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When Norman Chenven, MD, a family practitioner in Austin, TX, formed a multispecialty group with two pediatricians in 1980, he didn’t know it would be the start of a long journey that would see the practice, Austin Regional Clinic, grow to over 100 physicians working in 12 offices.
Nor did Chenven now president, chief executive officer, and chairman of the board of the practice know that he would spend much of the mid-1990s looking for some sort of partnership that would give the clinic the capital it needed to continue expanding, the strength to negotiate fair contracts, and the autonomy to run that practice as the board saw fit.
But such has been the case, and Chenven has traveled a twisting path to get where he is today still searching for the right partner.
The practice enjoyed a good, exclusive relationship with one payer, Prudential’s HMO PruCare, throughout the 1980s and into the 1990s, says Chenven. About 70% of the practice’s patients came from that HMO. The remaining were fee-for-service. "By the end of the 1980s, we took care of 78,000 people," he recalls. "But by the early 90s, the relationship was less comfortable. We thought that the exclusivity needed to go, and they thought it didn’t."
At the end of 1993, the practice canceled its contract with Prudential and had two years to transition and build a practice that could survive losing 70% of its patient base. "We had to have capital to continue our business."
But what kind of relationship would the practice choose pure financial investment? A merger with another practice? Money from a practice management company? Chenven says his options were open, and much of 1994 was spent determining what the best path would be.
"We engaged an investment banker and got very methodical," he says. The practice put together a business plan and looked at all potential strategic and financial partners. "Venture capital gives you money only. Hospital partnerships work on a strategic level, especially for the hospital, but there are issues of control. An HMO relationship, like our previous one, helps with growth, but we’d been there and done that."
Management groups offered money and a stake in the future success of the practice, says Chenven, but "the hurdle there is often a big management fee, and the two partners have to create a lot of business and more margin for the physicians to do well."
There were a few medical groups in the area that offered potential merger opportunities, as well, but that would mean entering the relationship as the weak partner. Chenven says his last option was to borrow money from a bank "but they don’t like that much risk."
The group came up with 30 potential partners, which was narrowed to 10. Requests for proposals were sent out, and of the responses, three were attractive. After intense discussions, the list was narrowed to one management company, Coastal. "We would have the capital we needed and authority over the central Texas market."
But as soon as that company was chosen, news hit that it was having severe financial difficulties. It was late 1994, and Austin Regional Clinic was back to square one.
By the spring of 1995, there was a pleasant surprise. The practice had expected to lose money due to the loss of Prudential patients, "but we were profitable," says Chenven. Even 1995 was a break-even year. "We were doing much better than our budgeting suggested. We had a cohesive group of 110 doctors, none of whom left and all of whom took pay cuts. The management group cut costs, marketers brought in new business, and patients were very aggressive in finding HMOs that included us on their panels."
Despite the unexpected success, Chenven and his partners knew that there was still a need to grow in order to succeed in the market.
What the clinic found was a line of credit from Seton Health Care Network, also in Austin, which helped the practice through 1996 when the loss of Prudential members was completed. "We woke up on Jan. 1, 1996 with 20,000 fewer patients than the day before," says Chenven, noting that nearly 60,000 Austin Regional Clinic patients were successfully transferred from PruCare to other HMOs that kept them under the clinic’s care. The practice also had use of funds from previous profitable years to tide them over.
"We did lose money in 1996, but we only used about a third of the line of credit," he says. "We expect to return to profitability this year."
Now, the search for a partner is on again. The difference, however, "is that we are coming from a position of strength, not weakness. We are looking to build our group, not have it bailed out."
This time, there is a strategic planning committee that consists of 50% board members and 50% from the practice not necessarily people who are in leadership positions. Management has made presentations to this committee, as have investment bankers, attorneys, banking groups, a hospital, and practice management companies.
"What [the committee] decided we want is to be a strong medical group that provides a rewarding career for its employees and retains autonomy and authority," says Chenven. "We want a partner who is committed to our vision and has the ability to help us grow to a point where we have negotiating power and leverage."
Although the first time around Chenven never considered merger seriously, that is an option now, "as long as the other party brings value to the merger."
Chenven has learned lessons from his past experience that can help others, he says. "Be sure you know yourselves and your goals and then find the expertise business and legal to understand how to achieve them."
Chenven also recommends that you find an investment banker with knowledge of your business. "We found one who spoke our language and was not just transaction oriented. He cares about the end result."
Finally, Chenven advises you "look deeply into the eyes of your intended and make sure there will be strategic and financial alignment when the deal closes. There is no one solution. You have to pick what’s best for you, making sure your head isn’t turned by another pretty face."