The earnings of physician practice management companies are going up faster than any other healthcare sector. The stock market isn't responding in kind, however.
The collective earnings for 30 publicly traded PPMs in the third quarter of 1997, the latest data available, increased 89% compared with the same period in 1996 on a 31% increase in revenues, according to an analysis by Hilton Head, S.C.-based WDI Healthcare Markets Group and KPMG Peat Marwick's Atlanta-based Health Ventures Practice. The industry average was a 13% earnings increase on a 16% rise in revenues.
Many other sectors performed well. The outpatient services sector was up 39%, rehabilitation was up 29%, and managed care was up 9%. Other services, a category that includes pharmacy services, benefit management and intermediate-care facilities for the mentally and developmentally disabled, was up 71%.
Hospitals, however, were down 39%, mostly because of a 69% earnings drop at Columbia/HCA Healthcare Corp.
Among PPMs, 28 out of the 30 companies tracked posted earnings increases, with the largest multispecialty PPMs-MedPartners, PhyCor, FPA Medical Management and PhyMatrix-all posting gains of 40% or more.
PPMs are still growing mostly through acquisitions, but companies are getting smarter about what practices to buy and how much to pay for them, WDI president John Cummings says. That means the practices are easier to integrate into a PPM's corporate structure.
"There's still a frenzy of activity out there, but pricing is more in line with what (the practice's) contribution will be" to earnings, Cummings says.
The third-quarter numbers for PPMs continue a strong year for those companies. According to WDI and KPMG Peat Marwick, second-quarter PPM earnings were up 51% and first-quarter earnings were up 71% over the comparable periods in 1996.
However, Wall Street, which dumped PPMs when earnings dove in the last half of 1996, has yet to regain its infatuation with the sector despite the robust earnings rise. As of Dec. 15, the stock prices of the 30 PPMs examined in the WDI/KPMG Peat Marwick report had increased an average of 8%, with 15 PPMs up for the year and the other 15 down, Cummings says. The numbers are up from the 13% decline in stock prices for 1996 but down from the 38% rise in 1995.
For the most part, small and mid-sized companies are leading the stock price increase, with Hollywood, Fla.-based Sheridan Healthcare up 100% and Vancouver, Wash.-based Gentle Dental Services up 93%. However, growth in larger companies has been tepid, and stocks that have declined have done so precipitously--most notably Dallas-based Physicians Resource Group, an eye-care PPM, down 71% (See related story, page 6.)
"The market is extremely unforgiving today," Cummings says, adding that companies that don't meet earnings estimates "get hammered."
Also dragging down the market for PPMs is PhyCor, down 12% this year. Most of the drop has come since Oct. 29, because of concerns about whether the Nashville-based company is capable of absorbing MedPartners in a planned $8 billion acquisition.