Financiers bought up anesthesia practices, then raised prices

The multibillion-dollar private equity firm Welsh, Carson, Anderson & Stowe took less than a year to create, from scratch, Colorado’s biggest and most prominent anesthesiology practice.

The financiers created a company, U.S. Anesthesia Partners, which in 2015 bought the largest anesthesiology group in the Denver region. Then it bought the next largest. Then it bought a few more. The company employed 330 anesthesiologists in Colorado at one point, according to its website, making it the state’s largest practice by far. It obtained contracts at 10 of the region’s 15 largest hospitals, according to the hospitals.

The Federal Trade Commission, which is supposed to prevent unfair business practices, questioned the company’s growth but did not stop it.

The company raised prices for its services - one by nearly 30 percent in its first year in Colorado - and continued raising them for several years, according to interviews and confidential company documents obtained by The Washington Post. The price hikes boosted patient bills and pushed up insurance rates, former company physicians and managers said. Eventually, some of the company’s own doctors became disillusioned, physicians said, with about 1 in 3 leaving the company over a three-year period.

“The company became big enough to influence pricing and raised prices because it could,” said Matt Bigalk, who worked as director of operations at USAP’s Colorado branch from 2015 to 2017 and who previously handled negotiations with insurers for one of the merged firms. He now works at another Denver anesthesia practice.

A spokesman for U.S. Anesthesia Partners denied that it wielded monopoly power. The company said the firm faces plenty of competition and pressure from insurance companies.

As the United States struggles to control medical costs, however, private-equity firms like Welsh Carson have become critical players in health-care economics, with private-equity funds acquiring hundreds of physician practices across America and, according to multiple academic studies, raising prices while returning billions to investors.

A 2022 study published in JAMA Internal Medicine based on six years of data, for example, found that when anesthesia companies backed by private-equity investors took over at a hospital outpatient or surgery center, they raised prices by an average of 26 percent more than facilities served by independent anesthesia practices.

Since its founding in 2012, USAP has built a staff of more than 4,500 clinicians and spread to nine states, typically following the same approach it took in Denver: acquiring the largest anesthesiology firm in a city and growing its reach from there, company officials said. It has issued more than $1.3 billion in dividends to its shareholders.

Information about private-equity acquisitions of doctor groups is scarce because private-equity firms are not required to make the same financial disclosures that public companies do. Because of confidentiality agreements, the academic analyses of the industry do not name the companies raising prices.

Internal USAP documents shared with The Post, however, offer a rare glimpse into one such private-equity venture into physician services, describing both the price hikes and how the company dealt with federal regulators reviewing whether USAP was accumulating monopoly power. The Post also interviewed or reviewed legal documents from a dozen former USAP anesthesiologists.

USAP executives declined an interview on the record but provided some answers in written statements. Their public relations representative, Jeff Birnbaum, provided others.

“USAP faces significant competition in Colorado, from a variety of groups and health care organizations,” said a statement from Robert Coward, the company’s chief executive. “USAP’s average annual net rate increases from major insurers in Colorado are modest and in line with national benchmarks.”

The company’s clinical governance board in Colorado, composed of 10 physicians, also sent a statement: “USAP-Colorado is a physician-run, patient-focused anesthesia practice that is proud of the quality of care that we provide,” the board members said. “A few disgruntled former USAP physicians here have apparently complained to you about us, but they are providing you with provably false information. USAP does not exercise market power in Colorado . . . We are pleased with the way physicians are scheduled and compensated.”

Company officials did not share annual price increases on contracts but said the company’s negotiated rates with insurers in Colorado rose at the rate of 3.7 percent annually from 2014 to 2019. That’s a total increase of 20 percent over the five-year period, meaning USAP’s prices rose twice as fast as median prices measured by a national survey by the American Society of Anesthesiologists.

The company called that survey unreliable, saying its sample size is too small; the ASA collects voluntary information from about 200 or more practices annually. The company also objected to comparing its five-year price increase to the national median price increase, saying the average increase would be a more appropriate comparison. While the median increase was about 9 percent for that period, the average increase was about 10 percent, according to ASA survey publications. By either measure, USAP’s prices rose about twice as fast as prices nationally.

Eventually the company raised prices so high that in 2020, United Health, the nation’s largest health insurer, terminated its contract with USAP, saying the anesthesia company had pushed its rate demands too far. The insurer said it had singled out the USAP contract for termination because the company wanted to charge 70 percent more than competitors in Colorado and twice as much as competitors in Texas. USAP blamed the cancellation on a national strategy by the insurer to push down prices. The two sides later reached an agreement.

