PhyCor. Coastal/PhyAmerica. MedPartners. KPC Medical Management. Physicians Resource Group. Response Oncology. EmCare.
The PPM industry is littered with corpses and terminally ill companies like these, the victims of a failed business model, a backlash against managed care and the rekindled desire by physicians to own and control their own practices.
And although the carnage of what was once a $200 billion industry continues, some single-specialty PPMs, notably Pediatrix Medical Group and AmeriPath, have found the formula for success. Other medical groups are seeking alternatives to practice management by forming IPAs, joining up with hospitals or embracing new technology for in-house management.
So why are so many PPMs failing? "In general, the physician management model didn't work out. Even the single-specialties haven't worked out," says Michael Redmond, M.D., chairman of Medical Center Clinic in Pensacola, Fla. Redmond recently led a physician buy-back of the 136-physician, multispecialty ambulatory care provider from Nashville, Tenn.-based PhyCor, which has been shedding physician groups nationwide for more than a year.
"The main thing is that the physician management companies were not able to add value to the practices that they managed," Redmond says. "They were chasing the stock market," looking only at the stock price and ignoring the needs of physicians. "Then doctors began to get unhappy and wanted to pull out."
Daryl Demonbreun, partner in Delta Health Care, a consulting firm in Brentwood, Tenn., says, "PPMs anticipated revenue streams going up and expenses going down. Those things didn't always occur."
Karen Childress, a Santa Barbara, Calif., business coach for independent physicians, has a much more succinct explanation for what went wrong. "Two words: managed care. When you bring in a third party (under capitated reimbursement contracts), there is no (profit) margin," she says. "There is no money left over when you insert another level of management."
According to Redmond, capitation as a result of managed care inhibited revenue growth at individual practices, which turned off investors and sent PPM stock prices plunging. The management firms also did not fulfill their promises of bringing in more business for the physicians and negotiating more lucrative contracts with insurance companies.
He says the PPM model first came together to give physicians more leverage in dealing with large HMOs. "There was a change in the marketplace because they thought managed care would sweep the nation," Redmond says. With more insured Americans now opting for the flexibility of PPOs or even returning to traditional indemnity coverage, physicians are finding it to their advantage to negotiate reimbursement contracts directly with payers.
"The original PPM model is a failed experiment. Doctors got very little value in return for higher overhead costs," says Richard Sinaiko, a member of the faculty at UCLA's School of Public Health and CEO of Healthcare Practice Enhancement Network, a Los Angeles consulting firm. "There is a need for continued consolidation of physician practices into groups. There's a need for capital for (information technology) . . . but you still need good business strategies."
Childress says, "You can't force fees up anymore. There's no way to get any more money to go around" at PPMs and even hospital-managed practices. She says that practice managers were unable to recognize that they had no control over the income side of their balance sheets. "All you can control is the expense side."
Still, some PPMs have even failed there. Coastal Physician Group, which was renamed PhyAmerica Physician Group in a 1999 merger, became the poster child of sorts for all that's gone wrong with PPMs because of its ill-fated attempts to rein in expenses.
In the mid-1990s, Coastal set up its own HMOs and set low capitation levels in an effort to control reimbursement payments to its physicians. This tactic put the firm in direct competition with other managed care companies, which responded by dropping Coastal physicians from their provider networks, forcing many enrollees to change doctors.
"In the business, we call it 'going Coastal,'" says Paul Angotti, president of Management Design in Monument, Colo. He has advised physicians on business practices for more than 18 years.
Compounding the problem, "They tended to bottom-fish. They picked up a lot of very large and dysfunctional groups," Angotti says. "They made some improvements but hit a wall."
Angotti says that PPMs mistakenly viewed themselves as large buying cooperatives similar to the True Value network of hardware stores. "They were dealing with physicians as opposed to hardware stores, and physicians are a very independent group. Some tried to give physicians some control with seats on local boards, but it became a power struggle.
"There are referral relationships that are deeply embedded. The PPM then recommends a certain group of specialists. There may be a radical difference in physicians' perception of the quality of specialists. That really goes against the core belief that a physician is the most qualified to make decisions for patients."
