Becker's ASC Review

53 M erger and acquisition activity in the anesthesia industry hit record levels in 2014, with around 29 total transactions. In 2015, the M&A activity remained steady with approximately 26 closed transactions. One month into 2016, the market has already seen activity. While certain factors still hinder anesthesia prac- tice M&A, the push toward consolidation is strong. "What may impact the level of anesthesia acquisi- tion activity in 2016 is the inability of some consoli- dators to access capital, given recent challenges in both the equity and debt markets," says Jeff Swear- ingen, managing director of Edgemont Capital Partners. "Despite this capital markets turbulence, I still expect to see over 20 anesthesia practice trans- actions in 2016. e underlying business rationale for consolidation is still very much in place." In fact, according to according to Jeff Wagner, MD, partner at Davis Hill Equity Associates, the per- centage and number of consolidations in the anes- thesia industry may be far higher than reported in the media as only successful M&A deals get 'press' but non-M&A consolidation deals oen do not. Is bigger really better? e PPACA caused a massive overhaul of the way care is delivered and the way care provid- ers are reimbursed. According to Mr. Swearin- gen, stakeholders in the healthcare industry are evolving and using M&A as one of several op- tions to affect change. "When Aetna, Humana, Anthem and Cigna decide they are not big enough on their own, that is a sign to others — facilities and physicians — that they need to consolidate to achieve operating efficien- cies, counter the negotiating leverage the mega- insurers will now have and access capital to make infrastructure investments and create capital pools under risk sharing arrangements," he says. In terms of the anesthesia industry, hospital ad- ministrators are expecting more of their anesthesia providers than ever before. Anesthesia teams are asked to increase coverage throughout the hospital for ICU/critical care, acute pain management and other services. ey are also expected to increase efficiency and quality metric reporting capabilities. However, anesthesia practitioners are being asked to do more with less. ey are oen asked to pro- vide these additional services without any increase in subsidy, which puts a great deal of pressure on local groups. It makes anesthesia practice manage- ment more complex, pushing a number of practic- es to consider partnering or selling to a third party. us, to survive in the post-PPACA landscape of healthcare, being "bigger" may be necessary. Anesthesia M&A that leaves a mark Two types of transactions in the anesthesia indus- try tend to make headlines and move the indus- try toward consolidation. e first is when a very strong, large group decides to sell and the second is private equity investment. e first type of transaction acts as a catalyst for prac- tices that haven't considered selling or partnering. "For example, New Jersey Anesthesia Associ- ates, a group Edgemont advised, or Valley An- esthesia, with over 200 physicians, were big, prominent groups that decided to sell in 2015," says Mr. Swearingen. "This caused a lot of phy- sicians to ask themselves, 'if they are pursuing a sale, is that something our group should be considering as well?'" e second transaction type usually involves an institutional investor like Goldman Sachs or TPG investing significant capital to acquire a control- ling stake in an anesthesia practice or company. Both investors have done so in recent years. A third type of transaction is sale to companies like CRH Medical and AmSurg. Corporate part- ner investors have made active advances into the anesthesia and physician services space. Dr. Wagner notes that AmSurg's $2.35 billion ac- quisition of Sheridan in particular may prove a game changer. "It is clear evidence that facility providers may be accelerating their entry into the anesthesia space," he says. The anesthesia market in the near future e AmSurg-Sheridan merger is a great example of how consolidation in the anesthesia landscape has affected ASCs and their partners. e pressure to provide high quality care to a greater percent- age of the population at lower costs is palpable for all healthcare organizations. New care models are emerging, such as bundled payments, however some new models are turning "symbiotic partners into competitors," notes Mr. Swearingen. In the ASC industry, large management and de- velopment companies are responding to health- care market challenges by acquiring or employ- ing a larger number of providers and physician services. Another example of this trend at play is Surgery Partners recent acquisition of Asheville, N.C.-based AllCare Clinical Associates. According to Mr. Swearingen, the emergency medicine market is a comparable hospital-based specialty that is years ahead of anesthesia in terms of consolidation. Looking to the EM market to- day, around 25 percent of practicing EM physi- cians work for a large national consolidator, whereas, the same can be said for about 8 per- cent of anesthesia physicians. But this figure has jumped from under 4 percent around five years ago, showing that the anesthesia market will see similar levels of consolidation to the EM market. "External forces, such as financial factors, quality reporting and compliance issues for example, will cause anesthesia consolidation activity to increase in the next five to 10 years," says Dr. Wagner. n Frenetic Consolidation: The Anesthesia Market Today & Where ASCs Fit In By Anuja Vaidya Jeff Swearingen "External forces, such as financial factors, quality reporting and compliance issues for example, will cause anesthesia consolidation activity to increase in the next five to 10 years." — Dr. Jeff Wagner

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