Ray Fernandez, M.D., considers it something of a miracle that Nalle Clinic in Charlotte, N.C., exists at all-let alone that it inhabits a radiant new $33.5 million office tower with an atrium lobby, a coral reef aquarium and a conveyor system.
Fernandez, Nalle's medical director and chief executive officer, credited the clinic's physician practice management company for all of it, even the paper cup in his hand during a recent interview.
"I don't think Nalle Clinic would have survived without PhyCor," he said.
In the late 1980s, Nalle Clinic was a specialty-dominated medical group whose 70 doctors saw their incomes leveling off and began to worry. Of particular concern were increasing overhead costs and more competition.
The clinic needed management expertise. For instance, it negotiated managed-care contracts in a "black box"-not knowing such information as the rate at which its patients used hospital bed-days or its costs for treating particular cases.
The clinic also needed stronger governance. Physicians were used to pounding a shoe on a table, threatening to quit or intimidating an administrator to get their way.
For several years, Nalle considered its options. Hospitals and insurance companies were eager to run the clinic but wanted full control. There was no guarantee Nalle would be left to operate as an integrated unit.
Venture capitalists were willing to invest in the group but expected a 25% annual return and offered no management expertise.
So Nalle picked PhyCor, which at the time managed five practices, all smaller than Nalle.
In 1990, PhyCor bought the clinic's assets for an undisclosed amount and signed a 30-year contract to run it in return for a percentage of profits. PhyCor would not disclose its exact take at Nalle, but the range for all its clinics is 15% to 18% of operating income before physician compensation. It's up to the physicians to decide how to distribute the remaining profits among themselves.
A joint policy board was established with three PhyCor representatives and three physicians-a structure that demands cooperation.
Things changed quickly. Within three months, Nalle merged with Metrolina Family Physicians-a deal that had stalled because neither medical group had known how to go about it. In all, PhyCor capital helped Nalle acquire 19 new family practice physicians and bring its primary-care doctor mix to 50% from 30%.
The clinic saved money through national supply contracts and trimmed 40%, or $200,000, from its malpractice premiums in its first year with PhyCor.
The clinic invested in new furniture, equipment and information systems including a database called Intellimed that tracks costs. It hired actuaries to assess risk associated with particular contracts.
In all, Nashville, Tenn.-based PhyCor estimates it invested $25 million to $30 million in Nalle Clinic over five years.
Clinic revenues increased 30% in the first year with PhyCor and 5% to 10% annually thereafter. Projected 1995 revenues are $68.4 million, up 13% from 1994.
In fact, some physicians that were skeptical of the PhyCor affiliation and left the group have since asked to return. Fernandez said outside specialists in the market have seen their incomes slide while Nalle doctors enjoyed increases.
"We've been very successful, and it's a cold world out there," said clinic Executive Director Sue Savard.
In January 1994, Prudential Health Care Plan, which provided a quarter of clinic revenues, all capitated, announced it would no longer do business with the clinic. It was a major loss, but no one panicked or jumped ship.
Instead, the group went to work. It negotiated new contracts, picked up patients in other plans, and ended the year with a 5% increase in revenues.
Now, Nalle, with 106 physicians, has 34,000 capitated lives accounting for 23% of revenues.
Fernandez said confidence was the biggest single factor in the clinic's survival.
"It was the fact that if we got into trouble someone was going to know what to do," he said.
Not everyone in Charlotte is happy with PhyCor. One of the city's two hospital systems, Carolinas Medical Center, broke off talks to locate Nalle Clinic on its property in 1992-in part because PhyCor's profit motive didn't mesh with the medical center's mission, President Harry A. Nurkin said.
Nurkin said he has no interest in doing business with the clinic, although Nalle doctors still admit patients at Carolinas.
"It's always our philosophy that if you practice good medicine, then the economics will follow. That's slightly different from the perception of PhyCor," Nurkin said.
But Paul Betzold, president and CEO of the rival Presbyterian Hospital and Presbyterian Health Services Corp., said better management has helped the clinic.
Among the positive moves Nalle made was aligning with his hospital, Betzold said.
Nalle and Presbyterian jointly launched a fertility clinic and a workers' compensation program, and Nalle leases its new building from Presbyterian. Nalle and Presbyterian are also developing an HMO joint venture with Blue Cross and Blue Shield of North Carolina in which patients may choose to use the hospital's network of physicians or Nalle's.
Betzold said better management has made Nalle more businesslike and easier to deal with.
PhyCor's shareholders "create some imperatives for Nalle," he said. "Quite frankly, that's just good business practice."
-Mary Chris Jaklevic