IT needs are driving the upswing in doc practice mergers

The merger-and-acquisition spree that in recent years has swept away hundreds of once independent physician practices continued unabated in the second quarter.

Driven by the need to upgrade computers to meet escalating federal demands to measure quality, Tyler-based East Texas Anesthesiology Associates in June joined forces with U.S. Anesthesia Partners, a Fort Lauderdale, Fla.-based firm controlled by the private equity firm Welsh, Carson, Anderson & Stowe.

It was at least the fourth major acquisition USAP made in Texas in recent years, bringing the company's total clinicians in that part of the country to more than 800. “This partnership with USAP gives ETAA immediate access to the infrastructure and expertise that we would not be able to build ourselves,” said Dr. Shawn Thomas, president of the East Texas practice.

It was only one of 22 physician practices of varying sizes that were acquired in the quarter, representing about 12% of all healthcare deals logged, according to data compiled in Modern Healthcare's Mergers & Acquisitions database.

Thomas said the anesthesiologists in his practice also were attracted to USAP's singular focus on their specialty and its commitment to using data to improve clinical quality. The fact that the deal, whose terms were not disclosed, allowed the practitioners to become partners in the larger firm and control governance of the practice made the loss of independence easier to swallow. “We are gaining valuable insight into the rapidly changing reimbursement environment and IT infrastructure that will position us for continued success,” Thomas said.

USAP acquired Greater Houston Anesthesiology in 2012 and Pinnacle Anesthesia Consultants in Dallas in 2014. Like the East Texas practice, Pinnacle's 550 physicians and other advanced clinicians foresaw the need for millions of dollars of investment in new electronic health records and revenue-cycle systems to provide payers with the quality data they wanted to fully reimburse the practice for care, said Dr. Thomas Swygert, a Pinnacle physician leader who is on the board of USAP.

Greater Houston Anesthesiology had the same information technology concerns plus the desire for management best practices that Welsh Carson could recommend, said Dr. Ron Osburn, a USAP board member who was in the leadership of the practice during the acquisition.

“The winds were changing some,” Osburn said of the healthcare business environment.

They still are. Acquisitions of physician practices and information technology vendors dominated M&A activity in the second quarter, with deals in the sectors showing no signs of abating throughout 2016.

The $10 billion healthcare merger of physician-staffing giants AmSurg and Envision Healthcare announced in June was the biggest in the quarter involving two U.S.-based companies, Modern Healthcare data show.

Initially, less than half the 113 partner doctors in Greater Houston Anesthesiology wanted to sell to USAP and become the first group of physician partners in the company, Osburn said.

But they came around when they learned they could retain majority ownership of the practice, he said. And the $5 million in capital that the private equity firm could invest for IT was going to have to come out of doctor dividends if they remained independent. Each physician in USAP remains a partner in the company, he said.

“One of the drivers was physicians like to take all the income out of the practice,” Osburn said.

Physician practices are rushing into the arms of physician consolidators such AmSurg, Envision, TeamHealth and Mednax to gain access to the capital and data needed to negotiate with payers and prove their quality under value-based reimbursement, said Jeff Swearingen, managing director of M&A consultant Edgemont Capital Partners in New York City.

Healthcare IT companies are coming together to give those providers as broad a range of products as possible to promote communication and increased use of analytics so that caregivers can be more efficient, he said.

One of the biggest deals in June in the very active IT space was McKesson Corp.'s decision to merge its healthcare IT unit with Change Healthcare of Nashville to create a company with $3.4 billion in combined revenue. “If they're on the front lines of change under the Affordable Care Act, we're seeing lots of (M&A) activity,” Swearingen said.

AmSurg CEO Chris Holden said this month at an analyst conference in New York that AmSurg and Envision went with a no-cash, all-stock transaction to keep the combined company's leverage low for more physician acquisitions.

With a debt ratio of about four times EBITDA and expected cash flow to bring that down further, the new Envision Healthcare Corp. will not be hamstrung as it pursues a pipeline of deals in a fragmented industry subsector still rich with independent groups considering consolidation, Holden said.

The company has given guidance that it will spend about $400 million on acquisitions. The deal is expected to close by year-end, creating a company with annual revenue of about $8.5 billion, Holden told analysts this month at Cantor Fitzgerald's 2nd Annual Healthcare Conference.

“Both the payer community is attempting to consolidate and the health system community is consolidating,” Holden said. “Who has not consolidated at the same rate are physicians.”

Healthcare acquisitions as a whole are happening at a steady cadence, though not at the record-setting pace of a year ago, said Mohamad Makhzoumi, partner and head of healthcare services at New Enterprise Associates, one of the world's largest venture capital groups with about $18 billion invested.

Last year was the busiest year ever for M&A, with $4.8 trillion worth of deals, including $500 billion in the healthcare sector.

Merger volumes in healthcare were down about 17% in the first quarter of this year compared with the year-ago period, said Toby King, managing director of the global healthcare group at Citigroup, speaking to the Nashville Health Care Council in May.

Makhzoumi said healthcare M&A in the first half has been dominated by “strategic” buyers or companies buying rivals or into complementary products rather than the big private equity players who look for strong cash flows and financials from their targets. He said the AmSurg and Envision deal is a prime example. AmSurg is strong in ambulatory surgery centers and specialty physician staffing, such as radiology and anesthesiology, while Envision has an ambulance unit and a prominent presence in ER physician staffing.

They also eschewed cash in the deal so they could invest in additional acquisitions as a combined company.

Another example of a strategic acquisition was the merger of Plano, Texas-based U.S. Renal Care with DSI Renal in January, Makhzoumi said. That deal combined U.S. Renal Care's 198 dialysis locations in 20 states with Nashville-based DSI's 100 facilities to create a dialysis giant serving 23,000 patients in 33 states and Guam.

That's not to say that private equity has stayed entirely on the sidelines, especially in healthcare IT. There's the example of New York City-based Welsh Carson expanding USAP and making a deal in June at another of its physician-practice companies, U.S. Acute Care Solutions. In that deal, U.S. Acute Care acquired a big chunk of Ergentus Emergency Service Physicians of Denver. Terms were not disclosed.

On the IT front, San Francisco-based Thoma Bravo this month agreed to pay $544 million to buy healthcare IT security company Imprivata and take it private.

In June, Pamplona Capital Management, which bought MedAssets this year and rolled it up with Precyse to create revenue-cycle giant nThrive, announced last month that it was buying the healthcare analytics consultancy Equation of Salt Lake City.

These types of rollups offer the promise of better integration of IT products and services to providers that often struggle to get their electronic health records to communicate smoothly with one another, said Caitlin Blalock, a Fitch Ratings analyst.

IT vendors are going to play an increasingly important role in making sure hospitals and physicians can operate efficiently and prove their quality to get full reimbursement as payers move from fee-for-service to value-based payments that put providers at risk for the cost of care, she said.

But private equity firms also tend not to be shy about taking cash out of their acquisitions, Blalock said.

For example, when McKesson completes divesting its IT business into a joint venture with Nashville-based Change Healthcare in 2017, Change's majority owner, the Blackstone Group, will receive a $1.75 billion dividend at the time of the transaction, Blalock said.

As Blalock and Fitch Managing Director Megan Neuburger noted generally in a recent IT report, “private equity involvement may also contribute to the deterioration of balance sheets, as private equity investors have favored this space for its durable cash flow prospects."