While physicians might say they like independence, they aren't rushing to repurchase their practice assets, financial experts say.
Physician practice management companies and hospitals are putting practice assets on the selling block, and the price for physician groups is dropping precipitously -- more than 90% over two years, in one case. Still, doctors appear reluctant to open their wallets.
As a result, their practice assets might end up in the hands of another hospital or PPM. That likely will be the case for the 3,500 doctors whose practice assets MedPartners is divesting through its exit from the PPM business.
"There's a big difference between being independent-minded and risk-minded," says W.L. Douglas Townsend, a partner at Durham, N.C.-based physician investment bank Townsend & Frew. "I haven't worked one (deal) yet where the independent physician group has bought itself back."
There are many reasons doctors don't want to buy back their practices. In some cases, they just don't have the money or don't want to guarantee their personal assets to get financing. Many physicians have been elevated to partner status without investing in the clinic, so they aren't used to putting up their own money.
Doctors might also think that if investing in physician practices were such a good idea, PPMs and hospitals wouldn't be shedding clinics. Or their decision might hinge on whether staying independent would mean being shut out of lucrative deals with hospitals and insurers.
Complicating a potential sale is that both sides generally believe physicians should be united in whatever decision is made. For example, Alan Hayes, M.D., president of Raleigh, N.C.-based Cardinal Health Care, says that for his 85-physician group to become independent from MedPartners, almost every doctor must agree to put up money.
But negotiators say it's easier to get physicians to agree to be sold to an outside party than to invest their own money in buying practice assets.
Hayes says opinion is mixed among Cardinal's doctors about whether to join a hospital group or buy back clinic assets. "My guess is that most groups are like ours," he says.
"Some are worried about relationships" with other healthcare entities, Hayes says. Others are looking at what to do "from the perspectives of finance, strategy, autonomy. Plus, there's the question of, 'Does it feel right?' "
Cardinal expected to separate from MedPartners by the end of last month. Hayes says hospitals may be strong candidates for purchasing his practice.
It might seem strange that hospitals and PPMs would be in line to buy groups, since for the most part they previously sold practice assets because of heavy financial losses.
As well as MedPartners getting out of the business, PhyCor recently has shed clinics, and at least three other publicly traded PPMs have declared bankruptcy.
Meanwhile, various surveys show that at least 80% of hospital-owned practices are losing money, many between $50,000 and $100,000 per doctor.
Howard Wizig, a founder of Leawood, Kan.-based Prime Practice Management, says some hospitals are worried that carrying money-losing practices could make them vulnerable to federal laws against paying doctors for referrals.
However, some potential buyers can't ignore the bargain prices for groups -- even those PPMs and hospitals that already feel they've gotten burned.
Those close to negotiations say groups likely will fetch 30% of the price they sold for even two or three years ago. Previously, part of the problem with acquiring practices had been finding a way to recoup the enormous upfront investment.
The run-up in practice asset value came from so-called intangible assets, like a doctor's reputation or ability to increase revenues.
Intangible assets have been devalued for many reasons, including federal and state regulators' increasing scrutiny of their legality and accounting.
Also, PPMs' stock value, which Townsend says drove the bidding wars for practices a few years ago, has dropped so much that the companies can't use stock to finance acquisitions. The higher the stock price, the fewer shares needed in an acquisition, which makes a deal less of a drag on earnings.
Hospitals, even not-for-profits, had to find ways to match PPM offers when those companies were trading for upward of $40 per share, as opposed to $5 or less now.
"In essence, when we're doing a hospital-based deal, we're helping the hospital get off a loss," says Wizig, whose PPM is concentrating on buying practice assets from hospitals. "We're able to negotiate favorable separation because of a recognition of a loss."
Even PPMs that have recently run into trouble are interested in buying practices on the cheap. For example, PhyCor has said it is interested in acquiring other PPMs' practices or joining hospitals in ventures to manage practices.
Steve Messinger, a consultant with ZA Consulting in Washington, says hospitals will be less likely to sell practices than PPMs.
Instead, they may try to rework contracts, which often give physicians guaranteed salaries, he says.
Wizig gives an example of a Southeastern hospital that told its doctors they would be fired in a year unless they could stop financial losses in their clinic.
Townsend says physicians whose practice assets had been owned by hospitals can expect to lose their income guarantees if another hospital or a PPM takes over.
He says the new owner likely would base compensation on physicians' production levels, which makes it even more in the doctors' interest to find a friendly partner.
"What we've suggested (to physicians) is to work with a partner and craft some deal where the physicians and strategic partners make a joint bid (for the practice)," Townsend says.
One more complicating factor for getting a group to buy itself back: figuring out how many physicians want to stay in the group.
Cardinal's Hayes is taking a head count to find out how many physicians are willing to stay in the multispecialty group, whatever the arrangement. It's possible more than one deal will be struck involving Cardinal physicians.
"I would assume that every group would be looking at the exact same thing -- how many people want to practice together," Hayes says.
While it might be difficult to get doctors to buy back their practice assets, it isn't impossible.
The 21 physicians of Los Angeles-based Axminister Medical Group, acquired by FPA Medical Management for $16.2 million in stock in 1997, reacquired their assets in December 1998 for $1.35 million -- a 92% drop. Axminister administrators did not return phone calls seeking comment about how they got their physicians to agree to the buyback or how they are funding it.