Anesthesia, Wall Street and Mednax

Discussion in 'Anesthesiology' started by BLADEMDA, 05.12.14.

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  1. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    So,

    Let's take a look at how Mednax executives gets rich by buying anesthesia practices:

    They buy practice "X" for $15 million dollars. They borrow the money from Wall Street by issuing debt. The partners of practice "X" receive compensation upfront and Mednax gets control of the revenue stream.
    Mednax cuts expenses by 3%, improves collections by 8% and does the internal billing.

    The practice generates a net revenue and profit each year to Mednax. After paying the salaries of all the employees Mednax generates about $3 million in profits. Mednax has a P/E ratio of 20 which means Wall Street says the value of that profit is worth $60 million to Mednax. Each dollar of profit generates $20 of value to the company.

    Mednax breaks even on the practice investment after 4 years but the net debt is held by the bond holders anyway. Alternatively, Medenax can issue new shares to investors in order to fuel acquisitions.

    Recently, Karl Wagner (President of American Anesthesiology) sold $4.5 million of Mednax stock at a huge gain: http://seekingalpha.com/article/2211783-mednax-3-different-insiders-have-sold-shares-this-month

    This thread proves Mednax, Sheridan, etc. will continue buying practices because the money is in the P/E ratio of the stock.

    When a group sells out to Mednax the P/E ratio is 1 of that group (some premier groups do get a multiple however by acquiring stock options/shares immediately plus cash for the buyout) but Mednax gets a P/E of 20 immediately from the Street.
     
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  3. cognitus

    cognitus 2+ Year Member

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    I think your logic is slightly out of order. Assuming Mednax is currently valued at 20x earnings, that reflects Wall Street's assumption of their earnings growth rate. If Mednax can continue to grow by acquiring these private practices and exploiting synergies (lowering operating costs and improving collections), then the executives SHOULD continue to make money. However, if they continue to raise debt, that could increase interest rates (and therefore lower income). Also, they may fail to cut these PP costs. If this happens, that 20x P/E multiple will drop.
     
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  4. BuzzPhreed

    BuzzPhreed

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    The whole concept of a company that has no assets can somehow be publicly traded seems completely bizarre to me. Think about it. They are purely a services company that relies on billing for services rendered and adequate collections for those services. They have no protected market other than the contract (for example they don't own a patent on anything). When they buy a practice, they are betting on consistent future earnings and that is wholly predicated on maintaining a positive net cash flow through the services provided by their employees. It's an absolute friggin' house of cards relying on monopolizing a market and continued earnings through stability of the workforce. All you have to be willing to do is walk away, or get a group together and challenge them with your own contract come RFP time, and it crumbles. They're counting on you not doing either of those things.

    Service companies are notoriously risky bets on Wall St. Sooner or later people are going to wise up. And by that time the fatcats will already have cashed out.
     
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  5. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    Buzz,

    That is my entire point with this thread. A company built on a house of cards with the executives making millions per year from the revenue stream of groups which had a PE of 1 now commanding a PE of 20. Even if the PE drops back to 15-16 Mednax is making a fortune exploiting Wall Street MBAs on a business with no real underlying Moat or intellectual patents. It's a fantastic scam which will end sooner or later as they all do. In the meantime, the insiders are cashing out of tens of millions of dollars of stock and/or options.

    This is another bubble that those of us in the business can clearly see will come to a bad end. But, if you can exploit that bubble because of Wall Street greed and ignorance then I say go for it.

    These large groups have senior partners that want to cash in BIG in this bubble by selling their group for a multiple of 1.5-2.0 and getting a management position in the acquiring AMC which comes with a good salary plus stock options (and NO clinical work, weekends, holidays, stress, etc).

    I have some former colleagues making big money with 1/4 of the work they used to do in the O.R.
     
  6. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    They don't need to raise debt unless they buy out a premier, large group. Otherwise their annual revenue is enough to buy quite a few groups per year. Growth is pegged at 3-5% per year so Mednax must continue to buy groups to fuel that growth. Eventually, they run out of practices to buy or are forced to buy more shady groups. Alternatively, they can buy one of the new start up AMCs which many guys in Houston and Orlando are banking on happening.

    The newest thing is to sell your group for a % of the AMC start-up so one can make millions from the sale of that venture AMC to a Mednax. So, the group gets 1/2 the deal in cash and the other half in stock in the new AMC which will eventually be sold for a PE of 10 or go public with a PE of 10. Even with a PE of 10 the group which got shares instead of cash has the potential for a TEN TIMES RETURN on the capital. I wouldn't hold out for a PE of 20 but a few might gamble and hold out for a PE of 20! That means 20 times on the initial investment which could be over $20 million dollars.

