Physicians at one of PhyCor's largest affiliated clinics are trying to cancel their 40-year contract with the leading physician practice manager.
Physicians at Holt-Krock Clinic in Fort Smith, Ark., say their incomes have declined significantly since they affiliated with PhyCor in September 1994.
"The bottom line is the 15% fee that we have to pay to PhyCor for management is far in excess of the value of their services," said Don Patrick, M.D., president of the 145-physician group.
Patrick said incomes dropped 10% for primary-care physicians and 17% for specialists in the second half of 1997 because of payments for a new computer system PhyCor installed.
He said some physicians left as a result. The clinic had 130 doctors when PhyCor came on board in 1994, with a peak of 157. The clinic has 21 service sites in Arkansas and Oklahoma.
The physicians are negotiating a possible buyback of their assets from PhyCor with financial assistance from 439-bed Sparks Regional Medical Center in Fort Smith, which is conducting a valuation of the clinic's assets, Patrick said. He said PhyCor has offered to sell the clinic's assets for $60 million, compared with its 1994 purchase price of $52 million.
In addition, 38 of the clinic's physicians filed a lawsuit April 17 seeking to nullify agreements that require the doctors to pay damages to PhyCor if they leave the clinic and practice elsewhere in the market.
Officials at PhyCor headquarters in Nashville did not return phone calls requesting comment last week.
Patrick said PhyCor President and Chief Executive Officer Joseph Hutts was scheduled to visit Fort Smith this week.
The suit contends that noncompete agreements clinic physicians signed pose unreasonable restraints and hurt consumers. The agreements "prohibit competition by approximately 50% of the physicians in Fort Smith," the suit says.
The physicians also claim PhyCor's management agreement violates state laws against the corporate practice of medicine and the splitting of physician fees.
It's the second time in a year that physicians have used legal means to try to break their ties with a leading PPM.
The fee-splitting argument is similar to one raised by physicians at a Tampa, Fla., clinic managed by PhyMatrix (See story, p. 13). PhyCor recently filed a friend-of-the-court brief on behalf of PhyMatrix.
PhyCor bought Holt-Krock's assets in September 1994 and signed a 40-year management contract with the clinic's physicians that provides the PPM with a fee equal to management expenses plus 15% of the physicians' net revenues.
The physicians each signed agreements not to practice medicine within 30 miles of clinic offices within 18 months of leaving employment. Additionally, the doctors agreed that PhyCor would provide management services for 15 years if they elected to leave the clinic and practice elsewhere in the area after the expiration of the noncompete agreement.
According to Patrick, each physician must pay damages of $250,000 for violating the agreement.
Hutts traveled to Fort Smith this past winter and met with about 80 Holt-Krock physicians, said William Marshall, a Little Rock, Ark., attorney who is representing the physicians. Hutts told the doctors the company had no intention of dissolving the relationship or renegotiating the management fee, Marshall said.
"After that meeting, they decided they better go see a lawyer," he said.
The suit was filed in the Chancery Court of Sebastian County, Ark. PhyCor has until May 7 to file a response, after which the plaintiffs intend to pursue a hearing to obtain a declaratory judgment nullifying the contract.
Last week, PhyCor reported a net loss of $7.5 million, or 12 cents per share, for the first quarter ended March 31. Revenues rose 29% to $322.7 million.
The company took $36.2 million in nonrecurring charges, including $14 million for a terminated merger with MedPartners and $22 million for restructuring.
Executives said the charges cloud solid operating results. Earnings before the charges totaled $16 million, up 30% from $12.3 million in 1997.