Joining the ranks of PPMs can pay off

Creating a single-specialty PPM

"Service after the sale" is a marketing axiom that applies in many industries. Atlanta otolaryngologist Ramie Tritt, MD, says it should apply in reverse once your practice sells its assets to a physician practice management (PPM) company, hospital, or other entity. "Capital is important, but just as important are the practice management services that are provided after the transaction has been completed," he states.

If you are looking for an alternative way to best use the resources you’ve developed in your practice and make it even more competitive, you may want to do what Tritt’s practice did: allowing your practice to become a purchaser, not a seller. Atlanta Ear Nose & Throat Associates P.C., Tritt’s practice, has turned to Wall Street for capital to acquire other ENT practices across the country by forming Physicians’ Specialty Corp., the first publicly traded PPM focusing solely on the ENT field.

In Atlanta ENT’s case, the expansion from managing its own practice to owning and overseeing other ENTs was a natural next step. "Our ability has always been to manage and grow a practice," Tritt says. With more and more mergers and acquisitions dominating the competitive specialty physician market, the practice knew it had to grow and expand — but it needed more capital. Rather than selling to a multispecialty PPM, the practice leaders decided it made sense to export its management skills to other practices. Its philosophy: to stick to what it knows — the ENT, head, and neck field — rather than becoming a multispecialty organization.

Becoming a publicly traded company

"We feel affiliating with a PPM is not the same as selling your practice to a hospital," Tritt says. "In many cases, hospitals are driving dollars into the hospital through ancillary revenue, rather than driving dollars into the practice. PPMs are driving dollars into the physician practice," he says.

The dynamics of the ENT field make it ripe for the physician practice management concept, adds Richard Ballard, chief executive officer of Physicians’ Specialty Corp.:

• About 80% of ENTs are in single-specialty practices.

• About 6,200 of the approximately 8,000 ENTs nationwide are in groups of four or fewer physicians.

"It’s a highly fragmented market. Otolaryn go logists enjoy working in a single-specialty environment," Ballard explains. "But there is a great deal of concern about how they are going to survive in today’s marketplace. They are feeling the pressure of consolidation in the health care industry."

Three survival skills are essential in a managed care marketplace, according to Gerald Benjamin, a principal with Atlanta-based Premier Health Care, which specializes in mergers, acquisitions and capital strategies:

• the necessary systems infrastructure to know your costs and handle delegated services;

• geographic diversity through satellite offices or affiliations with other practices;

• risk-contracting capabilities — an undertaking that is not as simple as it seems.

Possessing these skills is just the beginning. A practice seeking capital also needs to do an honest evaluation of its strengths, weaknesses, and core competencies, Benjamin says. Do you have the physician and executive leadership to assume risk contracting? Do you have the vision and ability to fund requisite information systems? Do you have physician and administrative leaders willing to commit the time it takes to operate an organization that does all these things? "If so, it may be appropriate to look at external financing [i.e., financing through a venture capitalist or by going public] as opposed to capital partners," Benjamin says.

Once Atlanta ENT decided Wall Street equity was the way to go, the organization went through a number of steps, including:

• incorporating Physicians’ Specialty Corp. as a Delaware corporation with the goal of obtaining growth capital through the public market;

• developing a detailed business plan, including core competencies and market dynamics;

• locating and hiring senior management experienced in the health care field and in working within the public market environment;

• using Benjamin’s firm to assist in the selection of two investment banking firms as underwriters;

• selecting accounting and legal representation;

• undergoing an enormous amount of accounting and legal due diligence;

• preparing the S1 filing for the Securities and Exchange Commission;

• preparing the prospectus to present to the investment community;

• presenting the company to potential investors during a three-week tour of the country;

• working with underwriters to oversee an initial public offering in March (the firm’s stock opened at $8 a share, generating $17.6 million in capital);

• obtaining a $20 million acquisition and working capital credit fund from NationsBank;

• honoring the rules of what Ballard calls "the quiet period," a 25-day period after the initial public offering in which you cannot communicate with investors or actively purchase acquisitions.

Once Physicians’ Specialty jumped through the legal and regulatory hoops of becoming a public company — which took about six months of hard work — the firm could get down to pursuing physician practices. The group’s first step was to initiate a direct mail campaign in May to about 7,400 of the nation’s ENTs, representing the bulk of licensed ENTs who practice in a group setting. As of mid-July, about 7% of these physicians had responded. Physicians Specialty Corp. mailed information packets out to each of these respondents, and is in the process of following them up with phone calls, Ballard says. Tritt and Ballard have met personally with serious candidates, and to date have closed on the acquisition of three practices.

As you can imagine, it takes time to ink these deals because selling your practice isn’t something the buyer or seller takes lightly. "A lot of the practices we talk with put us through a lot of scrutiny, and we take just as much care in scrutinizing them," Ballard says. In addition to checking credentials of physicians in the practice and the practice’s reputation in the medical and lay community, Physicians’ Specialty Corp. can tap into the networking relationships its own 28 physicians have built up. "The ENT field is a very large small community," he says. "It’s likely someone went through residency or medical school with a physician in a candidate practice, or knows someone who did."

Once a conversation leads to a purchase, Physicians’ Specialty Corp. acts as a consulting firm and a management firm, providing services such as:

• capital and operating budget development;

• practice development planning;

• conducting a practice merger and affiliation analysis;

• identifying, implementing, and funding an ancillary revenue opportunity analysis;

• issuing monthly reports that include departmental, office, and physician results and statistics;

• managing the billing and collections function;

• developing and implementing staff job descriptions;

• developing an employee handbook, and implementing policies from the handbook;

• developing managed care contract proposals;

• evaluating risk pools, contract features, and re-insurance requirements;

• purchasing other groups;

• developing and implementing a quality improvement plan;

• setting up and training staff on an Internet-based provider panel network administration system;

• recruiting and developing allied health professionals, such as physician assistants and audiologists;

• developing a practice governance structure that includes equal representation from physicians in the practice and Physicians’ Specialty Corp. management.

Physicians’ Specialty Corp. charges a monthly management fee based on top-line revenue that the practice collects, rather than charging a flat rate, Ballard says. The company believes this creates an atmosphere of camaraderie and aligned incentives. "Because of that, we can go to a group and say, ‘Here’s what we should be doing,’ and they can choose to accept that advice or not." When queried about the ongoing management of acquired practices, Ballard responded, "We’re going for the premier practices, and premier practices tend to have premier administrators and physician leaders. Our staff works with these individuals to ensure the provision of Physicians’ Specialty Corp.’s management services."

Analysts expect Physicians’ Specialty Corp. to have contracts with 46 physicians by the end of 1997, and 71 physicians by the end of 1998. The organization’s immediate focus is on acquiring practices in the East, with a Northeastern regional presence expected in the next six to nine months, Ballard says. The organization plans to expand to other markets later in 1998.