    The guys in Nashville did something similar to this with their deal. Imagine if the Group in Charlotte got all stock in Mednax (at 1/2 the price of that stock at that time) instead of cash. If they sold 100% of that position today they would have netted up to a 400% gain in 4 years.
    They couldn't have made that much money by working their arses off for the next 20 years.
    ( in 2010 Mednax was about $27 per share and is now $57). Mednax is willing to make deals using stock/stock options instead of cash.

    The real money isn't giving anesthesia any longer, but, rather in selling anesthesia services to hospitals/CEOs then getting Wall Street to give you a MULTIPLE on the earning stream.
     
    Last edited: 05.12.14
  7. circulus vitios

    circulus vitios 7+ Year Member

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    I don't think you understand P/E. It's just a metric. It doesn't leverage the return.
     
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  8. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    Please feel free to explain the multiple Mednax gets for each additional $1 of earnings. Clearly, they get a multiple back from the Street for each additional $1 so that's why they can offer a buyout with cash and stock options.

    Now, if Mednax earns an additional $3 million in PROFIT each year from an acquisition and they make 5 acquisitions then for a total of $15 million in additional profit how does that affect the stock price and valuation of the company?

    I do understand that I oversimplified the P/E metric but I did it to make a valid point. The profit and revenue Mednax gets from each acquisition has a multiple on it.
     
  9. cognitus

    cognitus 2+ Year Member

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    Why are you assuming that these groups are getting sold for 1x earnings? Where do the private practices come up with this valuation? Are there actually any publicly traded anesthesiology practices that they compare themselves with to in order to get that valuation? If the valuation is true, then it is not a scam. Either this is happening because the groups are not being efficiently run or the partners of that group are selling for WAY too cheap (both examples of HORRIBLE management). If the groups aren't efficiently run, then Mednax is actually creating value by stripping out costs and making collections more efficient. This would drive earnings growth, increasing valuation. Wall Street would reward that, keeping that P/E multiple high. Wall Street would not just assign that multiple if it didn't assume that Mednax was that much more capable of growing their earnings. If they lose the ability to grow (which they will eventually), Mednax will no longer be valued at 20x earnings. I am curious as to where you get these numbers from. They are simply metrics and you get those from comparable publicly traded companies in similar businesses. And P/E assumes a level of growth with the faster/slower growing companies getting higher/lower multiples. The market just doesn't tack on that number without making some assumption of future earnings growth.
     
    Last edited: 05.14.14
  10. IanMcGalt

    IanMcGalt

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    And you don't just sell another 20 million dollars worth of stock for every additional million in earnings you expropriate. The current owners want and expect those extra millions, that's why the P/E is 20.
     
  11. cognitus

    cognitus 2+ Year Member

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    Once again, P/E is a simple metric that Wall Street uses for valuation. It's essentially like a rating that you can calculate that has implicit assumptions of future earnings growth. An investor looks at the stock price of company X and divides that by the annual expected earnings per share of company X to get P/E. The investor then compares that P/E with similar companies (competitors) to help determine if that is high or low. It's a quick and easy way to see how the market feels about a company.

    But to answer your question, the stock price/valuation of Mednax after it hypothetically makes 5 acquisitions that net $15 million in incremental profit also would depend on how much it paid for those acquisitions. Think about this: if I paid $10 million for a 7-year old's lemonade stand, I would now have the income of that lemonade stand. However, I would also be out $10 million. Would you think I was a genius for buying that lemonade stand? Probably not, because it is not close to making any of the $10 million back. Same thing with Mednax. Wall Street will reward it if Mednax didn't pay too much for those acquisitions. If it did pay too much, the stock will get crushed.
     
    Last edited: 05.14.14
  12. aneftp

    aneftp 5+ Year Member

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    President Hilary will take care of companies like Mednax. I agree it's a house of cards. If bundling of charges gains steam, AMCs are done. My buddy who has had to deal with bundling of charges up north says usually anesthesia's cut of fees is around 8-10% of total collections during surgery. Some AMCs are bidding for as low as a 3% take. Think a $7000 shoulder outpatient. AMCs are saying to can only opt for $200 anesthesia services for that one should that takes 45 minutes in outpatient.
     
  13. BuzzPhreed

    BuzzPhreed

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    On a related note when the fee-for-service model dies, so does most of consulting. You ever see that "Outside Hospital" video on Youtube? There will no longer be "specialists" that people will get referrals for on in house patients. Unless you're on the hospitals payroll you're going to be out of a job. For example they simply won't call the ID guy for that wound infection but instead every Tom Dick and Harry FP guy is going to try to treat it themselves. They not going to want to split the pie any further. How this is ultimately good for patients is beyond me.
     
