Dean Health System, a 432-physician multispecialty group in Madison, Wis., and its sister management and consulting company, Dean Solutions, have become the newest and largest shareholders in a different kind of physician practice management company.
While many publicly owned PPMCs are divesting practices in the wake of disappointing financial results, 4-year-old Stratum Med, a doctor-owned collaboration of 15 independent Midwestern medical groups, has pursued a strategy of limited growth.
Stratum doesn't purchase the assets of practices and has no intention of going public or growing beyond its five-state geographic area. In many ways, the Urbana, Ill.-based company looks more like a local cooperative than a for-profit corporation.
Even the terms of the Dean deal, described by Dean Health's President and Chief Administrative Officer Kevin Hayden as an "equity earn-out strategy," sound like a barter arrangement.
Dean has received 110,000 shares, or 10.6%, of Stratum's outstanding stock, valued at about $275,000. In the noncash transaction Dean will acquire the shares in exchange for business services to be provided by Dean Solutions to Stratum shareholders.
They include access and scheduling improvements, service quality initiatives and productivity enhancement techniques that Hayden says have proved effective in group practices with which Dean Solutions has consulted.
"Our purpose isn't to make money for this company, but to save costs for our shareholders," says Gerry Tresslar, Stratum's president and chief executive officer. "It's always been our strategy to drive efficiencies and economies of scale. If you get outside a certain geography, it's difficult to do that."
Because Stratum shareholders' markets are different, each is responsible for its own contract negotiations, Hayden says. "What (Stratum shareholders) are focusing on is using shared business lines to improve our operational performance," he says.
Stratum's approach is not unlike an independent practice association model, minus the emphasis on managed-care contract negotiation, says Anthony Pietrak, an analyst with North Wales, Pa.-based Sherlock Co., which publishes research on the managed-care industry as well as the monthly PPMC newsletter.
"I've seen companies like that work in oncology, for example, where the purchasing benefits are even greater. It avoids the PPMC label because the company is not buying the medical groups. And the groups probably like it because they have some say in which initiatives they want to invest," Pietrak says.
Stratum's newly elected board chairman, Dale Anderson, M.D., president and CEO of the 180-physician McFarland Clinic in Ames, Iowa, said Stratum is more than just a group purchasing co-op; it is an exchange of intellectual talents.
"Each individual shareholder group shares intellectual capital as part of the movement toward sharing best practices," Anderson says. Stratum has categorized all the processes associated with managing and now looks for ways to standardize what works.
"Dean Health is a premier multigroup practice that has developed systems of delivery that all of the groups can benefit from," Anderson says. "They're clearly a leader in that market."
Stratum expects to save shareholders more than
$5 million in measurable overhead costs in 2000, Tresslar says, with shared services such as group purchasing, physician recruiting and information technology initiatives. In fiscal 1999, Stratum made a profit of $122,000 on revenue of $5 million, with profits reinvested in operations.
"We're just trying to cover our expenses," Tresslar says, adding that where most PPMCs historically have taken a percentage of revenue, Stratum works off of shareholder dues.
"Members pay to take care of overhead. We work to save them three to four times whatever their dues might be," he says.
Each year, shareholders get their return on investment mainly through savings or reduced costs for services.
This year the board, made up of the groups' CEOs and chief medical officers, may elect to raise dues in order to fund the purchase of a practice management information system, Tresslar says.
Even Stratum's governance structure is a little offbeat. Board seats are not based on stock ownership, but on participation. Those groups that are most involved with Stratum get to elect seven board members and those whose involvement is less active get to elect the other three.
"When we have leverage is when we have participation," Tresslar says.