Physician practice management companies may not be the antichrist-like figures some healthcare executives fear, but they're certainly not saviors either. Once the darlings of Wall Street and the healthcare industry, PPMs went through a honeymoon period of soaring stock values and speedy practice acquisitions.
But that all changed in 1997. The legal and financial turmoil at Columbia/HCA HealthCare Corp. and some other managed-care companies caused Wall Street to take a second look at PPMs and to question the soundness of their underlying structure. Then, late in the year, Birmingham, Ala.-based MedPartners announced a $145 million write-off of goodwill, which turned out to be a $647 million pretax charge for fourth-quarter operational restructuring; for all of 1997, Medpartners lost $820 million -- or $4.42 a share -- on $6.3 billion in revenues.
In spite of a general increase in PPM earnings, a handful of well-known companies have lost up to 20% of their one-time market value. Some teeter on the brink of bankruptcy, while others gut out class-action lawsuits and turnover at the highest ranks of management.
The reality is that while PPMs are supposedly in the business of physician practice management, not all have the infrastructure and depth of competencies to fulfill this mission.
In evaluating a potential relationship with a PPM, physician executives need to gaze beyond popular myths and assumptions; they need to look squarely at some disconcerting realities. Following are just a few:
Myth: Physicians will earn more by using sophisticated PPM information and management systems.
Reality: Physician compensation formulas vary dramatically among PPMs. Under some plans, money is available for physicians only after all practice and PPM expenses are paid. Because PPMs must cover high corporate overhead costs, some PPM-acquired practices have experienced a 6% to 10% decline in earnings, which can be catastrophic -- especially for physicians. Reports of PPMs that lack the needed funds to pay physicians their negotiated compensation are common.
Myth: PPMs will lower physicians' overhead.
Reality: None of the major PPMs has been able to push the overhead of primary-care physician practices below 50% -- and neither have hospital management services organizations nor physicians. No matter what PPMs promise, the costs associated with running a primary-care practice still hover around 50% to 55% of collections.
Myth: Because they are physician-driven and controlled, PPMs operate in physicians' best interests.
Reality: Once a PPM acquires a practice, physicians enter into a long-term management relationship with a publicly traded company or with a private company that aspires to go public.
Because the company's ultimate responsibility is to its shareholders, its focus is on how to maximize shareholder wealth. As a result, physicians have less control of their practices than before the acquisition when the lone decisionmakers were members of a physician-controlled board.
Myth: PPMs offer physicians unparalleled opportunities to "cash out."
Reality: A number of PPMs have acquired physician practices in the form of stock. While such offers may look enticing on paper, consider what happens when physicians receive stock at a certain value and that value subsequently drops; physicians never receive the practice price they were led to expect. Many physicians fail to realize that they may have to hold stock granted through an acquisition for a specified period of time -- sometimes as long as five years -- before they can sell it.
Physicians acquired by start-up PPMs, such as Durham, N.C.-based Coastal Physician Services, learned this lesson the hard way when a gradual erosion of the company's financial position eliminated the value of its stock (February, page 2).
Moreover, the only way a PPM can recoup its investment in acquiring physician practices is through the practices' operating earnings. Senior practice partners typically receive the majority of a practice acquisition price because they've built up practice equity. Younger partners, in contrast, literally fund senior partners through the practice's operating earnings.
Myth: PPMs offer future stability and security.
Reality: PPMs actually offer physicians less stability than other arrangements. A good example of this is the many hospitals and physician groups Columbia has put on the market. Relegated to the status of a commodity in a mega-business transaction, physicians have little or no say in these decisions. Similarly, Caremark went on a buying spree of practices before it was acquired by MedPartners, a company still struggling to sort out its future. (Now, the MedPartners subsidiary faces a $3.3 billion lawsuit filed by 22 insurers who are accusing it of fraud.)
The bottom line is simple: PPMs are no panacea for the problems facing physicians. They grapple with the same set of prickly issues -- from how to maximize reimbursement and manage capitated lives, to how to attract new patients. Before jumping on the PPM bandwagon, physicians should look more closely at the benefits of joining forces with colleagues or with hospitals in creative joint ventures.
To survive, PPMs must be flexible and willing to make the transitions necessary to become the kind of organizations that add genuine value to physician practices. To achieve continued success, PPMs must be prepared to show how they will boost physician incomes, save physicians' time, manage capitation, reduce malpractice exposure and enhance care.
Because state-of-the-art information systems for physician practices may carry price tags of as much as $1 million plus annual support costs, one obvious value-added strategy is for PPMs to offer physicians the level of information technology they only can access by affiliating with a larger organization.
The best systems already are monitoring patient compliance with treatment plans in terms of factors such as diet, medication and diagnostic tests. They also are reducing the likelihood of Medicare fines by helping doctors with patient records documentation.
One example of a forward-thinking PPM is Purchase, New York-based IntegraMed, which enhanced its acquired infertility practices by offering physicians both capital and centralized management. The influx of capital has allowed physicians to purchase new technology, which has helped boost success rates for viable pregnancies and attract more patients.
Meanwhile, new practice sites purchased with PPM capital have helped physicians land new, previously unavailable managed care contracts. Most important, the PPM has freed physicians to focus more intently on patients.
Centralized office processes such as payroll and accounts payable allow office staff to concentrate on patient care, while physicians receive compensation based on their own professional corporation's distribution plans.
In the end, PPMs must support the best interests of both patients and physicians. Patients must have the kind of positive experiences that leave them eager to build a relationship with a physician and to refer family and friends to his or her practice. At the same time, physicians must experience medical practice under a PPM as more liberating, empowering and rewarding than do-it-yourself practice management. Only when PPMs can demonstrate that they consistently add value to the lives of physicians and patients will their future be secure.
Jeffry Peters is president and CEO of Harvey, Ill.-based Health Directions, an affiliate of Ingalls Health System.