Larry House says he designed his company, MedPartners, for rapid growth. Looking at the results, it seems like an understatement.
The 4-year-old company leads the physician practice management pack. It manages nearly 10,000 physicians, including some of the West Coast's top capitated medical groups. Its announced acquisition of InPhyNet Medical Management will make it the nation's largest manager of hospital-based physician practices. That's not to mention its status as one of the top five pharmacy benefit managers as well as a disease management provider.
With projected 1997 revenues of $6.4 billion, MedPartners is now the largest corporation in Alabama, according to the Birmingham Business Journal.
But these are baby steps for MedPartners, a company whose leadership and capital sprang from another Birmingham-based success story, HealthSouth Rehabilitation Corp. MedPartners' strategy is to build physician networks in the nation's 55 top markets-the same markets targeted by large HMOs.
To a degree, House is trying to do with physicians what Richard Scott of Columbia/HCA Healthcare Corp. is doing with hospitals: create a national, brand-name, profit-driven delivery system.
But MedPartners also wants to lead the charge into the complex and uncharted world of medical management-controlling overall costs and quality. Its goal is to convert physicians nationwide to global capitation, accepting financial risk for all care, including hospital and pharmacy services.
"This is not about acquiring a lot of practices and trying to squeeze profits out of them. It's about fundamental change in the healthcare delivery system," says House, a 30-year healthcare veteran.
Bold and nimble. This strategy pits MedPartners against established hospitals, HMOs and physician groups, which all stand to lose clout. But MedPartners has yet to show that it can export its managed-care capabilities to new markets.
So far, it is moving confidently forward. This month it signed a groundbreaking agreement with Aetna U.S. Healthcare to provide physician services wherever they both do business (March 10, p. 22). MedPartners expects it will be the first of many vehicles to add to its roster of more than 1.6 million prepaid enrollees, which are now mostly in Southern California.
MedPartners also is attaching its name to medical groups in Southern California, the first step toward a national branding strategy.
"I think payers are going to want to sponsor larger physician groups," says Lawrence Marsh, a research analyst in the New York office of Salomon Brothers. But he adds, "It's a daunting course they've set for themselves."
John Runningen, an analyst with Robinson-Humphrey Co. in Atlanta, agrees: "They've got their hands full."
MedPartners' key advantage is a sharp management team. House, a former respiratory therapist, quit his post as chief operating officer at HealthSouth in 1992 to build MedPartners. He's now the company's chairman, president and chief executive officer.
House incorporated what he learned working at the side of HealthSouth CEO Richard Scrushy, who sits on MedPartners' board and owns 800,000 shares of its stock, and mined his HealthSouth contacts for financing.
After snapping up small practices in the Southeast and conducting an initial public offering in February 1995, the start-up encountered a juicy opportunity on the West Coast: Mullikin Medical Enterprises, the largest privately held multispecialty group in the country and a pioneer in capitation, was looking for capital. Mullikin was on the verge of its own IPO when its investment banker suggested a last-minute meeting with MedPartners. Things clicked, and the two had a deal.
"I was fascinated with Larry House," recalls medical group founder Walter Mullikin, M.D., now a member of MedPartners' board. "He is such a dynamo."
MedPartners' priority is always to have more than enough capital, says Chief Financial Officer Harold O. Knight Jr. Last year, it gained distinction as the only physician practice management company to obtain an investment-grade rating for its debt.
House, a decidedly unflashy and serious executive who works out of an upscale business tower on the outskirts of Birmingham, assembled a close-knit team of talented executives, some of whom abandoned prominent positions elsewhere. They include Mark Wagar, president of Western operations, formerly president of Cigna HealthCare of California, and John Gannon, president of Eastern operations, a longtime partner with KPMG Peat Marwick.
The company's management arsenal also includes teams of financial analysts enabling it to evaluate acquisition targets rapidly. "We move quickly. We make decisions quickly. We communicate constantly," House says.
J. Michael Condit, M.D., chairman of the board and corporate medical director at Kelsey-Seybold Clinic in Houston, which MedPartners gained in its September 1996 acquisition of Caremark International, says the company realizes it doesn't know everything about managing physician practices.
But Condit believes MedPartners is uniquely positioned to improve healthcare thanks to a huge patient base and sophisticated information systems. MedPartners has created a formal process of information-sharing by convening a medical advisory committee of practicing physicians. This year, its focus is to replicate disease management successes of Kelsey-Seybold and Mullikin at other groups, Condit said.
He looks forward to the day when Kelsey-Seybold can charge a premium for proven quality.
