Austin (Texas) Regional Clinic is shopping for capital. Again.
"It's time," says Norman H. Chenven, M.D., president of the multispecialty group practice he helped establish with two other physicians in 1980. "The main reason is, simply, we went through this process three years ago. We did what was appropriate at that time, but the world keeps changing."
Austin Regional sailed through a difficult transition in 1994 with the help of "commercially competitive" debt financing arranged by Austin-based Seton Medical Center, a Daughters of Charity National Health System hospital. The 105-physician clinic, with $55 million in annual revenues, is on firm ground now, but Chenven is trying to prepare for whatever bumps lie ahead.
"You've got to have capital resources that are significant to deal with the volatility because huge things happen very quickly," he cautions. Survivors of that change also will need to have size, leverage and information, he adds.
Those were lesser concerns when founding partners Chenven, Carol Faget, M.D., and Tom Zabaleta, M.D., launched Austin Regional with the idea of doing managed care. "We really just saw ourselves as developing an organization and a delivery system as opposed to being just a doctors' practice," Chenven says.
For many years, Austin Regional operated under an exclusive "seven-figure" contract with PruCare of Austin, Prudential's HMO. Under the contract, PruCare provided some operating capital and built and equipped facilities staffed by Austin Regional.
One problem emerged, though. Austin is home to a number of large employers that provide insurance coverage to their employees. But the huge swings in enrollment resulting from employees dropping in and out of the health plan caused the clinic undue stress. "If you lose 4,000 members, that's the equivalent of two doctors' worth of business," Chenven says.
Currently, a whopping 50% of the clinic's revenues comes from capitated contracts. In Austin, HMOs and PPOs account for about 65% of total market revenues.
Because Austin Regional relied on PruCare for 85% of revenues, physicians believed they needed a less exclusive arrangement. Failing to mutually agree on how to do that, the contract was phased out over a two-year period ended Nov. 30, 1993.
Having retained earnings for more than a decade, the clinic landed on a nice $6 million cushion once the contract ended. Meanwhile, Austin Regional hired San Francisco-based Volpe Welty & Co. (now Volpe Brown Whelan & Co.) to help assess its capital needs and options.
Through that process, "we were able to project different scenarios with different capital budgets," Chenven says. Its capital requirements were pegged at $6 million to $12 million over three years. An initial list of 30 potential capital sources was whittled to 10, including another HMO, an unlikely option because "we had been there and done that," he says.
Responses to a request for proposals helped Austin Regional pare the list to three candidates: Coastal Physician Group, PhyCor and Daughters of Charity's Seton Medical. In January 1994, Austin Regional entered exclusive negotiations with Coastal, but when the physician practice management company ran into its own difficulties with its South Florida physician network, the talks ended by mutual agreement, "Here we are up the creek without a paddle," Chenven remembers.
The search for capital had taken an enormous toll on management's time and resources. Instead of joining another PPM company, the group decided to go it alone and negotiated debt financing with Seton Medical.
Austin Regional has come full circle. In mid-March, its strategic planning committee began reviewing six broad capital financing scenarios management proposed. Those strategies focus on ways to build its capital reserves and amass the market leverage Chenven thinks the practice will need.
"What we've told the group is that each strategy has its opportunities and risks," Chenven says, adding that any option could succeed as long as the group is consistent about its goals. "There is no clear path," he says.