There was no way to sugarcoat the bad news, so it was served with coffee and minimuffins instead.
First thing at a Sept. 14-15 investors' conference on physician practice management companies, PricewaterhouseCoopers partner Gary Garbrecht informed the 200 attendees that since his company and Salomon Smith Barney started organizing the conference in January, PPM stocks had gone down a collective 75%. During the same period, the Nasdaq Composite Index, representing the market where most PPM stocks trade, had risen 12%.
The conference that followed Garbrecht's bad news had the tone of a football coach delivering a halftime speech to a team down by four touchdowns. As much as everyone wanted to feel hopeful about what was to come, what had happened was too brutal to ignore.
Dallas-based Monarch Dental was the "PPM success story" presented during the conference; down only 21%, its stock was considered relatively healthy. It's pretty obvious an industry is in trouble when advocates express hope that an economic recession might turn the business around. The expectation is that an economic crisis would force recalcitrant physicians to sell out to practice managers.
"What's the difference between a PPM and a pigeon?" asked Atlanta-based Cordova Capital principal John Runningen, retelling a joke he'd heard about oil investors during the industry's bust in the 1980s. "A pigeon can still make a deposit on a Mercedes."
So the underlying question dominating the conference at New York's Grand Hyatt Hotel was, are PPMs still relevant? (At the Grand Hyatt, that question didn't apply just to PPMs. In the next ballroom, the Democratic Party hosted a reception featuring Vice President Al Gore, who also knows something about being part of an organization under siege.)
No one had any new ideas for turning around PPMs or about what could replace them. Instead, as possible solutions to PPMs' problems, investors and analysts came up with general ideas like changing physician behavior, gaining greater local rate-negotiating clout and finding better management.
There was even discussion about better customer service, although no one could agree on whether the customer is the corporate purchaser, the health plan or the patient.
About the only consensus was that PPMs -- which manage less than 10% of the nation's physicians -- are going to be in the stock-market doldrums for at least another two to three years while investors figure out whether anybody can deliver on the promise of larger, better physician organizations.
That is, of course, if larger organizations are even necessary. More physicians are deciding it may be better to remain in a small group until the financial chaos sorts itself out, analysts said.
"I would attribute (that thought) to the recognition that PPMs aren't the pot of gold at the end of the rainbow," Larry Marsh, a Salomon Smith Barney director and healthcare analyst, told Modern Physician. "The environment is less onerous (for the smaller group) than it was a couple of years ago. There's not a crisis feeling of, 'We've got to do something.' The only reason you affiliate is you worry about where the future is."
Marsh is certainly worrying about where the future is for PPMs. As the conference's de facto centerpiece, he has been covering the PPM industry since 1991, when he was at investment boutique Wheat First Butcher Singer in his native Virginia. After 13 years there, he moved to New York with Salomon Brothers in 1996, the year before it merged with the Travelers Group's Smith Barney.
Marsh was one of the first analysts to cover PPMs. He recently was voted the No. 1 analyst covering physician companies in a poll conducted by Greenwich Associates for Reuters news service.
He indicated during a luncheon speech that his reputation is intertwined with the performance of the PPM market. "I'm wearing a lot of the lashes" taken by the industry, Marsh said over the clinking of forks against plates of apple cobbler.
Some of those lashes had come because even though stock prices for many PPMs had fallen since peaking in mid-1996, analysts had continued to be bullish about the industry. Even when MedPartners and PhyCor took multimillion-dollar charges after the collapse of their merger Jan. 7 -- a day some view as the beginning of the end for PPMs -- most analysts were still high on the industry.
Downgrades from "strong buy" into murky categories like "hold" and "neutral" -- analysts rarely ever say, "sell" -- didn't happen until spring, when the downward spiral for many companies already was well under way.
Marsh said the PPM industry, which has been around for only about 10 years, merely got the benefit of the doubt from Wall Street when things first started to sour.
"The excitement (from Wall Street) was the size and ability to affiliate with those who had direct control over patient care," said Marsh, repeating the oft-cited statistic that physicians control 80%, or about $800 billion, of annual healthcare costs.
That excitement created high expectations for PPMs from investors, companies and doctors, Marsh said, and lots of money flowed in. But, he added, when the expectations aren't met, money flows out just as quickly.
"While the marketplace was willing to give the benefit of the doubt while (companies) were building, the market expects a payoff," Marsh said.
Speakers at the conference, addressing a crowd of consultants, small PPM executives and investors, offered numerous theories as to why the payoff hasn't come.
Patricia Widmer, who co-manages the Warburg Pincus Health Sciences Mutual Fund in New York, said the speed at which PPMs hit the financial wall has scared off many investors. Widmer didn't say whether her fund has any PPM investments, but about the kindest thing she said about the industry was that it has "no Russia problem, no Asian problem."
'The service sector tends to hit the wall after five years of growth," she said. "It takes two to three years for a generalist (mutual fund investor) to warm up to an industry, and just as I'm getting warmed up, I see a bankruptcy (FPA Medical Management)."
Eugene Hill, a partner at San Francisco-based venture capital firm Accel Partners, which has $30 million invested in eight PPMs, said the industry's former status as a high-growth investment bred "less-than-stellar operating habits."
"We'd like to think that we were choosy already" in what PPMs Accel would invest in, Hill told Modern Physician. "But now we're even more choosy."
James Robinson, a professor of health economics at the University of California-Berkeley, said PPM managers have caused problems because of "some greed, some lust and some stupidity." But he disputed that poor management was totally responsible for PPMs' problems. All physician groups are caught between a hammer of reduced payments and an anvil of increasing costs, he said.
"It's not all internal," Robinson said.
Skip Klein, a healthcare analyst at the Kaufmann Fund in Baltimore, compared the PPMs struggles to the Industrial Revolution.
"This is a gut-wrenching transition," Klein said. "What's going on is a change to industrialization from the guild model. You (the PPMs) are the union organizations. You're the Samuel Gompers of physicians.
"MedPartners-PhyCor was like the AFL and CIO," he added, although the proposed PPM merger did not take.
It seems investors, having figured out what went wrong, are waiting for the PPMs to figure out how to make it right, or at least build on, as Klein described MedPartners, "a few decent assets in a knish of things put together."
And in their waiting, they won't be turning over any money. Said venture capitalist Hill: "We're in for a rather sustained period of capital-asset restraint."
Warburg Pincus' Widmer added, alluding to PPMs' tendency to grow through acquisitions and outside capital: "(PPMs) have to become self-financing first. I know it's a tough order, but other service companies have done it."