In a stunning departure from its market-by-market growth strategy, PhyCor announced last week it will buy chief rival MedPartners.
The $8 billion merger will give PhyCor affiliations with 35,000 physicians, or nearly 6% of nonfederal U.S. doctors. Nashville-based PhyCor will have $8.4 billion in annualized revenues, making it by far the nation's largest physician manager.
The deal surprised analysts and doctors alike. Considered the industry vanguard, PhyCor built a folksy reputation by affiliating with strong group practices in cash deals. Swallowing competing companies in stock acquisitions has been a hallmark of MedPartners, a 4-year-old industry upstart based in Birmingham, Ala.
HMOs' growing appetite for large and globally capitated networks prompted PhyCor to change strategy.
"The whole health field is characterized by big organizations-big HMO organizations, big hospital organizations. Physicians need critical mass in order to stand as equals," said PhyCor Chairman, President and Chief Executive Officer Joseph Hutts.
In another turnabout, Hutts told MODERN HEALTHCARE that PhyCor will aggressively pursue global capitation as long as HMOs want it. Unlike MedPartners, PhyCor doctors have been slow to take risk for all healthcare services.
"Twenty-five to thirty percent of our IPAs are globally capitated . . . so we're moving that way anyway," Hutts said. "I think MedPartners has moved faster and better, and we're learning."
The merger is expected to foster more national contracting, another area where MedPartners took the lead. Its pacts with Aetna and PacifiCare could draw new patients to PhyCor doctors. "The best thing that can happen to payers is for this kind of organization to develop," Hutts said. "Payers need long-term partners."
Expected to close in early 1998, the merger will narrow options for physician groups. MedPartners and PhyCor often bid against each other to manage groups, and no one matches their industry reputation.
Physicians "need to get into organizations with scale and sophistication. That's going to be increasingly obvious," said Brooks O'Neil, an analyst with Piper Jaffray in Minneapolis.
The industry's No. 2 in size will be San Diego-based FPA Medical Management with 6,687 physicians in 29 states and about $960 million in revenues, according to Gwynedd, Pa.-based Sherlock Co.
PhyCor generally has enjoyed positive relationships with its doctors. Both companies sought to reassure nervous physician affiliates in conference calls shortly after the deal was announced.
"They've got a lot of explaining to do, even internally," said Salomon Brothers analyst Lawrence Marsh. "They've breached the PhyCor way." Marsh nevertheless supported the deal as a way to export the PhyCor culture.
The companies said the merger will generate $50 million in pre-tax cost savings, but market reaction was negative. MedPartners shares fell $1.12 to $25.75 in trading the day after the announcement. PhyCor shares were down $5.56 to $24.
Standard & Poor's placed the companies on CreditWatch, PhyCor with positive implications and MedPartners with negative implications. Moody's Investors Service placed MedPartners' ratings under review for a possible downgrade.
In one sign of stability, PhyCor's senior management will remain intact. MedPartners Chief Operating Officer Mark Wagar will move to PhyCor to head Western operations. H. Lynn Massingale, M.D., who heads MedPartners' hospital-based physicians subsidiary, and John Arlotta, chief of its pharmacy benefits operations, also will be retained, Hutts said.
MedPartners Chairman and CEO Larry R. House will join PhyCor's 11-member board along with another MedPartners director, Richard M. Scrushy, chairman and CEO of Birmingham, Ala.-based HealthSouth Corp.
MedPartners wasn't looking to sell, House said, but felt compelled to entertain PhyCor's offer in part because their strategies were converging. The deal was negotiated in a month.
With its high price-to-earnings multiple, PhyCor was able to offer MedPartners a price that represented a premium of about 30% for MedPartners stockholders. The $8 billion price includes the assumption of $1.2 billion in debt. MedPartners owns a leading hospital-based physician management firm, Team Health, and a top prescription management company. Hutts said he's "very impressed" with the hospital-based business, but said PhyCor will be looking carefully at prescription management to determine whether it's a good strategic fit.
PhyCor is the industry leader in the number of affiliated physicians with 21,580. MedPartners is No. 1 in revenues and capitated lives.
Despite representing more doctors than anyone, PhyCor downplayed the achievement. "We will only represent approximately 5% of all physicians in America. We have plenty of work to do," Hutts said.
The companies plan to notify antitrust regulators of the deal, but they said they don't expect a challenge. The transaction is expected to be accounted for as a pooling of interests.
A day after the deal was announced, MedPartners said it would cut 720 employees including 120 physicians from its Southern California operations. The cuts represent about 14% of the company's 5,000 employees and about 7% of its 1,800 physicians in the areas. Wagar said the reductions have been in the works for several months.