PhyCor case study sheds light on physician practice management tactics
PhyCor case study sheds light on physician practice management tactics
Many of our readers tell us they are struggling with whether to sell to a physician practice management company (PPMC), although only about 2% of the nation’s physicians currently are affiliated with one. This month, Physician’s Managed Care Report examines the reasons behind the success of PhyCor, a PPMC with accolades from both Wall Street and physicians. We also give you a list of questions to ask if you’re negotiating a deal with a PPMC.
Get ready; the fledgling physician practice management company (PPMC) market is poised for a boom that will likely result in your practice being courted by at least one of the more than 30 publicly traded PPMCs. The advice from practices that have been through it: Pick your partners carefully, make sure your incentives are aligned, and do your own practice valuation before signing on the dotted line.Only about 2% of the nation’s physicians currently are affiliated with a PPMC. However, one industry expert predicts explosive growth in the industry. Peter S. Stamos, director of Stanford University’s Comparative Health Research Center in Palo Alto, CA, predicts the industry will capture one-third to one-half of annual revenues in the physician services market within five years.
"The health field is going through fundamental reform, more change than we’ve seen in any of our lifetimes," says Joseph Hutts, president and CEO of Nashville, TN-based PhyCor, a company described by many analysts as among the cream of the PPMC crop. "The net result is that it’s becoming a much more competitive field. I think physicians realize that if they’re going to do well, they’re going to need to be in the right structure with the right resources and aligned with the right partner."
Since its formation in 1988, PhyCor has grown selectively but wisely, analysts and consultants say. For the fiscal year ended Dec. 31, 1996, revenues totaled $766 million, up 74% from 1995. Net earnings for 1996 totaled $36.4 million, a 66% increase from the prior year. On a base of 23 clinics operated as of January 1995, same-clinic revenue increased 16.1% for the fiscal year ended Dec. 31, 1996.
"They are prescient in their ability to accurately read the market and anticipate the needs of physicians," says Elaine Scheye, president of The Scheye Group Ltd. in Chicago, strategy advisors to physicians and hospitals. "They were accurate in their reading several years ago that as managed care would continue to grow, physicians would earn less and have to work harder just to keep pace with what they were earning under a traditional fee-for-service plan. That on top of the added administrative burden of maintaining a well-run practice, negotiating managed care contracts, and dealing with the hassle factor’ — a tall order for most physician practices."
PhyCor’s strategy: sticking for the most part to secondary markets like Jacksonville, FL, Petoskey, MI, and Lafayette, IN, where it can get a significant market share by acquiring a multispecialty or primary care practice with market dominance, according to Erik Wiberg, a physician practice management analyst at New York-based UBS Securities LLC.
"If they can find a 50- to 100-physician practice through one acquisition, they’re able to obtain that significant market share," he says, adding that PhyCor may also help build a multispecialty network or work with a group of physicians who already have explored the idea of getting together. Analysts and consultants speak highly of PhyCor’s acquisition strategy. Purchase terms for a practice usually range from 6% to 8% of first-year earnings before interest and taxes, Wiberg says.
"PhyCor spends a lot of time in doing very careful due diligence in a practice before it makes an offer. Its long-term strategic plan for growth is disciplined," Scheye says. "It doesn’t stand out in a field with a rifle and shoot at every single bird that passes its way. It shoots, or acquires, selectively."
Adds Wiberg, "I only know of two practices of the approximately 40 they acquired where it didn’t work out. PhyCor sold the practice back to the physicians at book value."
The fault of some other PPMCs is that they allow themselves to be pressured by the investment banking community and shareholders and don’t spend as much time in careful due diligence and doing long-term strategic planning before making their acquisitions, Scheye says. The result: They lose the value they paid for.
