Emerging Trends

Physician Practice Management Companies
What Went Wrong And Where Do We Go From Here?

Tom Nash
Marketing Analyst, Blue Cross and Blue Shield of Florida

A few short years ago, publicly-held physician practice management companies were among the brightest stars on Wall Street. They were acquiring physician group practices at breakneck speed by appealing to physicians' distaste for dealing with the world of managed care. PPMC's also catered to doctors' desire to grow their practices while concentrating on practicing medicine — leaving administrative details to the PPMC. PPMC's revenue and stock price growth was phenomenal, and with only about 10% of the nation's physicians on board, future growth and increased market leverage seemed a forgone conclusion. Many managed care organizations bought into the trend as well, forming several global capitation alliances with PPMC's like FPA Medical Management and MedPartners.

However, at some point, analysts warned, PPMC's would have to prove they could grow physician practice revenue and profits, and not grow solely through practice acquisition. The PPMC's publicly agreed, proceeded to say the right things, but continued to grow primarily via acquisition. Typically they offered a generous sum of company stock to group practice ownership along with the promise to handle all administration and negotiation with health plans, while simultaneously growing the practices' revenue. All of it seemed to make sense. Conventional wisdom is that physicians have a unique position to wield the most leverage in die U.S. healthcare system because it is they who are the true health care deliverers. No hospital or health plan can deliver healthcare without physicians. The primary reason physicians had yet to exercise that power was they were not sufficiently organized on a united front. PPMC's appeared to be the knight in shining armor that would accomplish this.

Although it was probably starting to occur sooner, the first undeniable sign the PPMC bubble was about to burst was the unraveling of the MedPartners/PhyCor merger. After the agreement was signed, PhyCor discovered many economic skeletons in MedPartners' closet, including a growing inability to meet capital commitments. MedPartners had acquired group after group with what appears to be little thought as to how the groups aligned strategically. Furthermore, it was apparent that MedPartners was not managing the risk it had assumed when 1997 earnings were well below expectations. MedPartners' stock price plummeted. PhyCor announced $120 million in charges due to the termination of the deal.

These shocking developments at the two largest PPMC's started a free-fall for the industry. Before the end of l998, FPA Medical Management had filed Chapter 11 bankruptcy. MedPartners and PhyMatrix had exited the physician practice management business entirely. PhyCor, despite having a seemingly superior resolve to execute its strategy of actually adding value to physician practices, had severed ties with once promising alliances such as First Coast Medical in Jacksonville because it had difficulty delivering the benefits promised. Many physicians lost their practices because of this — albeit at least temporarily. PhyCor is now seriously considering going private due to the deflated value of its stock price.

So what happened to this seemingly "can't miss" business? For one, they assumed an insurance risk and were thus subject to many of the same market pressures that have eroded the margin of HMOs. What PPMC's also found was physician practices were much more complex to run than they imagined. Successfully consolidating such a vast array of physician practices was expensive given the multiple information and accounting systems among the groups acquired. Perhaps the greatest miscalculation, however, was that the industry was predicated on managing a large group of professionals that had never been managed, and as it turned out, were often unwilling to be managed. Kenneth Abramowitz, healthcare analyst at Sanford C. Bemstein put it more bluntly: "Physicians are trained to be individual entrepreneurs. They are not trained to take orders. So it's the old joke about herding cats. The PPMC's are in the business of herding cats together, which can be done intelligently, but... you have to do it 50 or 100 at a time."

So is the PPMC industry dead? Not so fast, say many industry analysts. Although the short-term outlook is not rosy, mostly due to the lack of investor and physician confidence, one fact remains unchanged: "the primary value creator in healthcare remains the physician," says Ken R. Laudan, Senior VP at George K. Baum & Co. Furthermore, adds Laudan, physicians "find themselves in the most mercurial operating and reimbursement environment in recent history — Sol strongly believes there remains the need for a physician-centric strategic partner who can deliver real value for the physicians."

Some single-specialty PPMC's are currently doing quite well. One example is Pediatrix. This PPMC has found a niche by focusing on hospital-based neonatology. It has an uncomplicated business model, providing most of its care in a discounted fee-for-service environment. It has also shied away from risk-sharing arrangements as only 3% of its revenues are derived from capitated contracts.

PhyCor is still pursuing what it has always believed is necessary for its survival and future success: joint ventures with hospitals. This has proven to be a challenge, however. Even though it makes intuitive sense for hospitals and physicians to have alignment of objectives and goals, sharing revenue with doctors is not typically part of the hospital mind-set. "If hospitals don't begin to get smart and get with doctors (notably specialists) in win-win relationships, the PPMC's are going to have that allure," according to Gregory Mertz, Executive Director of Horizon Group, a Virginia Beach-based consulting firm. "Those relationships where the hospitals and specialists both benefit ... are going to be the real models of the future."

The common theme in all this seems to be, "it all sounds good ... on paper," but the reality is physicians, with a few notable exceptions, have been largely unable to form successful business partnerships with PPMC's, hospitals, MSOs, HMOs or each other. According to Jeff Peters, President of Harvey, Illinois-based Health Directions, a physician practice management turnaround firm, physicians must come to grips with who they are and what they want. "Physicians who stay with the PPMC's must accept the reality that they may be bought, sold and managed by people over whom they have little or no control or influence, and that the situation could change at any moment. Physicians with an entrepreneurial bent and a need for autonomy are probably better off cutting their losses and seeking out other arrangements."

Partnering with a hospital may be less onerous, depending on the agreement, but some sacrifice of autonomy is inevitable unless physicians are willing to go it alone. However, that would require both medical and business skills to deal with the other players in the healthcare system, leaving little time for a life outside the practice. In other words, physicians' careers are becoming more like those of any other professional. "Having it all" is rarely an option. The advice of Mr. Peters is for physicians to do some soul-searching and figure out what is most important to them as their best next step.

REFERENCES

Jaklevic MC. PPMs on the Rebound. Modern Healthcare. October 5 1998: 97-104.

Practice Management Industry. The Wall Street Transcript. December 14, 1998: 4-30.

Physicians Must Act Fast to Counter PPMC Failures; Six-Point Checklist Boosts Chances of Practice Success. BW HealthWire. December 1,1998.

Sharpe A. Technology and Health: PhyCor Considers Going Private as Option to Address Depressed Price of its Shares. The Wall Street Journal. October 30, 1998.

PPMC Contracting with HMOs Can Be Tricky and Vice Versa. Physician Manager. October 30, 1998.

Bituon-Blecher M. Burned on the Street: Wall Street Rethinks Healthcare. Hospitals and Health Networks. March 5, 1998:22-28.

Jacksonville Medicine / February, 1999

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