PhyCor expects to pay less for medical groups' assets and lower its management fees under a new affiliation model designed to improve its long-term relationships with doctors, MODERN HEALTHCARE has learned.
The industry trendsetter said the strategy will shield physicians from deductions in their earnings to pay for capital expenses. Essentially, physicians would trade upfront proceeds for higher future incomes.
It also could boost PhyCor's capital returns and diminish the risk that physicians will sour on its management contracts, which typically run 40 years.
It's "a more comfortable ride for the physicians," said Joseph Hutts, the company's president and chief executive officer.
Hutts said the strategy change does not reflect discontent among PhyCor's doctors. He called a recent controversy at the Holt-Krock Clinic in Fort Smith, Ark., "an aberration." Doctors there have been seeking to cancel their management contract with PhyCor, complaining that their incomes have declined and the company's management fee is too high (April 27, p. 12).
While declining to discuss specifics, Hutts said the dispute "probably will resolve itself."
"If you're going to reposition an organization, you've got to go through a little pain," he said. "I think the (Holt-Krock physicians) will do very well long-term."
Nevertheless, Hutts said PhyCor's management fees, which typically have ranged from 15% to 18%, will be reduced to as low as 12% under the new model. He declined to say how much less PhyCor expects to pay for practice assets.
PhyCor expects to affiliate with an additional 10 to 15 independent practice associations and multispecialty medical groups this year.
The Nashville-based firm is taking advantage of a lull in the competition to reset the market. Other major industry players, Birmingham, Ala.-based MedPartners and San Diego-based FPA Medical Management, have put a hold on practice acquisitions this year. Practice prices appear to be falling after being driven up by industry competition in recent years.
Hutts said high prices were "having probably a negative effect, given that physician organizations are among the most poorly capitalized (in healthcare)."
He said the new model is especially geared to groups that expect rapid growth requiring intensive capital investment.
Salomon Smith Barney analyst Larry Marsh downgraded PhyCor stock after the new strategy was disclosed, fearing a slowdown in affiliations.
But Hutts said he does not expect physicians to balk at lower practice prices. He said the company expects to implement the model in deals that will be announced by the end of this month.
"It was our feeling that physicians primarily have always come to us not for the proceeds of the transaction but for the strategic alliance, the capital and management resources," he said. "What we're trying to do is create more competitive physician organizations."
Last week PhyCor announced an accounting change expected to reduce by 8 cents its 1998 earnings, which had been anticipated to be around $1.10. PhyCor will accelerate its write-offs for intangible practice assets, or goodwill, in response to Securities and Exchange Commission concerns.
The company said the new model could diminish the impact of the faster write-down period by reducing the amount it pays for goodwill.