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  14. Mman

    Mman Senior Member 10+ Year Member

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    Mednax isn't issuing debt to finance their acquisitions. They are paying cash. They have almost no long term debt. And when they acquire a company, the cash they paid comes out of their bottom line so their stock price doesn't increase 20:1 with their new revenue stream. They lose money on it the first few years. They are just making the bet that in the long run it's a profitable purchase. In essence they are buying an indefinite revenue stream for a fixed price.

    Also, you can take a reasonable guess that they are collecting $150 a unit for all their insured cases nationwide. That's where the real profit is in the deal. They buy a practice that is making $75/unit for a Blue Cross patient and then that revenue doubles overnight.


    Where the acquisition model can run out of steam is when there is nobody left to acquire. If their stock price is run up on consistently improving earnings year after year, but those earnings are from acquisitions and not from expansion of current practices, then you lose your momentum when you can't acquire enough to pad those increased earnings each year.
     
  15. IanMcGalt

    IanMcGalt

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    That's when you start increasing earnings by decreasing anesthesiologist income.
     
  16. gasdoc77

    gasdoc77 2+ Year Member

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    Northstar is a 50-50 partnership between Phil Eikenholz (MD) and Neil Neele (CRNA). I won't make any statements or suggestions beyond that.
     
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  17. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    AMCs value the revenue stream and profits from each group they buy out. Their stock price is based upon continued earnings growth and profitability. The PE of 20 shows that they do get a multiplier effect for each extra dollar of earnings.

    The current market for Sellers is red hot right now with AMCs offerering more than the group's current revenue/earnings per partner over 60 months. There is no way an AMC could purchase a group and pay 1.5 times the partner's current income for 5 years without a multiplier effect. The partner gets most of that cash upfront instead of salary over 5 years.

    Other AMCs offer stock options up to 50 percent of the acquisition price for those Anesthesiologists who prefer equity in the AMC instead of cash.
     
  18. BuzzPhreed

    BuzzPhreed

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    I think you're right about the stock options. It's a form of golden handcuffs and keeps the partners who sold the practice working (i.e. they leave and the options go away). My bet is that the strike price is low so on paper right now they look like they've made a ton of money. The earliest exercise date is probably in 3 (or more) years at the strike price. I'm willing to bet that they won't be worth the paper they're written on in three years.

    I have a buddy who was at a biotech company that went bust. He was offered stock options that he had to wait 24 months before he could exercise. He was given 10,000 shares when he was hired. His option price was $8.75/share and at the time he joined the stock was trading at roughly $52/share. He told me that, see, he was already worth over $430k on paper and all he had to do was wait it out. And, you know, the chances are that the price is only going to go up once they get approval for the monoclonal antibody that they had just submitted to the FDA. I don't have to tell you what happened, right?
     
  19. Mman

    Mman Senior Member 10+ Year Member

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    The way the AMC does it is because the day they take over the group the revenue from that group is greatly increased from their higher billing rates. There is more money to be made in a group if it's part of the AMC than if it isn't. The problem for the physicians is 10 years down the road when they cut the salaries because they can.
     
  20. BuzzPhreed

    BuzzPhreed

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    The problem is the restrictive covenant that they shouldn't sign if they go work for an AMC. There's absolutely no point to signing one of those if you work for a corporation. That's what chains you to a sh*tty job. Don't do it. If they're fair and they can compete, they should have nothing to worry about. Or you should have a deal that says if they cut your salary that the covenant is null and void. Don't strap yourself to a crap-ass job.
     
  21. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    In 10 years (2024) you really think the current anesthesia reimbursement model will still be in force? I'd rather get the money UPFRONT and invest it at an expected 6% rate of return compounded over ten years.

    For your sake I hope the Anesthesia market stays hot for 10 plus years. Your future depends on it.
     
  22. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    Why not just take another job somewhere else? Some of those restrictive covenants aren't that restrictive at all.
     
  23. Mman

    Mman Senior Member 10+ Year Member

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    I have no idea what the market will for our services will be like in 10 years. I know from people in the business for 40+ years that similar cycles come and go and the end is always near depending on how you look at it. But 40 years later they are still in the game.

    But I agree that if you think the reimbursement is going to be crappy that selling out to an AMC for a bunch of $$$ is obviously the right idea. We've been approached by several AMCs over the years, some more than once, and have always told them that things are looking too good right now. Our revenue each year has been higher than the last. Will that hold out forever? Who knows. I'm fortunate to be in a rather rapidly growing area so even if our margin decreases our overall case volume will likely make up for it.
     
