Endocrinologist Jean Lucas, M.D.'s review of MedPartners' management ability could be the epitaph for its physician practice management business: "They don't know how to run an office any better than I do."
Events seem to have proved Lucas right. MedPartners told 10,000 affiliated doctors on Nov. 11 that the Birmingham, Ala.-based company, the largest PPM in terms of annual revenues, planned to pull out of money-losing physician management in favor of its profitable pharmacy benefits management division, Caremark International.
MedPartners' decision, along with similar moves last month by three other practice managers, has doctors, analysts and others wondering if the PPM industry-which a little more than a year ago was a hot healthcare sector-is as good as dead.
At the least, MedPartners' pullout signifies the unofficial end of the dream of building a multispecialty PPM that can negotiate favorable, national contracts with health plans. PPMs, depending on who's counting, own the practice assets of anywhere from 5% to 10% of the nation's physicians.
"All healthcare is local," says J. Michael Condit, M.D., a rheumatologist and chairman of Kelsey-Seybold Clinic in Houston, one of MedPartners' premier clinics.
Mac Crawford, MedPartners' chairman, chief executive officer and president, says the doctors' practice assets will be sold off over the next 12 months. Crawford says doctors will get a say in where they go, and it's expected that hospitals and the practices themselves are most likely to buy MedPartners' PPM assets, since some doctors are vowing never again to associate with a practice manager.
"I think probably one thing we have learned is the mixture of Wall Street and physician practices is not something physicians find best," says Charles Brenner, M.D., an orthopedic surgeon and board member in MedPartners' beleaguered Southern California Medical Corp. MedPartners cut 900 physicians and other employees there this year because of heavy financial losses.
"Sometimes decisions are made on a 90-day time line (for quarterly reports), but it's not the best thing for the healthcare delivery system," Brenner says.
But PPM backers, including most investment analysts, say MedPartners' pullout isn't a reflection on the industry. They say good PPMs-defined mostly as single-specialty and hospital-based PPMs-are suffering from a backlash caused by a few companies' problems, but they will survive any industry shakeout because they still provide the money and management skills most physicians lack.
Some doctors agree. For example, the 10 physicians at Cleveland Ear, Nose and Throat Clinic in Ohio have been impressed with otolaryngology PPM Physicians Specialty Corp. since it bought the practice from MedPartners on Oct. 12, says Tamara Wood, the clinic's director of operations.
And bucking the stock meltdown trend that's hit just about every other PPM, neonatology PPM Pediatrix Medical Group-both single-specialty and hospital-based-traded for all-time highs of more than $53 late last month.
"I think it's an inevitable business," says Joseph Hutts, chairman and CEO of PhyCor, the No. 2 PPM. "Business and physicians will find a way to get together. What (MedPartners) says to me is the inevitable ups and downs you have to go through to reach the right balance."
Hutts caused a stir when he told the Wall Street Journal early last month that PhyCor was considering a buyout to take the company private, but he later emphasized that no deal was imminent. Hutts says PhyCor may look at buying some of MedPartners' practices.
The Jan. 7 demise of a planned $8 billion merger between MedPartners and Nashville, Tenn.-based PhyCor put MedPartners in serious decline. Investment analysts point to the merger's failure as giving Wall Street an excuse to punish all PPM stocks, which have fallen more than 75% in value so far in 1998.
MedPartners' stock declined from $18.50 on Dec. 31 to as low as $1.62, before rebounding to more than $4 in mid-November.
MedPartners has admitted it made a mistake by focusing more on acquisitions than on improving operations. The company, founded in Birmingham in 1992, bought practices nationwide to reach $6 billion in annual revenues in five years.
But that didn't translate into profits. For the first nine months of 1998, MedPartners' PPM division lost $48.7 million on $2.6 billion of revenues.
Caremark, which MedPartners acquired in 1995 with the hope of integrating its pharmacy services with MedPartners' doctors, made $116 million on $1.9 billion of revenues. Overall, the company lost $41.7 million on $5.2 billion of revenues through Sept. 30. The integration between the pharmacy benefits and PPM businesses never happened.
One of the most damning things doctors said about MedPartners was it didn't add any capital or management ability their practices didn't already have--or could get without paying the PPM a 15% management fee.
For example, MedPartners' clinic expenses actually have been increasing-to 58.5% of revenues compared with 53.5% over the first nine months of 1997.
Lucas says MedPartners discovered what doctors already knew--it's tough to make a lot of money from an office-based practice. MedPartners spent $300,000 to start up her three-physician practice last year. By her calculations, it would take MedPartners 10 years to earn that back in management fees.
However, Lucas thinks MedPartners gave up too easily. In Atlanta, she says, MedPartners was making strides in finding ways to cut unnecessary costs out of physician practices. And Condit credits MedPartners with giving Kelsey-Seybold some financial discipline.
"I thought they were cowards, and they were trying to take the easiest way out," Lucas says. "It's hard to make the offices efficient. They've helped us, but they haven't realized their full potential. I thought Crawford would work on the operations part. But I think the stockholders were impatient."
Stockholders' interests made the company decide to get out of physician management, says Crawford, who was hired March 18 to replace co-founder Larry House and figure out how to turn the company around. The board determined Caremark held the greatest opportunity for income growth without large capital investments.
"This isn't about how MedPartners ran the PPM," Crawford says. MedPartners' withdrawal, he adds, "is not a statement saying that the PPM business is bad or the industry is bad."
However, the move away from physician practice management is growing. At least three other companies--Advanced Health of Tarrytown, N.Y., Specialty Care Network of Lakewood, Colo., and Complete Management of New York--last month said they will sell off or cut back on physician management to concentrate on other businesses. The companies manage a total of about 2,500 physicians.
"I think it's difficult to make doctors understand that the type of services that we provide really do deliver a tremendous amount of value," says Arthur Dague, head of investor relations for Advanced Health.
Meanwhile, on Nov. 19, Reston, Va.-based PHP Healthcare Corp. became the second publicly traded PPM, after FPA Medical Management on July 19, to file for Chapter 11. Miami-based FPA, which had hoped to get out of bankruptcy court by Dec. 31, instead received an extension to mid-April after some creditors objected to its reorganization plan. Also in November, Norristown, Pa.-based U.S. Physicians filed for Chapter 7 liquidation, putting the privately held company out of business.
Amid all this turmoil, Lucas wonders who will end up controlling her practice. She says she doesn't have the money to buy it back--a lack of capital caused her and others to join PPMs in the first place. But she does think she's found the secret to running a practice.
"Have a good banker and a good office manager," Lucas says. "That's all you need. And don't pay yourself too much."