"At Kelsey-Seybold, we receive a somewhat higher capitation rate because of being academic, having a reputation for quality. Well, that's pretty soft stuff," Condit says. "What we want to be able to do is show a payer that our rate maybe is a dollar or two more, but Kelsey-Seybold has programs that are designed to improve the health of the employee and keep them out of the hospital."
Creating a brand. Along those lines, MedPartners is starting to devise a branding strategy to familiarize consumers with its name, initially in Southern California. The company plans to add its moniker to physician group names to help patients identify its networks.
HealthSouth gradually shaped itself into the biggest brand in rehabilitative care, and House envisions a similar long-term strategy for MedPartners. "We want to have people think of our identity and good healthcare as synonymous," House says.
Woe to those who stand in the way. In November, MedPartners fired two respected executives of Friendly Hills HealthCare Network in La Habra, Calif., which it acquired in its purchase of Caremark International. The company contended Albert Barnett, M.D., and Gloria Mayer resisted the company's attempts to fold Friendly Hills operations into Mullikin.
MedPartners fired the two executives, sued them for breach of contract and has hired three law firms to litigate the case. Barnett filed counterclaims, and now MedPartners is struggling to portray the dispute as an isolated incident.
House doesn't believe MedPartners mishandled the situation.
"What we did was the absolutely right thing and the only thing we could have done to protect our physicians and our shareholders," House says.
Challenges ahead. MedPartners' overall strategy threatens some powerful interests. The push toward global capitation lowers hospitals' place on the food chain. Some HMOs aren't eager to delegate to physician groups the job of pharmacy benefit management. And medical groups aren't always eager to join the corporate bandwagon (See related story, p. 44 ).
While industry boosters point out that only a tiny fraction of the nation's physicians have affiliated with a management company, the market might not be as wide open as it seems.
MedPartners would like to achieve 10% to 15% share in each market, but so far it appears to have succeeded only in Southern California, Marsh said. In other major markets, he said, it doesn't exceed 5%
Also, MedPartners has relied on pooling-of-interest accounting for its major transactions, which allows it to simply marry its balance sheets with those of the acquisition targets instead of putting up capital. However, the Securities and Exchange Commission is considering disallowing such methods, which could slow its acquisition rate, Marsh said.
This year MedPartners withdrew its independent practice association from California's Santa Clara and Santa Cruz counties, where it was unable to gain market share from established networks.
On the East Coast, physician management companies are challenged by hospitals that dominate the market. In some of those markets, MedPartners is negotiating with hospitals to operate physician groups.
Hospitals want to secure a cut of the capitation payment, says Sol Lizerbram, M.D., president of FPA Medical Management, a San Diego-based physician practice management company that's going after some of the same markets as MedPartners. Lizerbram expects tripartite agreements among hospitals, HMOs and physician management companies in Florida, New York, Pennsylvania and Texas.
"In some areas," Lizerbram says, "you need that hospital name as a marketing tool."
Different drum. MedPartners' push into big markets and global capitation distinguishes it from its largest competitor, Nashville-based PhyCor, which has about half its groups in small markets of fewer than 250,000 people. PhyCor President Joe Hutts says his company has eschewed global capitation because relations with hospitals and HMOs work better if everyone can "share the upside."
MedPartners believes HMOs want to pass on the management of medical costs, but some HMOs could be threatened by its foray into that area.
Thanks to its acquisition of Caremark International, MedPartners is the only physician company that owns pharmacy benefit management and disease management businesses. Some industry analysts say those businesses are so different from physician services that they will be spun off, but House dismisses that notion.
Putting pharmacy benefit management in the hands of physicians, he says, will lead to more rational healthcare spending. For example, rather than being told through a formulary which drug to prescribe, a physician could opt for a more expensive one if it will make the patient healthier in the long run.
The strategy seems to make sense from the standpoint of managing costs, but many HMOs now prefer to operate their own pharmacy programs. "We would not carve out our (pharmacy benefit) services to a medical group," says Robert Seidman, director of pharmacy for Blue Cross of California.
One thing MedPartners and its competitors agree on is that physicians increasingly will be required to document healthy outcomes as well as competitive prices. Successful practice management companies will do more than simply consolidate physician groups.
MedPartners says it takes this mission seriously. The company is far from being in a position to launch a national ad campaign, but when and if it does, don't expect anything like Columbia's tongue-in-cheek ads, which feature a man asking silly questions to consumers and healthcare workers.
House faults Columbia for failing to impart useful information to consumers. "I cringe when I see those things," he says. "They're trying to get cute."
That just isn't his style.