Antitrust reviewers have looked into USAP’s acquisitions at least three separate times, according to company accounts, physicians and media reports. None of the inquiries has ended with enforcement action. The earliest of the known inquiries was in September 2016, shortly after USAP moved into Colorado, when company officials faced questions from the FTC. In response, two company representatives flew to Washington to assure FTC officials that there was still plenty of competition in the region, according to interviews and the company documents obtained by The Post.

One of the company representatives was Peter Harkness, an anesthesiologist who was then chairman of the clinical governance board of USAP’s Colorado branch.

Today, he believes that USAP’s presentation to the FTC was misleading though he believed it to be accurate at the time.

“I was given talking points [for the FTC meeting], but I’m a doctor not a businessman,” Harkness said. “What USAP led us to believe would happen is that we were going to be the premier practice in Denver. Patients and quality would be the first priority. "

It didn’t turn out that way, Harkness and other USAP physicians said.

Harkness sued USAP with four colleagues in 2020 to extract themselves from their employment contracts, arguing that they contained an unreasonably restrictive noncompete clause that required them to pay damages to USAP to practice elsewhere in Denver. The heart of the case was settled with the doctors paying undisclosed amounts to USAP and the company terminating restrictions on where they could work in Denver.

The Colorado attorney general also has reviewed the company’s practices, former physicians said, and the FTC was investigating again as recently as last year, the Wall Street Journal reported. Neither of the agencies has pursued antitrust enforcement against USAP. The agencies declined to comment.

Officials with USAP declined to comment on the investigations other than to point out that the FTC 2016 inquiry ended without enforcement action.

“We cannot comment on any inquiries other than to say that USAP cooperates fully with information requests from government agencies and regulators,” a USAP spokesman said. As for patients, the company said they are satisfied and quality has improved under its management.

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Origins of U.S. Anesthesia Partners

The private-equity firm that created USAP, Welsh, Carson, Anderson & Stowe, is a New York outfit that specializes in buying and managing health-care and technology firms. Since its founding in 1979, the firm has invested more than $31 billion on behalf of its clients.

Funds raised by Welsh Carson have invested in, among other things, doctor groups in radiology, emergency medicine and outpatient surgery.

Its venture in anesthesiology was financed from a $3.9 billion fund Welsh Carson raised in 2009.

The anesthesia company created by Welsh Carson began in 2013 when it purchased Greater Houston Anesthesiology, that city’s largest practice. It then bought the largest practice in Dallas, and then the largest in Orlando. It then added other firms in those regions, creating even bigger doctor groups in those markets.

The company’s growth strategy involved “identifying the most attractive geographies and establishing a presence within them by partnering with the leading groups of anesthesiologists,” the company’s chief executive at the time, Kris Bratberg, said in a press release.

In presentations to the doctor groups it wanted to buy, executives from Welsh Carson and USAP presented a vision of an anesthesiology firm that would be more efficient and more profitable: back office operations would be combined; the larger firm would have the money to invest in technology for monitoring quality.

The expanded doctor groups would also have more negotiating power to command higher prices from commercial insurers. A USAP presentation at the time described the economic incentives of the larger firm as “Better contracts . . . Lower overhead.”

Asked for comment on the story, Welsh Carson responded with a statement through a public relations firm, Goldin Solutions.

“We are proud of the dedicated clinicians at USAP who have created a practice group that provides enhanced care to the patients they serve,” the statement said. “It also seems clear that the information provided to The Washington Post by competitors during the reporting of this story is both misleading and untrue.”

Asked what information was misleading and untrue, the company did not answer.

“Size creates negotiating power,” said Ambar LaForgia, a business professor at University of California at Berkeley, who has studied medical pricing and co-wrote the paper on anesthesia pricing that was published in JAMA Internal Medicine.

The price hikes that doctor groups negotiate with insurers might seem irrelevant to most Americans, but they affect everyone because the insurers pass on the higher costs, health economists said, and much of the burden falls on patients and their families.

About 60 percent of working age U.S. adults ages 19 to 64 receive health insurance through an employer, according to statistics from the KFF. When insurers pay more for medical care, they typically pass the increases along to employers and employees through higher premiums and deductibles. If employers take on the increased costs, employees may receive lower wages.

“Rising costs of health care ultimately hurt workers and their families,” said Cathy Schoen, an economist and former senior vice president of research and policy at the Commonwealth Fund, a health-care foundation. “For decades, this has been one of the reasons U.S. wages have been so depressed.”

