Physician Practice Management Companies... Going...Going...

March 5, 2001

Companies that bought practices in the mid-90s are mostly out of gas or running on empty. But what about the new, "compact" models hitting the market?

 

PPMs: Going . . . going . . .

Jump to:Choose article section... Why PPMs soared, only to crash and burn Single-specialty PPMs: The track record is mixed Multispecialty PPMs: still trying to get it right Do you really need help from a PPM?

Companies that bought practices in the mid-'90s are mostly out of gas or running on empty. But what about the new, "compact" models hitting the market?

By Robert Lowes
Midwest Editor

An 80-doctor group practice in Pittsfield, MA, disbanded last fall—one more gravestone in the physician practice management cemetery.

Though dead, Berkshire Physicians & Surgeons isn't resting in peace. ProMedCo Management, the PPM that bought the practice in 1998, has sued five doctors, claiming that they owe $1.9 million in penalties for leaving prematurely. Another departing doctor, FP Steven Myers, couldn't cough up the $120,000 demanded of him if he wanted to continue practicing in Pittsfield. So he's moving to North Carolina. Meanwhile, ProMedCo stock was trading about 10 cents a share in February, down from $16 in 1998.

Not much has changed with the PPM industry since it imploded in 1998, wreaking financial havoc on thousands of doctors. The disasters just keep coming. Elsewhere in 2000, KPC Global Care, which took over the California physician network of MedPartners, went bankrupt. The 79-year-old Nalle Clinic in Charlotte, NC, folded under PhyCor, which hopes to unload its remaining clinics in 2001. Other venerable groups that died after a PPM buyout include Thomas-Davis Medical Centers in Tucson, founded in 1920 and acquired by now-defunct FPA Medical Management, and the Burns Clinic in Petoskey, MI, a PhyCor pickup founded in 1931. If nothing else, PPMs will be remembered years from now for their sheer destructiveness.

Nowadays, PPMs are sometimes called Ponzi schemes, but early on they made sense—at least on paper. "The reasons for the emergence of this industry haven't disappeared," says Tim Schier, a vice president with health care investment banker Cain Brothers in Houston. "Doctors need capital and business discipline." Trouble was, most PPMs supplied only capital. When it came to actually running physician practices, they floundered.

"Month after month, ProMedCo said things were bad today but would be great tomorrow," says Steven Myers, who, by his reckoning, earned only $15,000 last year. "You kept waiting for the sun to start shining, and it never did."

Among the surviving PPMs, a few actually do shine. Most of these, though, operate in specialty niches. For the average doctor, viable PPMs are few and far between.

In fact, the most pressing question is not "Where can I find a good PPM deal?" but "How can I get out of the deal I'm in?" Our experts offer exit strategies that can prevent your practice from becoming one more PPM gravestone (see below).

If you never belonged to a PPM, our pathology report on this industry may give you a perverse sense of satisfaction: "At least I didn't make the mistakes those doctors made." But the account that follows warrants your attention for another reason. You're likely to hear more business propositions riddled with the same flaws that killed off PPMs. So inoculate yourself against a repeat of history.

Why PPMs soared, only to crash and burn

Many companies that once bid lustily for physician practices have hightailed it out of the field after their stock tanked in 1998. MedPartners now operates as a prescription benefit company under the name of Caremark Rx. PhyMatrix morphed into Innovative Clinical Solutions, a research and disease-management company.

Wall Street has lost faith in PPMs, too. At first, venture capitalists invested in private PPMs, hoping to gain a hefty return with a public stock offering. But then Wall Street stopped taking PPMs public, and venture capital dried up.

Of course, Wall Street's affair with PPMs contributed to the industry's miserable track record. The prospect of selling their practices for PPM stock and making millions as its value went up touched many a doctor's greed button. Stock prices rose for a time, but only because PPMs binged on buying practices. Every acquisition boosted revenue, creating the impression of growth. Never mind that PPMs overpaid for practices, some of which were damaged goods. (Berkshire Physicians & Surgeons was $7 million in debt when ProMedco came along.)

An accounting technique bolstered the illusion of success, says Michael Parshall, a consultant with The Health Care Group in Plymouth Meeting, PA. "When a PPM spent $10 million to buy a practice, it amortized the cost over 40 years, which made the company look more profitable than it was," says Parshall. "Then accounting firms told PPMs to shorten their amortization period. That increased expenses on an annual basis. The gloss fell off the business."

