As fate would have it, the vision for Portland, Ore.-based Physician Partners, a physician-owned practice management company, began with a "red herring."
No, not the pickled fish variety. In Wall Street jargon, a red herring is the preliminary prospectus released before a company goes public. It gets its name from the red type that appears on the cover of the document.
It was the red herring for MedPartners that sparked the imagination of Tim Dupell, who was the chief financial officer of the 85-physician Corvallis (Ore.) Clinic and now serves as CFO of Physician Partners.
"He realized putting together existing group practices was a much stronger model," recalls David Goldberg, now president of Physician Partners. Goldberg was consulting for two other large clinics on Oregon's I-5 corridor--Portland's HealthFirst Medical Group and Medford (Ore.) Clinic--when he was presented with Dupell's proposal to create a physician practice management company and possibly take it public. "And, frankly, I was skeptical," Goldberg says. "I think I called it Operation Sisyphus at first."
Sisyphus, in Greek mythology, is the legendary king of ancient Corinth who was condemned to rolling a heavy rock up a hill in Hades. Each time the rock neared the top, it would roll down again.
The skeptic in Goldberg said a three-way merger was crazy. "It was going to be a very expensive, intense process," he says. He estimated the cost at $2 million to $3 million. Nevertheless, Goldberg agreed to put the plan through its paces, discovering through his analysis that "the idea is absolutely right."
Creating a PPM company would enable physicians to access capital not directly related to their incomes, achieve needed economies of scale and gain leverage in a marketplace noted for its high managed-care penetration, low commercial rates and "horrible" rates for Medicare-risk contractors.
If you were to look at the amount of money medical groups historically have been able to pay themselves, you'd find "a funny sine curve" emerges based on the number of physicians brought into the practice the year before, Goldberg explained. The three Oregon clinics had also "self-capitalized" by controlling the amount of money paid to physicians.
But unlike most physician groups that move cash out of their practices at year-end for tax purposes, the clinics had operated more like businesses. "Some of these groups had retained earnings, believe it or not," Goldberg says. "One of the groups paid income taxes."
Physician Partners, a Delaware corporation approved by the Securities and Exchange Commission and physician shareholders earlier this year, now owns all the assets, employs all the nonphysician staff and has a 40-year agreement with each of the three clinics, which had combined revenues of $146 million last year and 81,000 capitated lives.
There are several critical steps that must be taken to accomplish such a Sisyphean task. "Step one is, before you spend any money . . . make sure each one of these groups is aimed in the right direction," Goldberg advises.
Fortunately, the Oregon physicians shared a common vision of a PPM that would be "a long-term play," not a "cash out" proposition, he says. Although Physician Partners has "millions," including bank lines, to satisfy current capital needs, costs will soar once it starts acquiring additional practices in the Northwest, part of its strategic plan to build clout in the region.
Physicians Partners is negotiating with Townsend Frew & Co., a Durham, N.C.-based investment banking firm, to help carry out its merger and acquisition plan. The PPM also has retained New York-based investment banking firm Morgan Stanley & Co. to help determine if and when the company can go public.
Physician Partners is seeking a venture capital partner to help pay for all this. At deadline, the PPM was evaluating proposals for a $10 million round of late-stage equity financing.