Though their prices have risen, the company said, hospitals and patients have saved because USAP’s patients spend fewer days in the hospital. Company officials pointed to a peer-reviewed study showing USAP patients in some Texas hospitals had significantly shorter hospital stays. Seven of the eight authors of the study have been affiliated with USAP or Welsh Carson, according to the disclosures included in the paper. The eighth author also has worked for USAP, according to his LinkedIn page.

The company also said that in 600,000 completed patient surveys, 95 percent of patients rated their care from USAP-Colorado as “good” or “great.”

“As a practicing USAP physician, I can attest to the focus myself and my fellow clinicians have on providing the highest quality patient care and serving the communities where we live and work,” Matthew Maloney, USAP’s chief clinical officer, said in a statement.

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USAP comes to Denver

In 2014, a year before selling to USAP, Harkness and other partners in Greater Colorado Anesthesia began looking for ways to keep up with the rapidly changing health-care market.

The firm itself had been created just two years before as a combination of three practices, and it stood as Denver’s largest, with more than 90 board-certified anesthesiologists.

Even so, with hospitals and insurers merging, the doctors felt pressure to keep growing, too, and they hired a law firm, Sheppard Mullin, for advice about possible expansion. If the medical group did nothing, the law firm advised in a slide presentation, the doctors would be “unlikely” to get insurers to pay significantly more for services in the short term because “rates are relatively high, compared to historical levels.”

Joining with other large firms would also enable the doctor group to invest in enhanced quality control and a more efficient back office system.

By January 2015, the doctors of Greater Colorado Anesthesia voted to sell to USAP for $94 million, giving the private-equity start-up its first foothold in Colorado. The firm’s anesthesiologist partners each received, on average, about $1 million in cash and company stock, according to physicians and contract documents.

Within a year, USAP acquired the next largest practice in the region, South Denver Anesthesiologists, which was almost as large as Greater Colorado. More acquisitions would follow.

“By sharing resources across a larger group, the Denver community will receive higher quality and more efficient anesthesia services,” USAP chief Bratberg said in a public statement at the time.

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USAP raises rates

With its acquisitions, USAP had become the region’s preeminent anesthesiology practice, and it quickly sought to raise rates, according to documents.

One page of an internal USAP company presentation labeled “Guiding Strategies” at the time listed 11 points.

“Accelerate rate increases,” said one. “Pricing +/-5% range, for market’s lead insurers,” said another.

While prices were already “relatively high,” according to the law firm advising Greater Colorado Anesthesia, USAP was able to negotiate significant price hikes with insurers.

For patients insured under the Cofinity network, effective payment to USAP jumped 29 percent, according to the internal company documents.

For patients covered by another insurer, Anthem, USAP rates would rise 17.5 percent in the first year the contract was up for renewal, according to the documents.

For patients covered by United Health, USAP prices began to climb more rapidly, too. The United contract was particularly important because of its size.

Anesthesiologists are paid based on how many “units” of work a procedure requires, with units reflecting the time needed for a procedure and its difficulty.

The documents show how the rates for United patients accelerated after July 2015, just months after USAP bought Greater Colorado Anesthesia.

In the 21/2 years before then, the group’s price for United patients rose about 4 percent, from about $101 per unit, to $105 per unit, according to documents and interviews. In the 21/2 years afterward, rates increased about 13 percent, or about three times as fast, from $105 per unit in 2015 to $119 per unit in 2017, according to company documents.

By September 2020, the price reached $128.50 per unit, according to an economist’s report filed in Harkness’s court case. After the pressure from United, the report noted, the price fell to $110 per unit.

The expansion of USAP also raised rates another way: When anesthesiologists from smaller firms came under the USAP umbrella, their prices were bumped up to USAP prices.

For example, when South Denver Anesthesiologists was acquired by USAP in 2016, its rates for Anthem patients climbed from $65 per unit to about $79 per unit, a 21 percent increase, according to the documents.

Similarly, another doctor group in Denver, Guardian Anesthesia, was charging United, a major insurer, about $75 per unit in 2020; when USAP won the contract at the hospital where Guardian had been operating, it charged about $125 per unit, or 66 percent more for services provided by the same anesthesiologists, according to the documents.

“The prices are not connected at all to quality,” said Tanya Argo, an anesthesiologist who founded Guardian Anesthesia and has retired.

In a statement to The Post, USAP said that in general, by using clinical data and best practices, “we provide superior clinical care.”

Citing the journal study, Maloney, the company’s chief clinical officer, said the company’s “clinical initiatives have been shown to increase the quality of care and patient satisfaction relative to national benchmarks.” He attributed this to “the significant investment we made in our systems and processes that allows the capture and use of meaningful clinical data.”

