bought or become employees.
Remaining groups interested in a sale are in a great position to attract good terms…..but for a limited time. We even have reports that industry consolidation saturation in fields such as neonatology and pediatrics is leading to greater demand for anesthesia groups. Now is the key time to make definitive investments to improve the quality and show the value of your practice. The right decisions can make a tremendous impact on how much control your have in your fate. In the worst case, poorly positioned groups will lose their contracts with hospitals and may lose their jobs.
From the investor point of view, two factors are important: size and quality. First, we need to define size:
- Small 0-20 providers (some say up to 50)
- Medium 20-100 providers (some say 150)
- Large 100 and above
Mednax and Phymed (Excellaire) have been active in acquiring smaller groups lately. NAPA and Sheridan continue to excel at buying out smaller groups as well as taking over contracts in the RFP process.
The August IPO of Envision Healthcare, parent of EmCare, was hot. Valuations of its market peers continue to rise in sympathy. The IPO debuted at $23/share and as of the market close on November 14, 2013, its shares were trading at $28.75. EVHC is currently trading at 18x EBITDA, which is a premium to its next largest competitor, Team Health Holdings (which is currently trading at 14.6x), while Mednax is trading at 11.5x.
Growth may favor companies with diversified offerings of Hospital based physicians. It is still left to determine what the best mix is of radiology, Pathology, anesthesiology, intensive care, hospitalists, and emergency medicine. The Acccountable Care Act (ACA) creates unfavorable reimbursement dynamics and value based payment risks, but also creates opportunities for scale (Better negotiating with hospitals and insurers, better terms for bundled payments and value based reimbursement). There will clearly be execution risk on the part of the company. With this backdrop, there will continue to be interest in the Anesthesia groups.
The Alphabet Soup of the Buyout: EBITDA and Multiples
We may feel we learned a second language in Medical School. Investment banking language can be equally intimidating. We will focus here on two concepts.
The numbers you need to evaluate a buyout offer are EBITA/EBITDA and the market multiple. Earnings before interest, taxes, depreciation and amortization, or “EBITDA,” is the key figure you need to know for your group. Taken from Wikipedia, It measures the operating performance of your practice. It evaluates this without having to consider other factors such as financing costs (interest), accounting practices (depreciation and amortization) or tax tables. Calculating EBITDA is usually a simple process for bankers and advisors. It’s impossible for us….
The second number, the market multiple, is more vague. Those of you familiar with the stock market will understand more easily. Essentially, it is the additional price investors are willing to pay for the earnings and potential growth of your business. Higher quality businesses command higher multiples. Anesthesia multiples have been higher than other medical fields and have varied between 5 up to over 8. The difference translates into a lot of money! In contrast, the multiples for Emergency Medicine are 5-6x, 4-5x for a cardiology group, 3-4x for urology and 4-6x for a well managed primary care group.
Groups interested in a sale need to maximize both their EBITDA as well as their Multiple. It really boils down to maximizing quality. “Quality” for the purpose of this article actually has two components. The first is “Investment Quality”. The second is health care delivery quality. Both are equally important.
The most favorable groups are large, diversified by age and provider, have good relationships with hospitals and are invested in their future. What if you have not done all these things? That’s where good advisors are needed to help you candidly and efficiently position your group for the future. Most important, they can help you overcome some of the sensitive and political factors that trip up many groups.
How Does it Work?
Basically, the EBITDA multiplied by the Multiple leads to the price of the buyout. The big numbers can be enticing. What is the trade off? In return, the group is switched to a salary which is 20-30% less over the contract term of around 7 years. The PMC will own the hospital contract and existing members will have a non-compete clause. After the term, there may be an extension or a renegotiation. The PMC will look to recoup most of the upfront cost through salary reduction. The rest will be made up through operational efficiencies and higher blended unit reimbursements. The details vary, but the general terms here are universal.
Choosing the right investment banker is critical. I’ve had the opportunity to speak to several. I’ve heard feedback about many others. They love to speak about big numbers, experience and results. At times, however, their arrogance and “take it or leave it” approach can create acrimony among group members. In the worst case scenario, anger spreads creating discord within the hospital. Be very careful!
So……where does that leave us? More than likely, you need help and a gameplan. The truth is, the window is closing on getting the best offer. Expected trends to increase volumes discussed in previous articles will be tempered with the push towards value based purchasing and decreased utilization. Its time to get the best game plan to maximize your EBITA and Multiple. Position your group to peak in value at the time of sale!
Amar Setty, MD