Merger failure means change for market
PPMCs are regrouping, not dying
All eyes in the practice management industry watched as PhyCor and MedPartners decided to merge in late 1997. And all eyes continued to watch as that merger fell apart earlier this year. But what does that failure mean to practices? Are there lessons to be learned?
Many industry analysts and players say that the unification of these two companies was strange to begin with, says Ron Pierce, president and chief executive officer of Integrated Orthopedics, a Houston PPMC. "They are the poster children for two different approaches," he says. "PhyCor was interested in building slowly in secondary markets. MedPartners grew quickly - in three years or so - primarily through acquisition of practices in large markets with heavy managed care penetration."
Pierce says that PhyCor must have been unnerved by the growth of MedPartners in all those managed care markets and thus approached it about a merger. "But in the end, PhyCor didn't like what it saw. It's a real vindication for the rebuild-it model and a bad omen for the growth-by-acquisition model."
Pierce isn't alone in his belief that the two companies would have had trouble making the two different models mesh well. Ira J. Coleman, managing partner of McDermott Will & Emery, a Miami law firm with a largely PPMC clientele, agrees. "The breakup of the PhyCor/MedPartners merger made the industry sit up and say, `We'll back companies that are into increasing same store-sales in a plausible fashion,'" says Coleman. "There is still a place for PPMCs. But the focus changes. What's important is a strategy that makes sense. Buying people and overpaying for practices - that isn't a strategy that makes sense."
Perhaps it started before the merger was even announced, but there is a consensus that practices understand a relationship with a PPMC is about more than how much money you can get for a practice.
Focus on core values
"The failure was a signal that PPMCs have to focus on the core values of why physicians are affiliating with them," Coleman says. "It isn't just growth for growth sake. Docs who want to sell their practices are looking at PPMCs that will build value. They don't just want cash, but an ongoing arrangement."
"Doctors want more than just the money," says Ray Fay, MD, chief executive officer of UroPartners, a San Francisco-based specialty PPMC. "They need increased efficiency and a way to tap into new markets and services for revenue."
What lessons should you take from the failure? Coleman says practices need to be very careful about who they talk to about selling their practice and what they have to offer - is it just money, or is there a level of experience and expertise, as well?
PPMCs are more than just financial windfalls for practices. They are "time shares in intellectual capital," says Pierce. "They have expertise for you when you need it." But, he adds, you have to look at each PPMC individually. "PPMCs can't be put into one basket. They are all over the board. It's not whether you think the PPMC industry is viable, but whether the group you are talking to is viable. If you have seen one PPMC, you have seen one PPMC."
The future may lie with smaller specialty PPMCs, such as those Pierce and Fay run. "Phantom profit based on acquisition isn't enough," says Fay. Instead, PPMCs that survive will focus on slower growth through expanding markets and services. And Fay says the ones doing that are single specialty PPMCs. "There are 30 or so PPMCs waiting to go public, most of them single specialty and many physician-led," he says.
Pierce agrees. "There is more of a future for PPMCs in single specialties - pediatrics, American oncology. They are thriving. If providers are going to have to both provide and finance care in the future, then single specialty is the way they will do it."
But Coleman is more neutral. "It comes down to who can bring efficiencies to the business, not the model," he says. "Single specialty PPMCs will learn the business of their specialty faster than a company running multispecialty practices can learn the broad spectrum of business in a multispecialty setting. But those multispecialty practices will have a stronger pull for good contracts. They have better overall market knowledge. Who succeeds in the future will depend on who plays best to those strengths."
· Ira J. Coleman, Managing Partner, McDermott Will & Emery, Miami. Telephone: (305) 358-3500.
· Ray Fay, MD, Chief Executive Officer, UroPartners, San Francisco. Telephone: (415) 202-0260.
· Ron Pierce, President and Chief Executive Officer, Integrated Orthopedics, Houston. Telephone: (713) 361-2011.
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