As for the price hikes cited by The Post, the company said those “selective statements . . . do not accurately represent our results . . . USAP’s average annual net rate increases from major payers are modest and in line with national benchmarks, and, in certain cases, rates have actually declined.”

Moreover, the company said, some of the prices that were raised had been substantially below market rates.

However, the company’s rates for three of the state’s largest insurers - Aetna, Cigna and United - were much higher than some industry averages. At the end of 2016, about two years after USAP entered the market, USAP set prices for all three of the insurers at $110 per unit or more, according to the company documents. By contrast, the median price in the Rocky Mountain region was $71 per unit, according to the annual survey by the American Society of Anesthesiologists, and no other region in the United States had a median exceeding $80 per unit

In response, USAP said the ASA Rocky Mountain region is not a valid comparison because it includes states such as Montana and Wyoming with less expensive and more rural markets.

Company executives also said anesthesiologists face overwhelming price pressure from large insurance companies, and USAP was merely standing up for the physicians. They said USAP has agreed to substantial rate reductions in some of its recent contracts - including cuts of 35 and 42 percent - but said they would not identify the parties or give other specifics because of confidentiality provisions in the agreements.

Aetna, Cigna, Cofinity and United declined to comment for this story.

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The FTC meeting

A year after USAP began buying up Colorado anesthesiology practices, the FTC began to ask questions about the potential for USAP to wield monopoly power.

The FTC inquiry appears to have been spurred by USAP’s acquisition of the largest and the next largest anesthesiology firms in the Denver area.

FTC officials have declined to comment on the matter, but two aspects of the company’s conduct appear to have drawn regulators’ interest, documents provided by USAP to the agency show. The first is whether the company dominated the market enough to artificially raise prices. The second is whether the company’s contracts with physicians, which included noncompete provisions, unfairly restricted the supply of doctors.

Girding for the FTC inquiry, the firm drafted multiple sets of talking points and, as many companies do, coached its main witnesses - Harkness and an executive at the firm - to answer questions. A meeting between the FTC and the company was set for September 2016.

The talking points included: “USAP faces significant local, regional and national competition.”

Contrary to hurting the economy, USAP said, its size “will result in more efficient and cost-effective service for hospitals, payers and patients.”

Harkness and the other executive met with attorneys at Ropes & Gray for a day and a half to prepare for the FTC meeting, he said.

“They would ask me questions that the FTC was likely to ask and then they would say, ‘How about you say it this way?’” Harkness recalled.

“We went down to Washington to tell the FTC that consolidation would be great for health care in Colorado,” he said.

He believed that at the time. Today he believes the bigger firm reduced competition among anesthesiology practices in Denver and that the firm’s relentless drive to grow burned out physicians which, he said, detracted from quality.

“At the time, I believed what I was saying,” he said. “But then we kept adding practices, we kept taking on more and more business and getting stretched thinner and thinner and that’s when I realized something had really gone wrong.”

Harkness currently practices with another doctor group in Denver and USAP called him a competitor.

The company said it isn’t big enough to wield monopoly power in Colorado, asserting that as of December it employed less than 21 percent of the state’s anesthesiologists. It said it hasn’t acquired any new practices in the state since 2019 and has no acquisitions planned. In addition, it cited a 2022 American Medical Association study indicating that through consolidation, insurers may have gained an unfair advantage in setting prices for physician services.

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Anesthesiologists leave

USAP officials often tout that the company is “physician-owned,” with doctors owning about 45 percent of company stock. Many physicians own USAP stock because when USAP bought doctor practices, it often paid the doctors partly in stock.

Several physicians said that they have been unable to redeem their shares, which they valued at hundreds of thousands of dollars. They asked that their names not be used because they are still seeking to sell their shares back and fear retaliation.

In a statement, USAP acknowledged that some share redemptions “did not occur.” The statement attributed this to the pandemic, saying “we were cautious about how we deployed our capital and used our cash.”

Five years after USAP began its foray into Colorado, physicians began to leave in larger numbers than before. Many had signed employment agreements when USAP acquired the medical groups, and those were expiring. The pandemic had begun.

Turnover at USAP climbed to 8 percent in 2020, 17 percent in 2021 and 11 percent in 2022, according to company figures. By comparison, the median rate of physician turnover nationally was 7 percent annually in 2020 and 2021, according to a survey by the Association for Advancing Physician and Provider Recruitment. A national figure for 2022 is not yet available. While the company had once employed 330 anesthesiologists in the state, according to its website, the figure has dropped to 275, the company said.

