Investors have tempered somewhat their enthusiastic outlook on the physician practice management industry. Late 1994 and 1995 were marked by numerous initial public offerings and existing healthcare companies entering the field. Some initiatives took off, while others saw lackluster results.
So far in 1996, there has been just one IPO, West Palm Beach, Fla.-based PhyMatrix, according to MODERN HEALTHCARE research. Another company, Chicago-based Gyncor, which manages obstetric/gynecological practices in teaching hospitals, has filed to go public in July.
Rather than new entries into the field, this year has seen consolidations of public companies: MedPartners/Mullikin with Caremark International and FPA Medical Management with Sterling Healthcare Group.
However, Mark Copman, a principal in corporate finance with Piper Jaffray, a Minneapolis-based brokerage firm, expects a second wave of IPOs by year-end. More than 10 companies are considering going public, he said.
In general, the newcomers will try to position themselves as having learned from the mistakes of predecessors, Copman said. A strong chief executive officer, good physician leadership and a disciplined acquisition strategy are key factors, he said.
Copman said Wall Street "is becoming more keenly aware that you need a good governance structure, not only for doctors in these PPMs but to add additional doctors."
Physician practice management companies succeed because they provide physicians with capital and negotiating clout while retaining some physician control. However, given the tremendous variety of operating models, some are bound to be more profitable than others. "Right now I think that investors have been a little too indiscriminate when it comes to PPM companies," said Lori Price, an analyst with Oppenheimer & Co. "They bought all model types and paid high multiples regardless of strategy or track record. At some point, there's going to be a correction."
Companies considering IPOs span all types of models, including multispecialty, single-specialty, primary-care, independent practice association and hospital-based physicians, Copman said.
A couple of years ago, primary care was the rage. But recently investors have put their confidence in companies that manage multispecialty groups. Assisted by IPA contracts, multispecialty groups can provide complete care to large populations.
With the merger of Caremark and MedPartners/Mullikin, the new MedPartners and PhyCor will be the only public companies tackling large multispecialty groups, and they have plenty of room to grow. Combined, MedPartners and Phycor will manage more than 15,000 physicians in groups or IPAs, but that's less than 3% of the country's medical professionals.
The trend toward multispecialty groups hasn't gone unnoticed among physicians in small practices. At a recent investors' conference, PhyCor executives said some physicians are forming their own multispecialty groups in order to link with PhyCor.
Single-specialty companies that add value by decreasing costs and offering one-stop shopping for patients also are favorites. But some single-specialty companies could see revenues erode as managed care lowers utilization of specialty services. Single-specialty firms such as Physician Reliance Network and Pediatrix say they will try to use their high patient volumes to do clinical trials.
In general, investors have a smaller appetite for companies that manage hospital-based physicians.
Near term, a company's growth will relate largely to its ability to acquire and integrate practices. As the industry matures in three to five years, internal growth and margin expansion will be more important, said Morgan Stanley analyst Elizabeth Senko. That means success will require adding physicians and ancillary services, improving efficiency and capturing new contracts for existing practices.
PhyCor, Physicians Resource Group and OccuSystems show strong same-store growth, with revenues increasing about 15% per year or more, Kerns said. Same-store growth "is an indication that the company has improved the property once they bought it," she said.
PhyCor is in a "controlled growth mode" in which it expects to acquire the assets of up to 10 clinics this year. PhyCor prefers medium-sized markets in which its groups can be a dominant player. Capitation represents 34% of the revenues of PhyCor practices.
MedPartners, which has acquired several large companies, is banking on its ability to take global capitation into new markets. By the end of the year, MedPartners expects to have nearly 800,000 globally capitated lives in California. It's starting to explore global capitation in Florida and Texas and expects to move rapidly into some Northeast markets, said Mark Wagar, president of the company's Western division.
That means taking not only the payment for physician services but also for hospital and ancillary services. Global capitation also could include vision, behavioral health and pharmacy benefits, Wagar said. In essence, global capitation puts physician groups near the top of the money chain, where they can profit by lowering utilization in other areas of healthcare.