Staff-model HMOs lost money operating physician practices. Hospitals are losing money operating physician practices. Now some of the biggest physician practice management companies are losing money operating physician practices.
Can't anybody here play this game?
It's a question that's being asked more often as the PPM sector -- once the Great White-Coated Hope of consolidating and managing doctors -- runs up against one financial buzz saw after another.
The bottom dropping out on FPA Medical Management is only the latest debacle in a series of missteps that include:
- A similar collapse earlier this year of MedPartners, the largest PPM;
- Multimillion dollar charges against earnings by PhyCor, the second-largest PPM, after its deal to acquire MedPartners fell through;
- PhyMatrix's decision, in view of its sluggish stock price staying below $10 per share, to consider a management buyout to take the company off the public market.
- A host of financial problems suffered by eye-care PPM Physicians Resource Group, exacerbated by dissatisfied physicians holding back at least $51 million of management fees due the company (see Vitals, page 4).
- Emerging state and federal rulings that seem to work against PPMs also aren't helping matters any.
"Arguably, it's difficult," says John Ederer, an analyst at San Francisco investment bank Volpe, Brown, Whelan & Co. "I still think it's a necessity (to combine practices). . . . (But) it's a little more difficult than all of us thought these last few years."
The top 14 PPMs lost 21.1% of their market value between Jan. 1 and May 7, according to the Cain Brothers PPM Index. That measurement doesn't include the effect of FPA's stock dropping about 65% in value between May 14 and 19.
PPM stock values have been declining since mid-1996, but 1998 has been the year of cataclysmic drops for some companies. The stock prices of at least four PPMs -- MedPartners, FPA, Apple Orthodontix and Vision Twenty-One -- each dropped by about 50% or more in one day.
The inability of some PPMs to manage their rapid growth is their downfall, analysts say. Like Mr. Creosote in "Monty Python's Meaning of Life," FPA and MedPartners ate and ate and ate until they became enormous, billion-dollar-revenue companies, but then they exploded under the pressure of digesting their acquisitions.
Now the companies, along with their employees and doctors, are paying the price. MedPartners, in an attempt to get back in the black, in May announced it was cutting 900 of its 9,500 jobs in southern California, including 49 of its 998 doctors. The physicians who remain will take 7% pay cuts. Attempts to contact MedPartners Chief Executive Officer Mac Crawford for comment were not successful.
Meanwhile, FPA has cut 100 jobs and is looking for other places to cut costs.
Like MedPartners, it is trying to integrate its acqusitions into a cohesive company.
Some smaller PPMs that formed as rollups -- groups of practices that didn't exist as a business until they had their initial public offering -- got caught in the same acquisition and management problems. Houston-based Apple Orthodontix missed Wall Street's projection on its first-quarter earnings, released May 5. As a result, its stock dropped almost $6 to $7.19 that day.
Other PPMs have suffered from some companies' implosions, regardless of whether they've done anything wrong. On May 18, when FPA was in the second day of a crash that sent its stock to $4.70 from $11.50, 18 of the 19 other PPM stocks that analyst Ederer tracks also declined. The lone gainer was Tarrytown, N.Y.-based Advanced Health, which manages practices but, unlike most PPMs, does not buy their assets. It went up a measly 13 cents.
PhyCor, almost universally praised for its relatively slow, steady growth and smart acquisition strategy, fell more than $2 that day to a 52-week closing low of $17.69.
"Anytime a competitor stumbles, it usually means we go down," PhyCor Chairman and Chief Executive Officer Joseph Hutts says.
Until last year PPMs could operate like Japanese investors in the 1980s: They had so much money, or in the case of PPMs, such valuable stock, that it was easy to buy, buy, buy. And doctors were willing to sell, sell, sell. PPM stock seemed like a good way to cash out their practices and watch them quickly appreciate in value. Plus, with managed care a bigger factor, doctors feared not linking with a larger group would leave them out of contracts.
The problem was that neither side was too discriminating about who it associated with, says Jamie Streator, a senior healthcare analyst at Hambrecht & Quist in New York.
But despite the many problems facing PPMs, analysts say they will survive in the near-term. Single-specialty PPMs, unlike their multispecialty brethren, have done a good job acquiring and integrating physician practices, analysts say.
And there's still PhyCor, which continues to command great respect. On May 19, in the midst of all the hullabaloo about FPA, PhyCor announced it would acquire PrimeCare, a southern California-based PPM with 210 primary-care physicians, 10 independent practice associations representing 2,000 physicians, one hospital and one surgery center. Financial terms were not disclosed.
Yet there's no question PPMs have become less of a sure thing. "Those who stay independent may do the best," Gastman says. "Maybe they'll have the last laugh."