Money is flowing into physician management, development and acquisition companies at a quickening pace, judging by a recent flood of financings.
Three companies received new venture capital infusions in December, and two publicly held firms recently raised about $150 million (See chart).
Most of the recent financings are to firms that acquire primary-care physician practices or put together networks of primary-care doctors.
"Lots of venture capitalists realize that primary-care physicians are going to control the healthcare dollar," said Paul Queally, vice president of the Sprout Group, a New York-based venture capital firm. The Sprout Group and another venture capital group, Welsh, Carson, Anderson and Stowe, last month funded First Physician Care, Atlanta, with $30 million in capital.
However, this may not be easy money for venture capitalists. "Assembling primary-care groups is management-intensive and expensive," Mr. Queally said.
Competing buyers. Physician practices are a hot item now from three buyers: hospitals, insurance companies and investor-owned independent companies. Mr. Queally said it may be tough because hospitals and insurance companies have a lower cost of capital than the independent companies.
Insurance companies and health maintenance organizations may be among the best financed. For example, Aetna Life Insurance Co. is reportedly spending more than $1 billion to open primary-care clinics in 20 markets.
However, investor-owned independent companies say they have a unique advantage: speed. And, in these fast-moving times of healthcare reform, that may give them a critical edge.
"The first players to tie up the physicians are going to be the winners," said Jerry Pogue, a principal with Integrated Healthcare Development Group, Lake Arrowhead, Calif. The top executive of an investor-owned company can call his venture capital investors and get approval for a deal overnight, he said, adding, "A lot of hospitals have to go through their board of trustees and a lot of trustees don't know what's happening."
No staff hassles. Another advantage the independent companies have over hospitals is that "they can go out and buy physicians without worrying about the politics on the medical staff," Mr. Pogue added.
For example, MedPartners, a Birmingham, Ala.-based firm, is buying physician practices in select markets and forming them into multispecialty networks. The company received its initial $1 million funding from hospital chain HealthSouth Rehabilitation Corp., Birmingham, whose former chief operating officer, Larry House, is MedPartners' chairman, president and chief executive officer. Mr. House remains on HealthSouth's board.
Then, in September, the company received another $7 million from four venture capital firms: First Century Partners, New York; New Enterprise Associates, Baltimore; Frontenac, Chicago; and Venrock, New York.
So far, MedPartners has acquired two group practices-in Miami and Plantation, Fla.-and is buying three others. "We're interested in physicians who aren't looking to be hired, but want growth capital," Mr. House said.
First Physician Care, Atlanta, was founded by Stephen George, M.D. He previously was vice president of managed-care operations for Provident Life and Accident Insurance Co. and also owned an emergency department contract management firm in Dallas.
Started last June, First Physician
Care focuses on primary-care physician practices.
Primary-care physicians are in high demand, but Dr. George said he believes that companies such as his have an advantage over hospitals and insurers.
"A lot of medical groups are uncomfortable with payer ownership," he said. "And, hospitals' motives are inherently driven by protectionism and protecting census."
Also receiving venture capital in December was HealthSpring, another primary-care-focused firm. The Reston, Va.-based company, formerly called American Healthcare Groups, received its second round of venture capital funding last month.
The company's first funding was $25 million from E.M. Warburg Pincus, New York. Other venture capital firms joined in the second round, although the company won't disclose the amount.
James Carlson, HealthSpring's president and chief executive officer, said the company is developing primary-care practices to serve the HMO market. For example, Philadelphia-based Keystone Health Plan East, a 500,000-enrollee HMO, has contracted with HealthSpring to develop a primary-care group network, called TotalCare. The first of at least five TotalCare centers will open this month.
So far, HealthSpring has recruited seven primary-care physicians and plans to have 50 within the next few years. HealthSpring is developing a similar network in Chicago.
Other players. The venture-backed firms, however, face competition from other larger competitors, which are attracting investors on Wall Street. Redlands, Calif.-based Pacific Physician Services last month filed a registration statement to sell $71 million in bonds. The proceeds will be used to buy more medical groups, the company said.
Pacific has been building a strong network of physician group practices in Southern California, where it now has 42 outpatient medical centers. It manages prepaid healthcare for 270,000 enrollees.
In addition, Coastal Healthcare Group, a Durham, N.C.-based firm that has been buying primary-care clinics, raised $73.7 million in an equity offering in November.