Anesthesia rollups: Lambos for the physicians, nightmares for the insurers?

Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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Let’s talk about anesthesia rollups - in the US. 

At stake is a $27B market (source) increasingly dominated by a handful of Private Equity backed rollups. Names like U.S. Anesthesia Partners (USAP), Sheridan Healthcare (part of Envision Healthcare) and North American Partners in Anesthesia (NAPA). 

What’s the point of these rollups?

I will give you a hint: not the multiple arbitrage and not the synergies either. The true raison d’etre: market power. Practically, this translates into two things: the widest hospital coverage and the strongest negotiating position vis-a-vis insurers.    

But push too hard, and the backlash can be fierce. Enter the story of U.S. Anesthesia Partners (USAP), the No.1 player in the US. $2.5B revenue, 4,500 clinicians, and 2M cases yearly. 

USAP has cornered anaesthesiology markets in key US metro areas, including Dallas, Houston and Austin. Through a mix of rapid M&A and allegedly anticompetitive tactics, USAP achieved 50-60% market share in all three cities - hurting insurers’ margins while handsomely rewarding stakeholders. Not just the PE firms: physicians own 43% of USAP, and their compensation is its largest expense item.

In building this case study, alongside the usual sources like credit ratings reports and expert calls, we relied on regulatory filings since, well, regulators don’t like that sort of thing. In 2023, the Federal Trade Commission (FTC) brought up an antitrust case against USAP. As the case continues to make its way through the federal court system, the FTC appears to have succeeded in its attempt to require Welsh Carson, USAP’s founding sponsor, to “limit its involvement”.   

The article is structured as follows:

1. So good you can’t make it up! 3 reasons why PE ♥ anaesthesiologists

2. USAP’s beginnings

3. USAP scales up

4. More money, more problems? How anesthesia rollups maximise profits

5. The authorities step in

6. Summary / Lessons learnt    

Ready? Let’s go!

So good you can’t make it up! 3 reasons why Private Equity ♥ anesthesiologists

Reason #1, anesthesia is a mission critical service. It is a medical treatment designed to prevent patients from feeling pain during procedures such as surgery or dental work. Without anesthesia, a surgery cannot happen. According to S&P, in 2020 USAP’s revenue was down by only 5%: “As procedures volume began to return in H2 2020, they tended to be of higher complexity, generating higher revenue per procedure” (source). 

Reason #2, we’re talking about a B2B market characterised by sticky relationships. Patients do not get to choose anesthesiologists. And how would they anyway? The surgeons or the hospitals do - based on long-term contracts structured either as arm’s length partnerships with third party providers like USAP (more common); or as direct employment (less common). 

Reason #3, exclusive contracts. Hospitals pay a premium for 24/7 coverage, simplified scheduling, and risk transfer - via so-called “stipends”.

This sets up a classic misalignment of interests:

• Hospitals want stability; they are reluctant to switch.

• Anesthesiologists know it.

• Insurers resent it.

Now imagine one anesthesiology provider dominating entire metro areas. That’s exactly what USAP did in Texas—making insurer resistance nearly impossible.

A 2023 Federal Trade Commission (FTC) complaint details USAP’s extraordinary grip on Dallas - the No.1 metro area in Texas:    

“In 2013, prior to USAP’s acquisition spree, at least fifteen small groups accounted for 60% of the anesthesia case volume in Dallas. The competition in Dallas between those groups led to lower prices. Today, USAP has over 900 anesthesia providers and accounts for 57% of the hospital-only cases in Dallas (and 68.5% of the revenue)”

Below, we explain how that happened - and what were the consequences. 

USAP’s beginnings

In 2012, John F. Rizzo, an experienced anesthesia executive, emailed D. Scott Mackesy, a partner at Welsh, Carson, Anderson & Stowe, an East Coast based Private Equity firm, the pitch for "New Day Anesthesia". Scott liked the pitch, and handed over the case file to Brian Regan, a junior partner. 

Brian’s subsequent, internal pitch was simple but powerful: 

1. Capture a high market share in a key markets through M&A

2. Maximise negotiating leverage with commercial payors (i.e. insurers)

Welsh Carson committed a couple of millions to sketch out the proposal, including the initial acquisition pipeline. Day to day, New Day was to be run by Kristen Bratberg, the former CEO of Pediatrix, a Welsh Carson owned rollup of neonatology practices (Kristen left in 2021). 

Side note: Welsh Carsh is HIGHLY skilled at medical services rollups. According to an FTC statement, “after investing in neonatology provider Pediatrix Medical Group in 1998, Welsh Carson subsequently acquired over 100 neonatology practices,8 eventually priding itself on staffing 1 in 4 neonatal intensive care units in the US”. 

Back to anesthesia though.

Very quickly, Kristen and Brian stumbled upon a gem: Greater Houston Anesthesiology, or GHA. Founded in 1996, GHA had 220 physicians and 180 certified registered nurse anesthetists, or CRNAs. The company had been actively searching for a buyer, touting itself as being 20x the size of competitor #2 in Houston. Encouragingly, due diligence revealed that GHA:

• Was “well positioned within the 4 major hospital systems [in Houston]” (Houston Methodist, Memorial Hermann, St. Luke’s, and HCA) that combined performed almost 65% of all inpatient surgeries in the metro area; and

• Had “achieved very good levels of reimbursement from commercial payers”

Welsh Carson completed the GHA acquisition days before the new year 2012. For the USAP team, this was only the beginning. The FTC complaint sheds light on their rollup playbook: 

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