Norman Rockwell never pictured a physician bent over a calculator figuring out
how much expansion capital it would take to build a regionally dominant
multispecialty group practice.
In the American illustrator's day, medicine was about healing the sick, not
tapping the capital markets. Physicians generally worked alone and retained
little or no cash in their practices. That was before managed care turned the
economics of solo practice on its head.
Today, medicine is more than a calling. It's a business. Even the most seasoned
practitioners are daunted by the challenges posed by healthcare delivery in the
"My feeling is that it's very hard to see beyond the end of your nose. There's
so much chaos," says Norman H. Chenven, M.D., president of the Austin (Texas)
Regional Clinic. "What's the next thing that's going to happen that we can't
Doug Townsend Jr., chief executive officer and managing director of Townsend
Frew & Co., a Durham, N.C.-based investment banking firm, makes it his business
to help physicians anticipate the future. "If you want to be well positioned,"
Townsend advises, "you have to be able to profitably take on global
capitation." Most solo practitioners, though, lack the size and infrastructure
needed to compete for the kinds of managed-care contracts that seem to be the
wave of the future.
That is beginning to change. Physicians are forming groups and joining larger
independent practice associations at an unprecedented pace. According to
American Medical Association data, there are close to 20,000 group practices of
three or more physicians, up nearly 30% from a decade ago. While capitation is
driving much of the consolidation, it's impossible to become capitation-ready
overnight. Generally, that goal is financed in stages.
A first step might be to corporately consolidate two or three disparate
practices representing, say, three to five physicians, says David Arpin, a
senior vice president in the Houston office of First Health Associates, a
Hartford, Conn.-based consulting firm. Initial capital needs may be satisfied
through some type of debt instrument or through an equity investment by the
physicians themselves. The practice also must begin retaining earnings.
A second stage might be defined by the group's corporate consolidation-moving to
one computer and accounting system, for instance, Arpin says. It also may begin
physically consolidating physician offices, another capital expense.
A physician group needs market share-a trigger that varies by market and
group-before it can expect to assume financial risk for "covered lives."
Expanding the number of patients and patient contracts may require an investment
in additional physician practices and clinic sites.
At this point, a group may be ready to "roll up" into a bigger physician
organization. But it still lacks the economies of scale and leverage to go
public, Arpin says. This is the stage many physician groups seek a venture
capital partner or consider contracting with a physician practice management
Depending on a group's size and experience and the market's managed-care
penetration, one physician group's financing options may vary drastically from
another. Townsend offers two cautionary pieces of advice:
One is to hire a financial adviser "who is well-schooled in these issues."
Secondly, "don't kid yourself when you go through this process," Townsend
warns. If you don't have confidence to compete head to head with other physician
groups and hospitals, it may be best to sell your practice, he adds.
Modern Physician spoke with several physician groups at various stages of
consolidation and capitalization. You'll find their stories on the following