What ultimately discredited PPMs was their failure to execute their business plans. PPMs told doctors, "Pay us a management fee—15, 20 percent of net income—and in return, you'll make more money. We'll boost your revenues and shrink costs through economies of scale." An audacious promise, especially since health plans were trimming reimbursements. PPMs counted on strength in numbers to negotiate better contracts. That didn't happen, according to William Bonello, a health care industry analyst with investment banker US Bancorp Piper Jaffray in Minneapolis.

"It's one thing to have 8,000 doctors nationwide, but contracts are negotiated in specific markets," Bonello explains. "If you lack critical mass in a particular city, you're still at a disadvantage."

Doctors buckled under the weight of huge management fees when PPMs struggled to get even the practice management basics right. "PPMs were built by finance guys," says Michael Parshall. "They know how money works, but they don't know how doctors' practices work." Case in point: General surgeon Charles Collin, who served on the Nalle Clinic's board shortly before the group's demise, says PhyCor let millions in claims go uncollected. (PhyCor's CEO, Thompson Dent, declined to be interviewed.)

Single-specialty PPMs: The track record is mixed

Not every PPM has fizzled. A handful of publicly traded companies catering to certain specialties are holding their own—and then some.

Houston-based US Oncology, a PPM employing more than 850 oncologists, earned $51 million and opened six state-of-the-art cancer centers in the first nine months of 2000. The PPM's ability to finance capital projects means a lot to oncologist Norman Aarestad, medical director of radiation oncology at a new cancer center in suburban Denver.

"We needed the center because local hospitals have been slow to upgrade or replace their equipment, such as computer systems that pinpoint which tissues you want to irradiate and which tissues to avoid," says Aarestad. "Maybe our group could have built the center, but US Oncology made it a lot easier."

Other publicly traded specialty PPMs look solid. Shares of Riviera Beach, FL-based AmeriPath, a PPM for pathologists, were trading at more than 20 in January. And the stock of Pediatrix Medical Group, a company in Sunrise, FL, that manages neonatologists, rebounded above 20 last year after falling from 65 to 6 in 1999. Both PPMs are in the black.

Single-specialty PPMs have advantages over those that try to run multispecialty groups. It's easier to master the ins and outs of just one specialty, particularly its coding science. And it's easier to set up single-specialty groups with lucrative ancillary services—every member of an orthopedic practice benefits equally from a new physical therapy center, for example. That might not be the case with mixed practices prone to income squabbles between primary care doctors and specialists.

Still, the single-specialty route doesn't guarantee success. Just ask Physicians Resource Group, an ophthalmology PPM that declared bankruptcy last year. Or Integrated Orthopaedics, which unloaded its practices and merged with an Internet company in the legal field.

The jury is still out on Kelson Pediatric Partners, based in Hartford, CT. On one hand, the PPM has reasonably contented doctors in Jacksonville, FL. "The beginning of the relationship was rocky, but now we're seeing a turnaround," says pediatrician Amy Garrett, a partner in Pediatric Associates of Jacksonville. Thanks to Kelson, says Garrett, the group negotiated better-paying contracts with health plans, opened a new office, and launched an interactive Web site that's popular with patients.

However, two of Kelson's practices in Massachusetts have untied the knot, and other New England groups are headed in that direction. Pediatrician Joseph Leader, managing partner of Woburn [MA] Pediatrics, which broke away in December, says better contracts with insurers never materialized even though Kelson brought other Boston-area groups to the bargaining table.

"We also wondered whether we were getting adequate value for the monthly management fee we paid," says Leader. That fee amounted to 15 percent of revenue after overhead, but before physician compensation.

Kelson CEO Lawrence Kries says that the health plan wars in New England have taken their toll, but elsewhere in the country Kelson doctors are experiencing revenue growth of 10 to 15 percent. To further boost physician income, the PPM is expanding into clinical trials. Says Kries: "Overall, we're doing very well."

Multispecialty PPMs: still trying to get it right

Is there any future for multispecialty PPMs? Those finance guys keep coming up with new angles. Sometimes they work, sometimes they don't.

Several companies, notably Florida-based Pendulum Physician Practice Management, billed themselves as "second-generation" PPMs, meaning they lowered their management fee to as little as 5 percent and didn't buy a practice's assets (no surprise, given that nobody would give them capital anymore). Clearwater, FL, health care attorney Alan Gassman says this model had its merits, but not enough doctors became believers. In Pendulum's case, it couldn't retain the few practices that signed up.

