Merger, joint venture with firm makes growth easier

Tradeoffs in culture, control may be necessary

To affiliate, or not to affiliate — that is a tough question. With the Big Three of Concentra Inc., Occupational Health and Rehabilitation, and U.S. HealthWorks firmly entrenched as dominant forces in the occupational health industry, small- and medium-sized providers have come to recognize that affiliation with one of these large organizations can be their ticket to growth and greater financial success.

That success does not come without a price, however. Entrepreneurial individuals used to calling their own shots must consider relinquishing some or all of that control, and there can be significant differences in corporate culture or even in delivery of services.

Still, a large number of firms have chosen the route of affiliation, through one of several possible routes. "There are lots of different types of affiliation," explains William B. Patterson, MD, FACOEM, MPH, medical director of Wilmington, MA-based Occupational Health and Rehabilitation. "Some choose a kind of joint venture, while others opt for outright acquisition. The benefit of a joint venture is that a smaller organization may retain some control over and have some say in the operation of the business, and obviously over what percentage of the business they still own. And, they have the opportunity to participate in future profitability."

Of course, he adds, if you turn over 100% of the ownership to a larger partner you lose control, but you also get rid of a lot of the headaches of running a business. "So you have to consider which of these you prefer," Patterson says.

When an occupational health organization reaches a certain size, or faces certain business challenges, management might begin to consider affiliation, says Jim Greenwood, executive vice president of corporate development for Concentra Inc., in Addison, TX. 

"As you look at your business, are you feeling competitive pressures? Are your customers asking for something you can’t deliver? In many cases, that could be related to information systems," Greenwood notes. "We spent over $20 million to develop information systems to manage our business and to report income to employers and payers. As they begin to see these report cards, they might start to ask independent providers where their report cards are. This could put those businesses at risk."

Patterson adds, "I’ve observed that when an organization reaches $1.5 million to $2 million in annual revenue, it’s big enough to benefit from a higher level of support — especially in sales and marketing and IT services. Those are the areas where you can see significant benefits from joining a larger organization."

Small organizations typically do not have the professional experience in hiring and managing a sales team, notes Patterson. "But if you want to grow, this is essential. My experience is that, for example, in the hospital that employs a sales staff of one or two people they just don’t know how to manage productivity, to teach others how to close a sale, and things like that."

Hospitals: A breed apart

Hospitals are a particularly challenging situation, notes Patterson. "Typically, they like to have their name on the door and they like the relationships they’ve developed with area employers, but they are just as typically not very good at managing," he asserts. "The occ-med program usually represents a very small piece of the total hospital budget, so it attracts very little management attention."

Hospitals, he notes, tend to be cumbersome organizations with entrenched turf guarding, making it hard for an entrepreneurial, customer-oriented program to thrive in such an atmosphere. "Affiliating with a larger partner allows the hospital to bring in outside management expertise while retaining some of the benefits of a close relationship with the occ-health program," says Patterson.

Because of these factors, adds Greenwood, most hospitals choose the joint venture route. "Generally, joint ventures are completed with hospital programs; they want to be able to have a say in the market," he explains. "If you are a big hospital organization in a major city, you have great name recognition and good relationships with employers. But some of our savviest hospital partners have come to realize that if we can help them have the best occupational medicine business in the market, they will gain market share."

Expanding horizons

Affiliation can, of course, help expand the reach and leverage the resources of an occupational health program. "If you have a big, installed base of offices you can deliver services more cost effectively," says Patterson. "We just looked at a program that had IT [information technology] costs that represented almost 10% of their annual revenue, whereas our percentage companywide is much lower than that. Through affiliation, you leverage your installed base for per-unit costs."

On the other hand, he notes, occupational medicine can be quite isolating. "If you are the only provider in one or two offices owned by a hospital, you may find that isolating, depending on whether or not you are effectively connected to the hospital," Patterson says.

Speaking of isolation, national relationships with both large employers and payers are only possible through affiliation, says Greenwood. "Even when we had 30, 40, or 50 clinics we really didn’t have national relationships," he recalls. "As we’ve grown over the last 10 years, we’ve reached the point where we truly can sit down with the national risk manager for Home Depot, or Target, or AIG and make an impact on their outcome. A hospital program in Indianapolis or a doctor who owns a clinic in San Diego does not have that marketing opportunity."

