Think before selling. Big does not necessarily mean better.
Those were the unofficial themes of a recent seminar held in Newport Beach, Calif., to acquaint doctors and medical groups with their options when dealing with physician practice management companies.
The event was sponsored by the Friendly Hills HealthCare Foundation, an educational offshoot of the Friendly Hills Healthcare Network. Three of the speakers were former Friendly Hills Healthcare Network executives terminated last November after its parent company, Caremark International, was acquired by MedPartners (Dec. 2, 1996, p. 8).
While former Friendly Hills Chief Executive Officer Albert E. Barnett, M.D., former Chief Operating Officer Gloria Mayer, and former consultant Thomas Mayer, M.D., did not use the event exclusively to bash MedPartners, they did offer a post-mortem of sorts on their situation. They and other speakers also gave their advice on how to achieve a happier medium when selling a medical group or practice.
Barnett, who remains chairman of the Friendly Hills Healthcare Foundation, and other speakers observed that doctors can often reduce their practice expenses, have more leverage in contracting and more access to capital by aligning with a large PPM.
But those who do so should keep in mind the pressures facing publicly traded PPMs.
"There is a hurdle factor, in that Wall Street wants a 14% to 16% return on equity. But when you're paying $250,000 to $1 million to buy out a single doctor, how can you get that level of return on your investment?" Barnett asked.
It can only be achieved, he said, by keeping costs down and working doctors hard. At the same time, those doctors may also be kept out of the loop as to what direction the PPM may take.
"Physicians don't have concerns of loyalty to shareholders. It's usually to patients first," Barnett said. "That can often lead to a cultural clash because publicly held PPMs believe in growth of revenues, capital and stock valuations while medical groups usually believe in growth of enrollment and capital improvements to facilities and internal systems."
Thomas Mayer said, "Merging cultures is a very slow, painstaking process. It doesn't happen because Wall Street wants it to happen."
Added Gloria Mayer, Thomas Mayer's wife: "Synergies take time to occur."
Gerald S. Benedict, principal with Medimetrix Group, an Englewood, Colo.-based consulting firm, sorted out the advantages and disadvantages offered by the various PPMs.
Nashville-based PhyCor, for example, is successful because it remains focused on the efficiencies that may be wrung out through practice management, rather than acquiring practices haphazardly, Benedict said. Physicians are given clear and aligned incentives to improve performance, he added.
"They're also pretty straight shooters as well," Benedict said.
The result? PhyCor's net income rose to $36 million last year from
$7 million in 1993.
By contrast, Benedict said he believes Coastal Physician Group acquired as many physician groups as possible, and strayed from its core business by trying to operate its own HMO, which meant less attention was given to building an infrastructure to properly handle all its practices. Doctors also weren't given enough incentives, he said.
Coastal's net income plummeted from a high of $24 million in 1993 to a $146 million loss last year (June 16, p. 4).
"Give Coastal another year,
and you probably won't have to worry about having them around anymore," said Thomas Mayer, who noted that few of the major PPMs are more than a half-dozen years old.
Benedict said potential sellers may also want to consider not-for-profit PPMs, which tend to operate under more physician-friendly philosophies.
Whatever the case, all the speakers stressed exhaustive due diligence.
"If you don't do it, you're not doing you're homework," said Carl Weissburg, partner in the Los Angeles-based law firm Foley, Lardner, Weissburg & Aronson.
Weissburg represents Barnett in his pending countersuit against MedPartners, which also sued Barnett when it fired him.
Key factors in Barnett's mind include discovering what the buyer's corporate philosophies are, their policies and procedures for doing business, and the ways they capitalize deals. Also, is the top management accessible?
"Does the CEO return phone calls?" he asked.
Thomas Mayer suggested contacting the health plans that PPMs contract with: "Are they getting a lot more complaints about doctors under this management? Of course, you may want to factor in any unhappiness they might have if they're being leveraged."
While he recommended studying a buyer's financials, stock growth should not overpower other
"Don't get carried away with Wall Street; it has little to do with the competence of the organization," he said.
And sellers who stay with the organization should keep in mind what happened to Burnett and the Mayers.
"You could have a second sale occur and not even know it," Weissburg said.