  24. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    As long as the fee for service model continues you will do well. The problem is the ACA has increased health care insurance costs and CMS wants a different model of reimbursement. Those 2 forces are powerful foes to the survival of the fee for service model. I know things move very slowly but the ACA and CMS have all the things in place for the end to Anesthesiology as you now know it in 10 years. Perhaps, the AMCs (and even your group) can adapt to these massive changes in Anesthesiology. Or, the AMCS go the way of the dinosaur.
     
  25. Man o War

    Man o War

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    I wanted to bump this thread to the top since many fellows and residents are starting to look around at jobs. I caution you against taking an extremely long and/or financially painful buy in to a private group on the promise of partnership. I've been at this for quite a while, and am hearing about large groups talking to these AMCs about acquisitions that I never would have thought would sell out.
     
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  26. Man o War

    Man o War

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  27. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    Med Students better get used to the concept of being an "employee" for their career in Anesthesiology. I'd say 90% of all practices in Florida are now AMC owned or academic positions.

    My best guess is that most new Anesthesiology graduates circa 2020 will be looking at some sort of employed position.
     
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  28. Man o War

    Man o War

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    True. I just hate to see new grads on 3-5 year partnership tracks, making less than academics, and then having the rug pulled out from under them with a sale to an AMC with nothing to show for it. I'd rather be employed by a hospital than an AMC at this point.
     
  29. Mman

    Mman Senior Member 10+ Year Member

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    they could negotiate a payout in the event that the practice is sold. We include it as standard in our partnership track contracts. If we were to be acquired and they weren't yet a partner they'd still get a partial payout.
     
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  30. Man o War

    Man o War

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    Yes, exactly what they should do if the group allows it. It's the only way I would consider entering a partnership agreement in these times.
     
  31. criticalelement

    criticalelement Probationary Status 2+ Year Member

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    The future is GRIM for anesthesiologists after reading this.
     
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  32. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    Actually, after 24 months the person on the employee track should get a full share of any buyout. Even if the track is 36-60 months long the person on the track should get treated well. I think 3/4 or full share is the right thing to do.
     
  33. Scotty_G

    Scotty_G Junior Member 10+ Year Member

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    How would you guys go about asking for partial compensation in the chance a group sells out? I know more than the avg rookie both from SDN and rotating at a large priv anesthesia group that was bought out by an AMC during my time as resident. Would you turn down a partnership track if it was more than 3 years or one where they wouldn't guarantee partial compensation if the group was purchased? ( I will be looking for jobs later this year :))
     
  34. Mman

    Mman Senior Member 10+ Year Member

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    Depends on how much they pay you on the partnership track. I've seen a few partnership track jobs where the docs were making $300K+ with raises each year before becoming partner.
     
  35. gasdoc77

    gasdoc77 2+ Year Member

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  36. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    Northstar believes in the Collaborative model of care where CRNAs staff their own rooms alongside Anesthesiologists. Clearly, such a model is not compatible with a Residency training program. The ACGME needs to give serious consideration to closing that program.
     
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  37. BLADEMDA

    BLADEMDA ASA Member 7+ Year Member

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    About NorthStar Anesthesia NorthStar Anesthesia is a community of caregivers, founded by an anesthesiologist and a CRNA. NorthStar partners with hospitals and ambulatory surgery centers (ASCs) nationwide to deliver a more productive and efficient model of anesthesia care. Its care team approach focuses on the provision of high quality while measurably improving operating room performance.
     
  38. Man o War

    Man o War

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    This depends on a LOT of factors. At this point in my career the longest partnership track I would take is 2 years for a group whose partners make north of 500K. If partners make low 400s or less, I can make that easily without a buy in so I wouldn't do it. Also depends on how much $$ they're offering during those 2 years. Straight out of residency I stupidly took a 3 year buy in with salary in the 200s on the promise of much more than was delivered. Dumb. Was not worth the investment, and that was before AMC buy outs were a widespread thing. I would've been better off working in academics those 3 years, and socking away a ton in retirement. I really needed a mentor back then who knew the private practice game.
     
    Last edited: 08.21.15
  39. Man o War

    Man o War

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    I also WANT to live in the Midwest, so keep that in mind when considering the numbers I threw out there.
     
