PPMC options less alluring to practices given industry’s woes

Groups search for other sources of capital

What a difference a year makes. Physician practice management companies (PPMCs), once billed as the answer to managed care contracting woes and a much-needed source of capital infusion for medical groups, now are finding it increasingly hard to generate a positive buzz. It’s the difference between being able to get a prime table at any restaurant in town a year ago and having a hard time even catching the restaurant manager’s eye today.

The verdict: The dance card for PPMCs is not as full as it was last year, due to such highly publicized failures as the exodus of Birmingham, AL-based Medpartners from the PPMC business and falling earnings among some of the country’s largest PPMCs. But consultants and practice leaders say not everyone has written PPMCs off as a passé trend. What’s left are two reactions: a mixture of skepticism and caution among practices who are considering affiliating with a PPMC, and an increased willingness to look for other strategic partners who can help a practice gain managed care contracting advantages.

"A lot of physicians I know are rediscovering IPAs [independent practice associations]," says Elaine Scheye, president of The Scheye Group Ltd., a Chicago-based strategic advisor to physicians and hospitals. "They’ve seen their colleagues down the street or across town affiliate with PPMCs . . . and hear all sorts of stories of disenchantment. At last, as a result of recent turmoil within the PPMC sector and the attendant publicity, physicians are sifting through all of the promises that PPMCs have offered, and are meeting them with a healthy skepticism."

Although IPAs traditionally don’t offer the kinds of management services that PPMCs boast, they can give physician groups the advantage of strength in numbers when approaching negotiations with payers.

Practices also may be more open to other arrangements after reading comments like the ones made by Mac Crawford, MedPartners chairman and chief executive, in the Chicago Tribune and New York Times. Crawford said he wasn’t sure whether the management of doctors should be performed by publicly traded companies.1

Scheye says she has encountered no practices that report any value-added benefits from affiliating with a PPMC — especially given the typical 15% of monthly revenue that PPMCs charge medical groups as management fees.

PPMCs that stick to managing one specific medical specialty "are doing a better job and have the potential to satisfy the physicians affiliated with them," she says. Many of these firms are developing outcomes data and treatment protocols, particularly with respect to disease management for specific groups of patient populations during a time when payers are demanding evidence of superior clinical outcomes and utilization management skills.

Three owners in five years

The uncertainty surrounding the PPMC industry is demonstrated by the history of Wheaton Clinic, a 20-physician clinic based in suburban Chicago, and several sister practices owned by MedPartners. During the past five years, the clinic has been through two owners and is about to be owned by a third. Wheaton was originally owned by Aetna (now Aetna US Healthcare), which sold many of the physician practices it owned to MedPartners. The MedPartners announcement in November means Wheaton Clinic is one of several Chicago-area practices (representing a total of 270 physicians) up for sale.

"The one piece of advice I have is, Don’t think anything is final,’" says Julie Kuehn-Bailey, a spokeswoman for the MedPartners Chicago office, who also serves as marketing director for several of the firm’s Chicago-area clinics.

Bailey says the clinics did realize some value from the MedPartners affiliation in two ways. First, MedPartners was able to bring together a number of small and medium-sized practices in the Chicago area, and thus provide the strength in numbers that is so important in managed care contracting. Secondly, the firm provided employees to negotiate more favorable managed care contracts for the collective group of practices.

"But now that they’re spinning us off, I don’t think it’s a threat to our managed care contracts or their value," Bailey says. "They [MedPartners] are talking about keeping us together, and our physicians are staying together. That’s what gives us a competitive advantage in contracting."

MedPartners has given its group of Chicago-area practices two options: Either buy back the practice (which will not likely happen, given the expense) or MedPartners will sell the practices to a local health system or practice management firm, giving the physicians with the current MedPartners-owned Chicago clinics a say in selecting the new owner.

"We’re looking at almost every health system in the area, entertaining what they have to say at this point," Bailey says. Because the collective group of practices have a patient base representing about 25% of the patients in the community, they are in a fairly enviable position. "We recently sold off one of our [affiliated] practices before the MedPartners announcement, and we had health systems that said, We know you’re not for sale, but if you ever are, let us know.’"

The clinics have only received two phone calls from patients about the MedPartners situation since the MedPartners announcement, she says.

One area that offers hope for the PPMC industry is an accounting requirement implemented by the federal Securities and Exchange Commission (SEC). Because of inconsistencies in accounting methods used by PPMCs, the SEC now requires publicly-traded PPMCs to amortize goodwill over a period of 10 years or less, Scheye says. By comparison, some PPMCs in their infancy amortized goodwill over a 40-year period.

While restatement of the financials resulted in the reporting of lower earnings at many PPMCs, this enforced standardization ultimately benefits the industry, Scheye says. "These changes in the end probably have done the PPMC industry the greatest service. Now, PPMCs must give truer pictures of their financials. Survival of the fittest will be the practice as PPMCs will have to achieve financial viability and stability by being able to demonstrate results, integrate their acquisitions and grow internally."

Kuehn-Bailey, who has worked for her practice under three different PPMC owners, says PPMCs can work in the right situation. "If you’re out there by yourself, I would have to think it adds value," she says. For example, a practice may have an excellent marketing manager, but may need help in getting its management information systems up to date or improving its billing collections. "But if you’re already a self-sufficient operation, take a close look at the [PPMC’s] management fee and what you would be paying."

One practice manager who did not wish to be identified sums up the feelings of some practices that have chosen to go the PPMC route. "I’m not sure who else is out there," he says. "Insurance companies tried to own groups and weren’t successful. Hospitals tried to own groups and weren’t successful. If PPMCs don’t work, how will groups get capital? It’s still difficult to get physicians to retain earnings, especially with reduced reimbursement. The question is whether [PPMCs] can generate enough of a profit margin to make Wall Street happy."

Reference

1. Japsen B. Another painful lesson in medical economics. Chicago Tribune, Nov. 12, 1998:1/News.