With the troubles many hospitals and physician practice management companies have had making money off doctors, it's no surprise the number of practice mergers and acquisitions fell in 1998.
But that doesn't mean 1999 will be a barren landscape for deals, analysts say. The desire to get rid of failures -- and build upon successes -- is driving current deals.
While hospitals and multispecialty PPMs unload money-losing practices, single-specialty groups and practice managers continue to grow. As a result, per-physician acquisition prices in some markets are greater than those of the bull market-fueled PPM boom of 1996 and 1997.
Meanwhile, companies like Oakbrook Terrace, Ill.-based UroTherapies are trying to take advantage of both trends. The 2-year-old urology PPM has 40 urologists and is interested in purchasing practices from troubled organizations trying to pare down.
"We view that as a potential because of the fact that the education (about how a PPM operates) has already been done," says Michael Klein, UroTherapies' chief executive officer. "But it may be a detriment because they're coming from a bad experience."
In 1998, Irving Levin Associates counted 258 publicly announced physician practice acquisitions and mergers, down from 310 in 1997 but still ahead of the 242 in 1996. Sanford Steever, editor of the New Canaan, Conn.-based company's Health Care Merger & Acquisition Report, says the 1998 figure could rise to 275 by the time final tallies are computed this month.
Steever says 161, or 62%, of 1998's deals occurred in the first half of the year, a sort of last gasp of the 1996 and 1997 boom. Ninety-seven deals closed in the last six months of 1998, down 27% from the same period in 1997. Data on the number of physicians involved in deals were not available.
Steever did not yet have information on the per-physician price for 1998 deals. However, he expects the average price to drop because of sell-offs of the thousands of physician practices affected by the bankruptcy of FPA Medical Management and the PPM divestiture of MedPartners, for example.
"There are, in a way, more sellers than buyers," Steever says.
The Center for Healthcare Industry Performance Studies' 1999 Physician Practice Acquisition Resource Book states that the price per physician was $390,000 in 1996-98, up 125% from $173,000 in deals before 1996. The Columbus, Ohio-based organization released its data in late January.
Although the information, culled from 615 practice deals, is mostly from 1997, CHIPS President William Cleverley says there is no indication per-physician prices are dropping.
"The practices being acquired are much more likely to be profitable than the ones in the past," Cleverley says. "There's better shopping going on. If you're buying a business that has a higher level of profitability, the (value) will be higher."
But unlike in 1996 and 1997, any bidding wars will be limited, he says. "If it's a bad practice, I think you can be assured there won't be many bidders," he says.
"A fair amount of the activity is being created by those who are already in the business exiting it," says Steven Elek, a partner in healthcare transaction services at PricewaterhouseCoopers in Philadelphia.
"Some are viewing that as a buying opportunity," he says. "But a fair amount of that buying is being done by the physician groups themselves, taking control back from entities they had sold to."
Elek expects hospitals to be active this year in selling off physician practices. According to most surveys, 80% or more of the nation's hospitals lose money on their practices. "Many of them are in the process of just re-evaluating the practices they have," he says. "They're sorting through ways of getting some of the operational efficiencies they hoped to get out of the deal. To the extent they can't get those, they're exploring the sale of the practices back to the physicians or to other groups."
With the troubles of multispecialty PPMs such as FPA and MedPartners, there's a growing sense in doctors' offices and on Wall Street that single-specialty groups may be a better way to consolidate practices.
UroTherapies' Klein attributes this to HMOs' greater use of point-of-service plans, which don't require a primary-care doctor's OK to seek specialty care. Also, single-specialty groups concentrate on one type of practice, giving them more ability to build up money-making ancillary services.
Six of the 10 largest deals in 1998 were consummated by single-specialty PPMs (see chart on page 50). In 1997, eight of the 10 largest deals came from multispecialty PPMs, according to Irving Levin.
The largest deal was Houston-based American Oncology Resources' $714 million purchase of fellow oncology PPM Physician Reliance Network of Dallas on Dec. 14.
Pediatrix Medical Group, based in Fort Lauderdale, Fla., appeared twice on the largest-deal list, with purchases of a Las Vegas perinatology practice and a West Palm Beach, Fla., neonatology practice.
Multispecialty PPM companies promised doctors that getting involved in a larger group would result in greater negotiating clout with managed-care companies. Because that met with little success, practices are hoping that large, single-specialty organizations can get them higher reimbursements.
Indianapolis-based Nasser, Smith & Pinkerton Cardiology figured a merger was the best way to lock up the lion's share of heart services in Indiana. After talking with PPMs and hospitals about some sort of alignment, Nasser, Smith & Pinkerton decided last August to merge with Northside Cardiology; both are headquartered in the same building adjacent to St. Vincent's Hospital.
The merged group, now called the Care Group, has 87 cardiologists and 57 primary-care doctors, a referral base in 82 of Indiana's 92 counties, and privileges at 40 hospitals, including all but one in Indianapolis. The merger closed Jan. 1.
"This is only going to be a positive when we deal with insurance companies," says Carol Kourany, marketing director at the Care Group. Kourany concedes that the group hasn't yet had the opportunity to throw its weight around in contract negotiations.