"Maybe doctors were gun-shy, given what happened to MedPartners and FPA," says Gassman. "Then again, most doctors are reluctant to pay 5 percent of their income to what essentially is an out-of-town consultant."

ProMedCo, based in Fort Worth, thought it could avoid the fate of traditional PPMs by targeting dominant multispecialty practices outside of big cities, where managed care was less prevalent and competition milder. The PPM preferred groups that had few ancillary services, because by beefing them up, the company could dramatically boost revenue.

After its stock began to slide in 1998, ProMedCo tried to convert to the second-generation model, but to no avail. In the first nine months of 2000, it lost $45 million. ProMedCo also got into trouble with its bankers. Last fall, the company warned that if the banks couldn't be persuaded to lend ProMedCo enough money to see it through the next 12 to 15 months, the PPM might have to fold.

What went wrong? ProMedCo Chief Financial Officer Robert Smith says the company found it harder and harder to raise capital because the massive failures of other PPMs tainted the entire industry. He attributes the breakup of the Berkshire group to internal strife. "They couldn't figure out how to pay themselves," says Smith, noting that ProMedCo increased the amount of group practice income available to doctors from year to year.

Berkshire doctors counter that they couldn't pay themselves because ProMedCo's fees didn't leave enough. And they characterized ProMedCo's management as subpar.

While ProMedCo is a bubbling stew of misfortune, Stratum Med, a physician-owned PPM in Urbana, IL, appears to have the right recipe for serving multispecialty groups: low risk, modest goals, and slow growth.

Founded by nine groups in 1996, Stratum has grown to 15 shareholders—the well-known Carle Clinic and Dean Health System among them—and more than 1,700 doctors in five Midwestern states. There's been no talk of Wall Street windfalls. Instead, Stratum has played economies of scale for all they're worth. Last year, Stratum saved shareholders an estimated $6.2 million, most of that through group purchasing of everything from surgical gloves to computer software to disability insurance.

"We've focused on the low-hanging fruit," says Chief Operating Officer Bob Mulcahey. There's still more fruit to be picked—standardized job descriptions, a catalog of best business practices, and reliance on no more than two practice management software systems across the organization. Stratum doesn't buy anybody's assets or burden doctors with high fees. Last year, shareholders paid in $1.5 million, less than $1,000 per doctor. Subtract that from estimated savings, says Mulcahey, and doctors came out $4.7 million ahead.

Internist Dale Anderson, Stratum's chairman as well as president of the McFarland Clinic in Ames, IA, says Stratum benefits from its regional focus. "The groups are close enough to meet regularly," says Anderson. "We also share a common culture."

While other PPMs are losing groups, Stratum is adding them. Two clinics joined in 2000, and Mulcahey expects two more this year. But Stratum isn't hell-bent on growth. "In 1999, we didn't take on new members because we wanted to get our ducks in a row," says Mulcahey. The result? The ducks are quacking happily now. Stratum may have found the formula.

Do you really need help from a PPM?

Successful PPMs such as Stratum have been the exception, not the rule. Accordingly, remember these words of caution if a PPM proposes a deal:

PPMs aren't the only folks financing ancillary services. PPMs tout their ability to build income-producing diagnostic imaging centers and laboratories, but consultant Michael Parshall says there are other sources. "I can get money tomorrow from banks, leasing companies, asset-based lenders—no problem," says Parshall.

Don't forget downside risk. When PPMs invest in a practice, they're prepared to get a return on their dollar, even if doctors suffer as a consequence, says Bob Bohlmann, a consultant with the Medical Group Management Association. "Doctors joined PPMs assuming that their income would go up. They didn't count on the possibility of its going down."

Beware of fearful forecasts. Besides wanting to get rich quick, doctors sold their practices to PPMs in the mid-1990s because they were afraid of managed care, says Parshall. "They figured PPMs would help them fight back." PPMs played on this fear, but guess what? Managed care never became the Goliath that everyone envisioned during the Clinton health care debate. So question every gloom-and-doom prophecy that you hear.

You need up-close-and-personal management. Doctors frequently accuse PPMs of being absentee managers. That's a danger with a nationwide, centralized operation. You're better off with a regional or local PPM whose executives can drop by at lunch.

