No easy answers in search for capital

Texas group takes methodical approach

As a thriving 105-physician multispecialty practice with 12 offices, a 125,000-member patient base, and a profitable balance sheet in a stage 3 managed care market of about 900,000 citizens, Austin (TX) Regional Clinic seems to have it made. But practice leaders are focused on the future, not the present — a focus that necessitates some tough decisions and planning about capital needs.

It’s clearly a sign of the times, as practice leaders around the country are considering a variety of options (see chart, p. 120). The process Austin Regional Clinic is undergoing in its search for capital offers some insights into the strategic planning methods groups can use to help determine the right approach for them. Physician’s Managed Care Report will follow up with Austin Regional Clinic in six months to determine the practice’s progress.

Austin Regional Clinic got to its present situation after terminating an exclusive relationship with Prudential Health Care of Austin with a late 1995 effective date (Prudential was not willing to let the clinic drop its exclusivity clause and contract with other health systems). The use of retained earnings and a line of credit helped the practice get through the loss of patients that resulted from that contract’s termination. As of early this year, the practice had recovered, with an all-time-high patient base and contracts with five HMOs and 12 PPOs.

"It’s such an interesting time for the medical world," says Norman H. Chenven, MD, CEO and president of the multispecialty group practice he helped found with two other physicians in 1980. "There’s so much consolidation going on, so much money chasing money, so much volatility. It’s almost as if we’re in a random evolutionary expansion, with all sorts of strange hybrid and new species popping up. Somewhere down the line, 10 to 15 years from now, we’ll know which ones are good enough to survive. But I don’t believe there’s anyone today with enough wisdom to anticipate how it’s all going to play out."

Chenven and his partners knew they had to decide which path to take for the future, but they wanted their choice to be the result of a well-thought-out process — not a gamble. They took the following steps:

1. Selecting a strategic planning committee. The nine physician members of the committee comprise several Austin Regional Clinic board members, chiefs of services, and physicians representing a range of specialties and demographics. "We wanted to get input that was representative of the whole group," Chenven says.

2. Educating the committee about various options. The committee heard presentations from Austin Regional Clinic senior management regarding the group’s current financial situation, met with two investment bankers who specialize in health care to discuss various financing options, and held discussions with potential partners, including representatives from hospital systems, other multispecialty practices in the community, publicly traded physician practice management (PPM) companies, and startup PPMs.

3. Defining objectives. The committee came up with these objectives:

• Creating a secure, satisfying, stable practice environment. "That’s different from just obtaining the most dollars for your practice," Chenven notes.

• Maintaining a competitive compensation and benefits package for the practice’s physicians and employees.

• Maintaining ongoing profitability.

• Obtaining, retaining, or growing whatever equity value it could. "The objective is stated that way to reflect flexibility; we want to be open to all possibilities," Chenven explains.

• Preserving as much physician control as possible in regard to both medical and business decisions.

4. Setting business goals to help meet these objectives. The practice targeted 25% to 30% market share as its goal (currently it provides care to about 17% of third-party reimbursed patients in the Austin market). "In order to grow to that size, we will need to add facilities and providers, merge or acquire some existing practices, grow and support our affiliated IPA and management service organization, and even expand our geographic access to some surrounding smaller communities," Chenven says.

5. Identifying a timetable and financial target. These goals don’t come cheap. Practice leaders determined they would need to invest $15 million to $25 million during the next three years to help grow the practice. Chenven says they would like to execute the plan relatively rapidly to take advantage of their current relationships with payers and other medical groups due to their practice’s reputation, as well as respond to the consolidation that is occurring among hospitals and payers. "We hope to have a definitive agreement [with a partner] by the first of 1998," he adds.

6. Beginning more serious discussions with potential partners or financiers. This is the stage Austin Regional currently is in. Because the practice has done so much planning, Chenven expects it to be a pretty short list — four to five groups at most.

Although the ultimate answer for Austin Regional Clinic remains to be seen, Chenven praises his group’s leadership and is glad they took the time to think through the process carefully. "Some of the development people we deal with have tried to get us to shortcut the process. They say, ‘let’s do exclusive negotiations. You can trust us.’ But each group needs to go through this process to decide what it is they really want," he says. "There are so many contingent events that can occur. The process sometimes feels more like white water rafting. You put your raft in and try to keep your raft off the rocks. If you can successfully negotiate all those dangerous spots in the river, you’ll be okay in the end."