Weighing the options

Despite the obvious advantages, affiliation is a major decision that must be weighed carefully. "If you sell to one of these organizations, for the most part there will be a relative lack of control or autonomy in dealing with clients you’ve been working with," notes Charles Prezzia, MD, MPH, FRSM, general manager, health services and medical director at USX/US Steel Group in Pittsburgh. "You give that up, and in return you are essentially promised a certain degree of stability in your income in addition to a larger organization to help you with marketing and IS."

Prezzia, who was formerly in private practice, has some personal experience dealing with larger occ-health providers, and has also spoken with a number of colleagues who have affiliated. "What I have heard from a lot of people — although some are very happy — is that they find they are being assessed by productivity measures some of them regard as unethical."

In some cases, Prezzia notes, physicians are asked how many physical therapy or radiology referrals they make. "Some people I consider to be ethical practitioners have become disgruntled," he notes. "For some of them there were incentive clauses for [physical therapy] and radiology referrals, as well as strong incentives to see a certain volume of patients. Obviously, some of that is needed, but in some cases it can affect quality issues."

He is quick to note this is not a universal practice. "We negotiated with one provider who had a fairly ethical approach," he says. "The question is: Is that an issue for you to begin with? At my old practice we felt we had to have a [physical therapy] component to compete, but we used an ethical approach. When you start incentivizing, you are bound to get physicians who will make referrals just to get the money."

Of course, if you don’t like how an organization operates you should not link up with them, says Prezzia. "If you decide you can exist with an organization that does this stuff then you make the deal. If you have issues and they won’t compromise, then continue the way you are or go with someone else."

As with any industry, corporate cultures vary. Richard J. Reichert, MD, MPH, who sold a private practice in Canton, OH, to U.S. HealthWorks, saw none of the concerns put forth by Prezzia. "I had started in private practice in 1989 and had grown to two sites, the other in Wooster [OH]," he recalls. "In March 1998, I sold the Canton office; Wooster was just a start-up. We had started to see large employers make decisions in corporate offices and take the decisions out of the local offices or plants. We began to see people having national contracts."

Reichert says his experience has been good. "I function now as medical director for my facility and regional medical director for U.S. HealthWorks," he says.

He recognizes that physicians are often concerned about how much their new partners will tell them about how to practice medicine. "I have not had that concern," he says. "I was never given any quota. From the corporate point of view, they recognize that each location has its own individual character." In short, he says, "Given the same choice, I would do it again."

Think ahead

A bit of planning and the careful consideration of options can help avoid disappointment in the future, says Prezzia. "First, consider the willingness of existing program management to share control and responsibility," he advises. "Second, find a good match between the cultures of the two organizations. The program that is affiliating needs to feel comfortable with the corporate culture of the occ-med company with which it is affiliating. And finally, consider the local marketplace — there may or not be business benefits to the affiliation. You could have the first two elements, but there may just not be any reason in the local marketplace to do the deal."

Finally, says Reichert, do your homework thoroughly. "Get a feel for the management team and talk with doctors who are currently in the organization," he recommends.

Greenwood says that occupational health managers will continue to have both options of affiliation or independence open to them. "I don’t see anyone else out there today that will join the Big Three [and reduce options]," he observes. "These three have had a nice head start. When they started to consolidate, many markets had large independent firms they could acquire. Now, pedestal acquisitions are hard to come by."

He does not foresee fewer independent operations in the future. "I would say they might decline slightly, but in any given year we probably see as many startups as buyouts; we’ve probably leveled off."

[For more information, contact:

• Charles Prezzia, MD, MPH, FRSM, General Manager, Health Services and Medical Director, USX/US Steel Group, 600 Grant St., Room 2581, Pittsburgh, PA 15219. Telephone: (412) 433-6605. Fax: (412) 433-6601. E-mail: cpprezzia@uss.com.

• William B. Patterson, MD, FACOEM, MPH, Medical Director Occupational Health and Rehabilitation, 66B Concord St., Wilmington, MA 01887. Telephone: (978) 657-3826.

• Jim Greenwood, Concentra Inc., Dallas, TX. Telephone: (972) 364-8127. E-mail: jim_greenwood@concentra.com.

• Richard J. Reichert, MD, MPH, U.S. HealthWorks, 2626 Fulton Road N.W., Canton, OH 44718. Telephone: (330) 453-6050.]