The largest PPMs--Coastal/PhyAmerica, PhyCor, and MedPartners--also got themselves into trouble by attempting to run multispecialty practices. "Multispecialty groups are very hard to manage," Angotti says.
"I always say that a good compensation plan will do away with 95% of the combative issues within a practice. It's very difficult to put together a fair compensation plan for a multispecialty group because everybody thinks that somebody is getting a little sliver of the pie that they shouldn't be getting."
He adds, "The thing that bothers me most is physicians fighting with physicians."
Curtis Udell of North Atlanta, Ga.-based Emphysys, which consults on physician reimbursement and practice management issues, says he believes that many of the PPMs were not prepared to handle multispecialty groups. "There was no level of experience across different specialties. There wasn't the track record of having management of specialists," he says.
"Most (PPMs) tried to manage as primary care, surgical and ancillary. Many doctors did not fit into one of those categories. The only way they were going to be successful is if they were homogenous."
He also blames physicians for their blind faith in the unproven PPM model.
"These guys sold their practices for stock. That's about the stupidest thing they could have done" because stock prices tanked as problems mounted.
James Bonomo, vice president of Caduceus, a medical collections firm and PPM adviser in New York, says: "You had a lot of people come into this business that didn't understand healthcare. Our model was never to make physicians employees.
As soon as they have physicians as employees, (the doctors are) on the golf course," Bonomo says. "In the beginning, the hype was, 'You're going to be rich.' Those paychecks never materialized."
Indeed, the few thriving PPMs remaining tend to focus on a single specialty. One of the most successful is Sunrise, Fla.-based Pediatrix, which has 390 hospital-based neonatologists under management in 25 states plus 60 perinatologists in a subsidiary. It has flourished by keeping its focus on maternal, fetal and neonatal care, says Robert Kneeley, the firm's director of investor relations.
Pediatrix stock reached a 52-week high of $25.69 late last month and was around $23.50 in mid-January after falling below $7 last June.
"We really never viewed ourselves as a physician practice management group," Kneeley says. "We have always treated ourselves like a group practice. We follow the
model of a small group practice, just on a national scale."
Chairman and CEO Roger Medel, M.D., founded Pediatrix in 1979 as a group practice and did not add centralized management functions until after the company had acquired and consolidated several other medical groups in south Florida.
Another PPM doing well these days is Rivera Beach, Fla.-based AmeriPath, which now owns and manages practices for 425 pathologists in 21 states. The firm's shares climbed steadily in last year's bear market, peaking at $27.13 on Dec. 27.
AmeriPath CFO Robert Wynn says the company has avoided the PPM carnage because it is "not a typical PPM." He says, "Everyone's interests are aligned with our model," adding that the majority of the pathologists under management have equity stakes in the firm.
"Obviously, if you have a vested interest, you're going to try harder," says Delta HealthCare's Demonbreun of physician ownership.
Says UCLA's Sinaiko: "There's got to be common ground and a common vision to make it work, and this is true for any group of professionals, not just for doctors. It also requires leadership, and there's not much of it around. It's getting better, but it's going to take time."
Many practices formerly in PPMs are turning to application service providers--computer-based systems that help physician groups manage their own practices. Others are joining up with hospitals, which have proven management systems in place. But the alternative touted most often by industry observers is the IPA.
"I continue to think that IPAs are the best way for physicians to gain control over their practices," Angotti says. Hospital groups often do not have the physician's best interests in mind, he says, as billing departments tend to focus more on collecting payments for expensive inpatient stays rather than for $50 office visits.
However, Angotti warns that IPAs are "doomed to failure" if they settle for capitated contracts. "As soon as you jump that fence to capitation, you become an insurance company," he says. "That's where a lot of IPAs go into bankruptcy" because they get saddled with extra administrative costs.
"You've had a whole bunch of IPAs turning against the doctors they represent by turning into insurance companies because they get into capitation contracts and have to divvy up a set amount of money," he says.
In the end, as in most other industries, the viability of a practice depends on the strength of its business plan, its skills and the relationships between individual physicians and with health plans. Udell says that the best way to make a practice work is to make sure all physicians have what he calls a "collective vision."