A top neurosurgeon in the Chicago area and three powerful venture-capital backers are about to launch a new firm to buy up and manage neurosurgery practices.
In doing so, Leonard J. Cerullo, M.D., and his partners are betting that medical specialists are looking to take advantage of consolidation in the healthcare marketplace, despite investors' flagging interest in similar physician practice management firms.
"We think there'll be a lot of interest in this," Cerullo said of the new firm, Neurosource, which is based in Chicago. "Neurosurgeons feel their practices are being eroded. They feel that (insurance) reimbursement per case has been eroded."
Cerullo, 53, is chief of neurosurgery at Catholic Health Partners in Chicago. He said he hopes the new firm will go public within three to five years. To bolster its chances, the company hired as its chief executive officer a former top executive at Baxter International and its spinoff Caremark International, Thomas W. Hodson.
Over the past decade, PPMs have attempted to organize the nation's physicians against the income-squeezing effects of large HMOs and other managed-care organizations.
The two biggest PPMs, Birmingham, Ala.-based MedPartners and Nashville-based PhyCor, focus largely on buying the assets of multispecialty group practices. Several smaller firms are targeting specialty markets, such as obstetrics and orthopedics.
Cerullo said it's time to consolidate the nation's neurosurgery practices, which employ about 3,600 practitioners. He hopes Neurosource can offer physicians increased bargaining clout with HMOs, operating efficiencies and more patient business.
Next month Cerullo, who will be Neurosource's chairman, will launch the company with $12.5 million in venture funding from Sprout Group, a subsidiary of New York-based investment firm Donaldson Lufkin & Jenrette; Health Care Equity Partners, based in Lisle, Ill.; and Piper Jaffray Ventures, an investment firm based in Minneapolis.
Neurosource will begin by trying to consolidate neurosurgery practices in Illinois and northern Indiana, Hodson said.
It will target four to five of the nation's 30 largest neurosurgery practices, using Cerullo's group of 19 physicians as a base.
"We'll be in two or three other markets by the end of the year," said Peter Breen, who will be Neurosource's chief operating officer.
Hodson, 50, left Caremark in October last year after the company's sale to MedPartners. While at Caremark, which until late 1992 was a Baxter unit, he helped design its PPM strategy.
"What we're looking to do is go to cities that have substantial neurosurgery practices, and see if we can . . . expand their practice in their local market," Hodson said.
"The fundamental factors affecting physicians today are the consolidation of payers and the focus on cost containment," he added. "There are a lot of reasons for physicians to come together whether it is a multispecialty practice or a single-specialty practice."
The PPM industry is a rapidly growing field worth about $200 billion in annual practice revenues. So far PPMs have consolidated a slim 4% to 6% of the nation's 560,000 physicians.
Recently PPM stocks have "underperformed the market," said Anthony Pietrak, an analyst with Gwynedd, Pa.-based investment banking firm Sherlock Co. PPM stocks appreciated 7.1% from the beginning of the year to July 15 vs. 22.8% for the S&P 500, he said. "It's not that easy an industry."
For Neurosource, "it's all about getting market share," said Scott F. Meadow, lead investor for Sprout Group, which has ponied up $6 million of Neurosource's $12.5 million in startup capital.
Kenneth O'Keefe of Health Care Equity Partners, which is investing $3.25 million, said he believes single-specialty PPMs have a bright future.
"The multispecialty clinics are in a competitive market now," he said. "Lots of public and private PPMs are pursuing them. (Neurosource has) an opportunity to become a national leader very quickly."