After a year of study, a task force appointed by the Securities and Exchange Commission has issued recommendations to standardize accounting by physician practice management companies.
The rules are meant to help the public get an accurate financial picture of companies in the rapidly growing industry, but they also could influence the way some firms operate. The full implications might not be clear for months or even years.
The task force resolved the issue of whether companies can count revenues of affiliated physician practices in their corporate revenues. Companies such as MedPartners and FPA Medical Management have consolidated the revenues of affiliated practices, even though corporate-practice-of-medicine laws bar them from owning the practices. Other companies like PhyCor don't consolidate practice revenues.
From now on, to consolidate practice revenues, companies must meet strict criteria: a contractual agreement of at least 10 years; exclusive control over key operating decisions such as budgets; exclusive authority over total physician compensation; a significant financial interest in the practice that can be sold or transferred; a significant financial stake whereby the practice's performance affects company income.
A MedPartners spokesman says the company is studying the changes. At deadline, FPA representatives could not be reached for a response.
Another major edict toughens the terms of practice affiliations by disallowing pooling-of-interest mergers. Instead, companies must buy practices, which eats into future earnings by requiring depreciation for intangible assets, or goodwill. Although companies cannot pool with practices, they still can pool with one another.
New rules were issued Nov. 20, 1997, with a 12-month transition period for transactions or agreements already in place. During the transition, some companies might have to restructure agreements that are not in compliance.
According to Salomon Smith Barney, the changes raise the bar for companies attempting to tap the public market and could lower prices for practice acquisitions.
Here's what some other industry observers had to say about the impact of the new rules. Comments have been edited.
Vaughan Curtis, head of corporate healthcare practice, Alston & Bird law firm, Atlanta: "I anticipate we'll see a real focus among some PPM companies in acquiring other PPMs to gain a lot of scale for managed-care contracting and other purposes without generating new goodwill.
"You might see some companies looking at other ways to gain scale and be more efficient users of capital. One of the strategies that may make sense is to enter a market through the formation of an independent practice association, then acquire the practices in the market, which provides some glue to the structure.
"A lot of companies were using stock options to align the interests of the doctors. As I read it, unless you meet the requirements for the consolidation of revenues, you must account for those options in a way that will also potentially reduce earnings. I think it makes it much less likely the companies will use options in the first place."
Larry Scott, Charlotte, N.C., partner in charge of the law office of Davis Wright Tremaine: "The control requirements that are imposed for companies to consolidate practice revenues are going to be difficult to get the physicians to accept. I think you're going to see more companies forgo revenue consolidation. Consolidating practice revenues makes you sound more substantial, even though your earnings per share and price-to-earnings ratio are the same. It's a perception, and it does impact somewhat when you might be able to have your initial public offering."
L. Fred Pounds, chief financial officer, American Oncology Resources, Houston: "I'm not aware of anything that will affect the way a number of folks, including us, report financial results. Financial reporting is very important, but in the final analysis economics are what count. I don't think it will have a dramatic impact. It will probably make it easier for physicians and investors to compare one firm with the other."
Mel Hope, partner, Price Waterhouse, Houston office: "The task force gives some clear direction, and that's important in an area that's been viewed as exploding faster than the regulators could keep up with it.
"Those companies to whom consolidation was very important because they wanted to reflect a bigger revenue line item will be slowed down somewhat. That's because they're going to have to alter their deals to comply with the new criteria."