FPA Medical Management, the nation's third-largest physician practice management company, is in critical condition.
Its poor diagnosis was accelerated by a May 15 earnings report detailing financial losses: an anticipated second-quarter charge of $200 million against earnings, dwindling cash on hand and threatened defaults on its credit line.
The meltdown caused FPA's stock price to plunge from an already-low $11.50 before the report to below $3 May 20.
As of June 11, FPA will officially be in default on a $215 million line of credit. Analysts say if FPA doesn't find some cash soon, the company could go under.
"This company is in need of immediate liquidity," says Elie Radinsky, an analyst for debt rating agency Standard & Poor's. "It needs that in order to survive."
FPA Chief Executive Officer Stephen Dresnick, M.D., at the time of Modern Physician's deadline, was burning up phone lines looking for financing.
Dresnick told Modern Physician he hoped to have financing in place by the end of June, although he surely would take it sooner. One compelling reason may be the previously scheduled June 4 meeting he has with the company's stockholders.
Late last month, Dresnick was able to renegotiate a contract with HMO customer, Pacificare Health Systems, of Santa Ana, Calif., in the hopes of restoring profitability to its Nevada operation.
FPA's trouble began Friday, May 15, when the company announced a loss of $9.1 million, or 20 cents per share, on $392 million of revenue for the first quarter, ending March 31.
But that was just the beginning. In the same quarterly report, FPA also:
- Announced a $200 million charge against second-quarter earnings, including $125 million in goodwill, $40 million in share risk and other receivables revenue, and $35 million in severance pay, office consolidation and other charges.
- Stated it had only $12.4 million in cash and cash equivalents on hand, down from $23 million on Dec. 31.
- Stated that as of May 15 it had maxed out on its $215 million credit line from BankBoston, $42.2 million of which was withdrawn between March 31 and May 15.
The earnings report confirmed the suspicions of some analysts that FPA might have been overstating its earnings in previous reports. First, they said the large charge-off against goodwill reflected the fact that FPA had overpaid for money-losing practices such as Foundation Health System's old staff-model HMO.
Second, FPA had been counting capitation revenue as earnings, despite waits for money of as much as 18 months after treating a patient, says Bernard Lirola, an analyst at Needham & Co. in New York City. FPA gets about half of its revenue from global-risk capitation contracts, a higher percentage than any other PPM, says S&P's Radinsky.
In its earnings report, FPA also presented some cost-cutting plans, to no avail. Investors hammered the stock, and it fell from $11.50 to $6 per share by the market close. The 18 million shares traded -- FPA has 45 million shares outstanding -- was a one-day record. And it was the day the first shareholder lawsuit against FPA was filed in U.S. District Court in San Diego, FPA's home
Asked if the market reaction was too harsh, Dresnick laughed in resignation. "I'm really not focused on the stock price," he said on May 19. "I'm focused on the operations of the company. I think there are a lot of strong fundamental strengths to the company. We have short-term issues, and we're working our way through them."
But the first-day reaction was only the beginning of FPA's quick slide. The stock price continued to plummet, hitting an all-time closing low of $2.81 on May 20. In four business days, FPA's market value -- the outstanding shares multiplied by the stock price -- dropped 75.5%, from $518 million to $126.5 million. By May 26, the stock stood at $3.88.
S&P and Moody's Investors Service, the other major corporate credit-rating agency, both downgraded FPA. S&P gave it a rating that indicates the company could default on its debt within a year.
Meanwhile, a dozen more shareholder lawsuits were filed in San Diego. Among the complaints are accusations that company insiders puffed up the stock price so they could reap $61 million in proceeds from the sale of their own stock, a charge which has not been proven. Dresnick was not available to comment about the lawsuits.
So what went wrong at FPA?
Jamie Streator, a senior healthcare analyst at New York City-based Hambrecht & Quist who helped shepherd FPA's initial public offering, says FPA was first established to build independent practice association networks, but "market opportunities" led it to grow quickly.
As of May 15, FPA had 7,877 affiliated doctors and another 5,643 doctors in affiliated IPAs. FPA's business is 10 times the size it was two years ago, notes S&P. But, like another struggling multispecialty PPM, MedPartners, FPA was indiscriminate about what it bought, analysts say. For example, doctors it bought out of Foundation's staff-model HMOs in Sacramento, Calif., and Tucson, Ariz., alone accounted for $5 million in first-quarter losses, according to FPA.
Also, FPA's $185 million acquisition of Norwalk, Conn.-based PPM Health Partners has drained $30 million from FPA since the acquisition closed in October, Needham & Co.'s Lirola says.
Eventually, FPA bought too much and worried too little about integrating those acquisitions into the company, analysts say.
Dresnick, who replaced founding CEO Seth Flam, D.O., on March 26, says he's considering numerous financing options, although none include selling the company.
Analysts say FPA may be able to get $20 million in cash from two sources: One is $12 million in payments to FPA subsidiary Sterling Healthcare Group, which manages emergency rooms. These funds have been held up by HCFA in a Medicare billing dispute.
There also may be pressure to rescind $8 million in severance payments promised to Flam and Howard Hassman, D.O., who resigned April 1 as vice president of corporate development.
"I think our big problems are in (three) specific markets -- Sacramento, Tucson and Las Vegas," Dresnick says. "If we can correct those things, we've gone a long way toward fixing our problems."