  40. SaltyDog

    SaltyDog 7+ Year Member

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    First thing you should look at is integrity of the group: Do all the partner track people become partners at the end of the buy-in, or does the group have a nasty habit of cutting people loose a few months before they're up for partner. In general, I think a track over 2 years is a bit excessive, but I would consider a 3 year track if we're talking about the right group in a very desirable locale. 3 years is a bit more palatable if compensation increases each year. Anything over 3 years is criminal. As far as asking for partial compensation, I would approach this 1 of 2 ways:

    1) Let's say it's a 3 year track where 1st year you make 70% of partner income, 2nd year 80%, and 3rd year 90%. In this case I would say if group sells in my first year, I want 70% of partner buyout, 2nd year 80%, and 3rd year 90%.

    or

    2) I would ask if the group sells before I make partner, then I want all of my buy-in money back.

    As an aside, a few local groups have been approached lately about selling. I've been thoroughly unimpressed by the buy-out terms. It seems like the AMC's are offering about 3 years worth of salary as the buy-out but it's a structured payout over 5 years contingent on continued employment with the AMC during that time at about 70% of current income level. Factor in additional tax burden and you're not really coming out that much ahead. Definitely a money loser if you're not planning to retire in 5 years anyway.
     
  41. Man o War

    Man o War

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    This is good advice. Also, you need to figure out who would vote on a sell out. Look at the ages of those people. You want a good mix of older and younger with voting rights. These buy outs are not a good deal for younger guys/gals with the strings that come attached.
     
  42. Planktonmd

    Planktonmd Moderator Emeritus Lifetime Donor 10+ Year Member

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    In a few years there will be zero private anesthesia groups in existence. This business model is no longer compatible with the changes happening everywhere in medicine.
     
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  43. Scotty_G

    Scotty_G Junior Member 10+ Year Member

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    And you think a group won't give me the stink eye if I ask about such terms being a new rookie? Can't they just say take it or leave it? I almost took a pp job before ultimately deciding on fellowship and when we came to negotiating it didn't seem like they wanted to change much in the contract. That was w/o trying to negotiate a buy-out strategy if the group sells out. Mind you this was a decent group w/ acceptable partnership terms in a popular NE area. This is why I am considering academics as I know some places offer similar salaries to PP minus the huge bump in salary in some places.
     
  44. HenryH

    HenryH AA-S Banned Account on Hold 10+ Year Member

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    I don't know much at all about how these things work, but is it unusual that Northstar managed to nab the contract at such a large metropolitan facility? Don't they usually go for the smaller rural/poor hospitals?
     
  45. ryanjmy

    ryanjmy 7+ Year Member

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    That's kinda the point. If they are thinking about selling they will be much more resistant to giving you favorable contract language. If they have no intention of selling this wouldn't be a deal breaker.
     
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  46. Arch Guillotti

    Arch Guillotti Senior Member Lifetime Donor SDN Administrator 10+ Year Member

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    Sure it's the right thing to do but I think the chances of it happening are rare.

    I would like to hear from anyone on this board who has such a clause written into their contract.
     
  47. repititionition

    repititionition Sure! 2+ Year Member

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    530
    You're saying that groups are valuing themselves at a P/E of 5-7 and the street is valuing those acquisitions at a P/E of 20.

    The sellouts are the dumb ones in these transactions. Now I readily admit that many groups can't easily get the commercially contracted rates that the AMCs can, but then again most groups aren't willing to spend $100-150K on a decent contract consultant or shared-services contract mgt. firm. Penny wise, pound foolish.
     
  48. GA8314

    GA8314 Regaining my sanity 2+ Year Member

    Joined:
    06.03.14
    Messages:
    303
    Selling out all depends on what time frame you have for retiring. This is the reality. The senior folks are gonna think it's a great idea and will use any number of reasons to sell out. The younger ones not so much. Depends on how the votes are tallied.....
     
  49. anes121508

    anes121508 ASA Member 2+ Year Member

    Joined:
    01.16.12
    Messages:
    212
    Status:
    Resident [Any Field]
    What are the specific changes scheduled to occur as result of the ACA that ensure pp will cease to exist or decrease partner earnings?
     
  50. anes121508

    anes121508 ASA Member 2+ Year Member

    Joined:
    01.16.12
    Messages:
    212
    Status:
    Resident [Any Field]
    When you say say hat the ACA and CMS have things in place to end anesthesiology as we know it, are you referring to bundled payments? What else is set to occur that ensures that partners making 500+ will struggle to do so?

    What are the smart pp groups out there doing to adapt to the changes that lie ahead?....hopefully the replies aren't "get the heck outta dodge"
     
  51. anes121508

    anes121508 ASA Member 2+ Year Member

    Joined:
    01.16.12
    Messages:
    212
    Status:
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    Qa/qi initiatives?
     

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