Literally hundreds of physician groups and other investors are forming physician practice management companies with the hope of going public. But increased scrutiny from the Securities and Exchange Commission could make that more difficult.
Stricter accounting standards are needed, according to some analysts, who note that investors have been stung in recent months when physician practice management companies failed to meet earnings targets.
Partly as a result of those performance shortcomings, stock prices for practice management companies plummeted about 15% in 1996.
Tougher accounting rules could assure that only the best companies access the public markets and help investors and analysts more accurately project earnings for those that do.
"It is probably a good thing because there are a lot of companies that are looking to become public as a `quick flip.' They don't bring a lot of value to the practices they acquire," said Todd Richter of Dean Witter Reynolds in New York.
In fact, some argue that quick-buck artists have tarnished the image of the infant industry. Many practice management companies bring capital and management expertise that increase the efficiency and marketability of physician practices, but some appear to be little more than accounting gimmicks, said Larry Marsh, an analyst with Salomon Brothers in New York.
One specialty company recently went public after being in business for just four months, raising millions of dollars worth of stock for physicians who contributed their practice revenues, which were worth much less, Marsh said.
"I think doctors see some of these PPM vehicles as get-rich-quick schemes," said Marsh, who published a list of ploys physician practice management firms sometimes use to pump up stock prices (See box).
It often takes some time for accounting rules to catch up with new industries, and physician practice management poses particular challenges.
One is the unusual relationship between management companies and affiliated practices. Corporate-practice-of-medicine laws in most states bar companies from owning practices and employing physicians or dentists. So companies typically sign long-term management service agreements of up to 40 years with physician-owned practices.
Some companies consolidate practice revenues under their books, arguing that the practices are akin to subsidiaries. But the SEC has objected, saying consolidation implies control that doesn't exist.
The Emerging Issues Task Force, which sets standards for the accounting industry, is developing guidelines under which companies could consolidate revenues if they have a controlling financial interest in the physician practices. The SEC is likely to follow those guidelines.
Under study are several ways companies could demonstrate control, including:
Unilateral authority over who owns stock in the medical practice.
Unilateral authority over all nonmedical decisions including pricing, contract negotiations and budgets.
A long-term contractual agreement that is not terminable by the practice except for default or bankruptcy of the management company.
Unilateral control over physician compensation.
The right to establish guidelines regarding physician employment and termination.
The task force is expected to complete the guidelines in several months.
The difference between consolidating and not consolidating is significant, said Woody Grossman, a partner at Price Waterhouse in Houston. Companies that report only their management fees take longer to meet revenue thresholds established by underwriters of initial public offerings, he said. That means a company could have to wait longer to go public.
A greater issue, according to some accountants, is that without consolidation, it's more difficult for companies to buy practices using stock as currency. Such pooling-of-interest transactions can be cheaper than paying cash.
However, companies such as Nashville-based PhyCor have grown nicely without pooling, Marsh noted.
Another hot issue with the SEC has been goodwill, the intangible value that companies pay for physician practices. Companies historically amortized goodwill over periods of as long as 40 years, but the SEC has been pushing to shorten that time to 10 years. Often, the compromise is 20 to 25 years, said Kurt Miller, a partner at Price Waterhouse.
Shorter amortization means companies have to take larger annual charges, which lowers earnings projections, deflating those all-important stock prices.
To make up for quicker amortization, companies will have to increase practice revenues or lower purchase prices by as much as 25%, according to some sources.
"In the trenches, it's a monumental fight," Miller said.