“Like many organizations, including other physician practices across the country, USAP-Colorado’s turnover increased during the pandemic,” Coward said. The company attributed part of its turnover to the contract dispute with United Health. It said the 2022 figures show that turnover has begun to decline.

In interviews, 12 former USAP anesthesiologists cited an array of reasons for leaving.

For starters, their pay declined more than they expected, they said. The company more often required them to work shifts of more than 24 hours, physicians said. Some said they were asked to take on more than 80 hours in a week. Several said that under USAP management, they felt like interchangeable “widgets” with less control over the practice than they previously had.

One of those who wanted out was Adam Manchon, who with his partner Steven Milo, also went to court to extract themselves from the employment contract and set up their own practice.

“It became very corporate, very impersonal - like the Walmart of anesthesia,” Manchon said, explaining why he left the firm. “It went from ‘patients first’ to ‘we want to make it bigger, we want to make it more profitable.

“Their doctors were overworked and paid below market rate for what they do,” Manchon said. “That’s why their doctors were leaving.”

Under the contracts many signed, physicians who left USAP to work elsewhere in Denver could be required to pay “damages” amounting to $200,000 or more, physicians said. The “damages” provision applied to physicians who took jobs within 15 miles of a facility that USAP served. The prior firm had a similar provision. Because USAP served more than 65 Colorado hospitals and surgery centers, according to its website, the clause meant that much of the region was off-limits to USAP anesthesiologists who wanted to switch jobs without having to pay “damages.”

Manchon and Milo settled with USAP, agreeing to pay damages while USAP agreed to terminate a noncompete provision in their contracts.

The Harkness lawsuit revolved around similar issues. In that case, the judge threw out two of the physicians’ four claims and then the case was settled. USAP required that the agreement ending the case include a judgment against the plaintiff’s claims.

Such “noncompete” clauses, which have been common in physician contracts, can stifle competition by making it harder for competitors to hire employees and, in 2016, the FTC wanted to know more about the employment contracts.

In a draft letter to FTC officials, attorneys for USAP wrote that the noncompete clause had little effect on doctors’ ability to leave USAP and join a competitor.

“Non-compete provisions do not reduce anesthesiologists’ mobility,” the draft letter said.

The letter acknowledged the contract could require a physician to pay “damages” to USAP to work elsewhere, but not how much the damages would amount to. In the margins of USAP’s draft letter to the FTC, a note indicated that physicians who leave might be obliged to pay more than $200,000 in damages and said: “Not mentioning that here.”

Some anesthesiologists who left USAP said they ultimately found work out of state because they wanted to avoid legal complications from the noncompete clause.

“There were no consistent places to work in Denver - so my only choice was to go out of state,” said Bridget Bailey, who worked for USAP in Denver from 2015 to 2020.

After leaving USAP, she took temporary work in Detroit, Portland, Ore., Nebraska and Montana. After the noncompete clause expired two years after she left USAP, she returned to Denver.

“The travel was good at first but in the end, it was emotionally and physically exhausting,” said Bailey, who had two middle-school children during that time. “It was terrible.”

USAP also sought to enforce a noncompete contract against another physician, Michael A. Crocker, who had signed the contract with the previous firm and left the firm before the merger. He said the contract essentially required him to move.

“Based on the concentric circles [around USAP facilities] in the contract, I would have had to move to another city, either to Boulder or Colorado Springs,” Crocker said. Otherwise, he said, the contract required him to pay more than $200,000.

He sued his previous firm to undo the restriction and won on the noncompete issue. The merged firm appealed this win, and Crocker prevailed again in 2018 in appeals court. USAP said it hasn’t imposed the noncompete provision in new contracts for years.

Maloney, USAP’s chief clinical officer, said that the noncompete provisions were “compliant with local laws and industry customs, and are reasonable for the purpose of protecting our physicians’ legitimate business interests. Our agreements do not force departing physicians to relocate.”

As a result of the turmoil, several anesthesiologists who worked at Greater Colorado Anesthesia who voted back in 2015 to be bought out by USAP now regret it, and say the entry of USAP has profoundly changed the anesthesiology business.

“It was one of the biggest mistakes I ever made in my professional career,” said Chris Strouse, one of the Denver anesthesiologists who worked for the company for five years before suing to release himself from the USAP contract.

“We took a very forward-thinking group that was focused on quality and turned it into a private-equity-backed money machine that sends profits to the East Coast by making patients pay more for their insurance benefits. That’s what’s gross about the whole scenario.”