Once PhyCor acquires a practice, they take the following steps, Wiberg says:
• forming a joint policy board, usually consisting of three practice physicians and three PhyCor representatives;
• coming in and cutting expenses, sometimes by providing administrative services through the corporate office, or by purchasing more efficient computer systems for the practice;
• trying to increase revenue through a number of ways, such as adding new contracts, renewing managed care contracts at a better rate, or adding equipment to enable the practice to offer new services;
• creating professional growth opportunities and career paths for administrative managers, either through opportunities for promotions to other markets or opportunities for physicians through their Institute of Managed Care. Through the Institute, the physicians on each of the clinic’s operating boards meet to share best practices and discuss clinical outcomes data.
PhyCor’s goal, Wiberg says, is to increase revenues for the clinics it acquires by 10% to 12% annually. Another plus for physicians: PhyCor typically limits its input to administrative decisions, leaving the clinical side of practicing to the physicians.
Making decisions by consensus
PhyCor’s governance style is one of its strengths, and a key to understanding PhyCor’s philosophy, says Gary Erskine, FACMPE, executive director of Arnett Clinic in Lafayette, IN. PhyCor acquired Arnett, a 115-physician multispecialty practice, in 1995. The three physicians/ three administrators mix works on the consensus model style that Erskine says is characteristic of most physician practices."PhyCor understands physician groups," Arnett explains. "We may have a board, we may have a president of the group, but decisions are made on a consensus basis. That’s why our transition has been so easy. It hasn’t required the physicians to change the way they make decisions."
Because PhyCor receives a percentage of the physician pool (revenues of the group less expenses before distribution to physicians), what’s good for Arnett Clinic is good for PhyCor, Erskine says.
Before Arnett Clinic was acquired by PhyCor, it explored forming a community-based management services organization (MSO) with two local hospitals. Because the two hospitals were not able to come to an agreement, Arnett looked for another integration partner. Because PhyCor had contacted the practice several times about a possible purchase, and because Arnett’s physician and administrative leaders liked what they had heard about PhyCor, they decided PhyCor was a good partner, Arnett says.
Erskine adds that in hindsight, part of the reason their MSO never came to fruition was differences in the way hospitals and group practices make decisions. "Our investigation of a lot of integrated models shows that a hospital governance is more hierarchical or corporate in nature, with decision-making on a chain of command. In physician groups, it’s more of a consensus model."
Arnett Clinic has felt the impact of PhyCor affiliation primarily in terms of strategic direction, Erskine says. There are two PhyCor vice presidents who work with Arnett Clinic as part of the joint policy board (Erskine is the third administrative member of the board). The board meets once a month, as does a clinic board that addresses medical decisions. "The utilization and quality issues of managed care still fall to the responsibility of the physicians. PhyCor will attempt to help the physicians when asked with the medical side, but they aren’t going to be in the role to make decisions," Arnett says.
It was like having in-house consultants’
Traditionally, Arnett has operated its own physician-owned health plan, and just recently decided to contract with other managed care organizations. Strategic assistance from PhyCor helped Arnett Clinic move forward in an initiative to contract with MCOs. Although PhyCor’s representatives did not attend the contract negotiations with Erskine and other Arnett Clinic representatives, PhyCor helped the group evaluate the various MCOs and whether the risks of participation with each plan outweighed the benefits. "Although the strategic decision was ours, it was kind of like having in-house consultants," Erskine says.Arnett Clinic signed a contract earlier this year that exemplifies a strategy PhyCor favors for many of its practices — something Hutts calls virtual integration."We’re trying to figure out how to work more closely with hospitals without actually owning them," he explains.
In Arnett’s case, the practice has a series of contractual relationships with a local hospital. The hospital serves as the preferred hospital for Arnett Clinic’s health plan, gives the practice "more advantageous hospital rates" (Erskine could not disclose details), and allows the practice to lease equipment for use by its medical staff. Arrangements currently are on a per-diem basis.
Wiberg says he expects PhyCor to employ the following additional growth strategies in 1997:
• purchasing more clinics at slightly less the rate than they had in 1996 (Wiberg expects PhyCor to add about 1,000 physicians to its network in 1997);
• acquiring one- or two-physician practices and integrating them into existing PhyCor practices;
• building the IPA business, which currently consists of 9,300 physicians;
• recruiting additional physicians for existing practices.
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