Amarillo, TX, pediatrician John Young enjoys that sort of attention from a hometown PPM, originally called HealthTrac, that manages 30 doctors in eight practices. Young says HealthTrac has more than earned its fee by boosting revenue with better coding and contracts. Because it employs the office staff of each area practice, HealthTrac can supply Young with an extra medical assistant when patient volume shoots up. The company simply borrows a staffer from another practice that's not as busy. "Contrary to popular belief, a PPM can be an asset," says Young. (The only fly in this ointment is that ProMedCo, whose future is doubtful, acquired HealthTrac last summer.)

You can't abdicate business decisions. Maybe you don't need a PPM. Maybe all you need is a topnotch office manager and a sharp practice management consultant.

That's right. Do it yourself. If there's one refrain from doctors who've been burned by PPMs, it's that they blindly trusted these supposed white knights to oversee their affairs.

"I was one of those doctors who thought a PPM could take care of all the headaches while I enjoyed seeing patients," says Tucson internist Paul Koss, who belonged to the now-defunct Thomas-Davis Medical Centers. "It may not be fun, but doctors have to stay involved on the business side."

Nothing beats self-interest, adds ex-Nalle Clinic general surgeon Charles Collin.

"Nobody," says Collin, "minds your business better than you do."

Are you a POW of a PPM? Here's how to escape

The woes of the PPM industry may seem like old news, but health care attorneys and consultants say plenty of doctors are still locked into PPM contracts they'd just as soon scrap. So how can they win their freedom?

The first step is to develop a business plan for the post-PPM era. "Figure out what your practice will look like after the divorce," says Tim Schier, a vice president with health care investment banker Cain Brothers in Houston. "What do you stand to collect? To spend? What will your practice assets be worth? How do you plan to grow?"

Valuing those assets is critical, says Schier, because you'll need to buy them back from the PPM, and you don't want to overpay. "If your group has shrunk from 10 to five doctors, but the building is designed for 10, you shouldn't pay full value for it."

Your next step is raising the capital to buy back practice assets and, if need be, cover operating expenses for the first three or four months after leaving the PPM. "You may not be able to recover your accounts receivable from the PPM," explains Janice Cunningham, a consultant with The Health Care Group in Plymouth Meeting, PA. "Not much money would be rolling in during your startup."

Capital can come from hospitals, real estate investment trusts, or national finance companies. But your best bet is a local bank. "A doctor may have to guarantee the loan with personal assets, like his house, but sometimes banks don't insist on that if the practice has a good reputation," says Bob Bohlmann, a consultant with the Medical Group Management Association. But nobody will lend you money if you don't have a business plan—another reason to map out the future on paper.

Now comes the tricky part: working out a separation with the PPM. That task is easier if the company is under the gun to sell practices to pay down debt. Just don't let the PPM intimidate you at the bargaining table. "They'll ask for all the money in the world at first," says Clearwater, FL, attorney Alan Gassman. "Once you stand up to them, they'll make a reasonable offer."

Still, the PPM may not want to set you free. If you bolt anyway, the company may sue you for all kinds of restitution, including payback of the buyout amount.

But you can play hardball, too. Doctors can sue a PPM for their freedom on several grounds, according to Gassman:

Violation of fee-splitting and kickback statutes. Both the Florida Board of Medicine and the US Department of Health and Human Services' Office of Inspector General have questioned the legality of PPMs making increased patient referrals a basis of management fees. If your contract stipulates such an arrangement, you may be able to convince a court to scrap the deal.

Fraud in the inducement. If you signed the contract because the PPM convinced you that A, B, and C would happen, and instead, you experience D, E, and F, you were given a false promise.

Breach of contract. This is perhaps the easiest charge to make stick. Did the PPM promise management services, but fail to send a representative to the practice for months at a time? Did it hire an unqualified person to head up your billing operation?

Violation of corporate-practice-of-medicine laws. Many states have laws that prevent nonphysicians from employing or controlling the practice of a doctor. In these states, PPM contracts may be void, and the doctor may be able to walk away without financial penalty.

"Every time there's a breach of contract, the doctor needs to document it in a letter to the PPM," says Gassman. "And remember, the agreement will have a provision for giving notice to the PPM to correct its breaches. If the PPM can't or won't, terminate the contract."

 

Robert Lowes. PPMs: Going . . . going . . .. Medical Economics 2001;5:60.