MedPartners/Mullikin's announced $2.5 billion acquisition of Caremark International last week leaves two dominant companies vying to manage physicians.
Measured in revenues, the merged company will be the largest physician practice manager in the nation, with annualized physician revenues of $2.2 billion and more than 7,000 doctors under its wing (See chart). Nashville, Tenn.-based PhyCor is No. 2 with $1.3 billion in annualized revenues, though operational and accounting differences prevent exact comparisons.
MedPartners' growth is remarkable for a firm that made its first acquisition-a small eye practice in Coral Gables, Fla.-just 21/2 years ago.
It exemplifies the rapid rise of the physician practice management industry, which amalgamates physicians to provide negotiating power with HMOs as well as capital and management skill.
The merger potentially gives physicians a strong financial partner with unprecedented market clout and flexibility. But MedPartners' swift acquisition pace also poses significant challenges.
MedPartners has yet to prove it's more than a liquidation vehicle for physicians and practice managers, said Ken Laudan, an industry analyst with Hambrecht & Quist, who nevertheless sees the Caremark deal as positive.
In the past six months, MedPartners has gobbled up three companies-Redlands, Calif.-based Pacific Physician Services; Long Beach, Calif.-based Mullikin Medical Enterprises; and now Caremark (See time line).
Aggressive growth sets it apart even from PhyCor, which is considered the industry vanguard. PhyCor has grown mainly by acquiring one clinic at a time.
"Caremark and MedPartners have been created by capital, and it takes glue to sustain them. I don't know what the glue is," said Frederick "Fritz" Wenzel, executive director and chief executive officer of the Medical Group Management Association.
The dominance of MedPartners and PhyCor could make it harder for smaller firms to acquire practices, PhyCor President Joseph Hutts said.
PhyCor operates 34 multispecialty groups with 2,100 physicians and independent practice associations with more than 6,000 physicians.
"It creates two very large players, and it certainly will be harder for the other companies to compete as an equal," Hutts said. "Physicians tend not to be too experimental. They like to stick with the things that are proven."
MedPartners may enjoy the most revenues and own the most practices at the moment, but PhyCor, which started in 1989, has a longer track record.
MedPartners will be judged on whether it improves the operating results of its clinics, acquires prestigious multispecialty groups that are leaders in their markets, as PhyCor has done, and extracts value from Caremark's pharmacy benefit division, Laudan said.
Pharmaceutical services, which represent 55% of Caremark revenues, have "no direct strategic benefit" for MedPartners, he said. Physician practice management represents just 30% of Caremark revenues, with the remainder coming from disease management and international services.
PhyCor, in fact, declined a deal with Caremark because it wants to stay focused on managing physicians, Hutts said.
Medical groups have declined to sell to Caremark, claiming they preferred a company whose only business is managing physicians.
But Larry House, the MedPartners leader who will become chairman, president and CEO of the combined company, said pharmacy benefit and disease management are compatible with physician practices. He said MedPartners already includes pharmacy benefits in its global capitation contracts.
"It's just a broadening of our in-house capabilities," House said.
The acquisition will put to rest concerns about Caremark management that have dogged its stock. Caremark last year agreed to pay more than $200 million to settle federal kickback allegations and is defending a lawsuit by Coram Healthcare Corp. over the sale of its home infusion business (May 6, p. 44).
Caremark Chairman and CEO C.A. Lance Piccolo will join the board of directors and serve as vice chairman of MedPartners. The new board will be composed of nine existing MedPartners directors, Piccolo and three additional Caremark directors.
The deal is expected to close in the third quarter. It calls for MedPartners to give 1.21 shares of its stock for each Caremark share.
MedPartners' stock closed at $25, down $1.13, in New York Stock Exchange trading. Caremark closed at $29.50, up 75 cents, also on the New York Stock Exchange.
House continues to plug MedPartners as a company with the breadth of expertise to run practices in any market environment-fee-for-service or capitation.
MedPartners' geographic reach could simplify contracting and reduce costs for HMOs. It also could make payers nervous, especially because its Mullikin group in California has a license to assume risk much like an HMO.
MedPartners will have a significant network in California, including almost 15% of the medical community in the five-county Los Angeles area. It will have 11% of the capitated lives in that market, House said.
Cypress, Calif.-based PacifiCare Health Systems, MedPartners' largest payer with 300,000 prepaid lives, said it wants to work with MedPartners in multiple markets.
"I think (the merger) will motivate us to strengthen our relationship and build longer-term contracts so both of us can be secure in the relationship," said Jeff Folick, PacifiCare's chief operating officer.