PPM industry fraught with risk, likely changes
Proceed slowly, advisers warn
And you thought you had a bad day at the office. Imagine the surprise of two physician practice management (PPM) company senior executives when they were pulled from an out- of-town business meeting, fired, and told to sign releases from their employment contracts. Meanwhile, their offices were cleaned out and locked at the order of MedPartners, a large physician practice management company that had acquired the organization three months earlier.
Is this what group practices can expect once they’re bought by a physician practice management company? Not necessarily, according to reports from practice managers, consultants, and attorneys who have been involved in deals with PPMs. A number of practices report positive experiences with PPMs. But one thing is clear: Because this is an industry in its infancy, practices considering selling to a PPM need to be aware of the risks and likelihood of change involved and negotiate accordingly.
"What you’re basically doing is taking your practice and buying stock on margin," says David C. Scroggins, a principal with the Cincinnati management consulting firm Clayton L. Scroggins Associates. "Would you go out today, pick only one company, go down to a broker and put $10,000 cash down to buy $100,000 stock on option, and agree to put up money later if the value goes down? That’s in effect what you’re doing when you take your practice and commit to one company."
Practice managers and consultants who have worked with PPMs offer the following advice to practices considering a PPM affiliation:
• Make sure your contract states that if ownership changes, your contract terms do not change.
Glen Allen (IL) Clinic, a multispecialty clinic that affiliated with Caremark in 1995, employed this strategy. "We’ve seen very little change with the switch from Caremark to MedPartners," says Glenna Keegan, chief operating officer of the clinic. The clinic has had a very positive experience with PPM ownership, she adds.
On the other hand, press reports of the firing of Los Angeles-based Friendly Hills Healthcare Network’s two top executives (referred to earlier in this article) paint a different picture.
• Make sure governance issues are clearly spelled out.
If medical autonomy is important, make sure this is stated in your contract. "Our physicians have in their contract that they deal with all medical issues, so delivery of medicine is totally the responsibility of the physicians on staff at Glen Allen," Keegan says. Groups also need to understand the makeup of the executive board charged with running each practice, advises Dave Regan, chief operating officer of Lexington (KY) Clinic. For example, what is the ratio of physician practice board members to PPM members?
• Clearly set out mutual expectations, including performance guarantees.
Lexington Clinic seriously entertained bids from two physician practice management companies before choosing to affiliate with Nashville-based PhyCor. "We mutually set out expectations in terms of what PhyCor would deliver to the clinic, such as helping with our HMO. The more specific you can be in defining mutual expectations, you can tell if you’re doing your job and they’re doing their job," Regan says. "I’d advice people to get a very thorough inventory of what management resources they [the PPM] have. The bottom line is, how does the practice management company bring value to the group?"
• Similarly, negotiate a right to escape if performance guidelines aren’t met.
"This gives you the ability to say they didn’t do that, so they obviously aren’t performing effectively.’ There are little ways to prove these guys have breached. The methodology I’ve used is to say that within 30 days of the effective date, the parties will have jointly determined performance measures," says Alice Gosfield, an attorney and president of Philadelphia-based Alice Gosfield Associates.
Scroggins recommends stating that a PPM will not get a percentage of your practice’s profits if investment performance falls below a certain level. Scroggins points to a group practice he’s familiar with that was acquired by a PPM whose stock plunged from $24 to $9 a share. This hurt the practice’s income as well, because many purchase deals are a combination of cash and stock options.
• Take time to evaluate the contract thoroughly and slowly.
Many physicians feel the need to jump at an offer because they’re afraid that if they don’t, the PPM will purchase a competing practice in town. Physicians often believe that because the large PPMs will have bargaining clout with managed care organizations, failure to affiliate with a PPM may cause a practice to be shut out of contracts with major payers. Consequently, physicians may not take the time to scrutinize the management agreement closely enough. An executive director should urge a practice to retain an attorney or other adviser to help evaluate the contract.
"Physicians have been trained in the medical field to make decisions and take action," Scroggins says. "When you make a decision, unless you’re incredibly knowledgeable in the field, you’re prone to make a wrong decision."
For most practices, the courting, contract review, and due diligence process should take six months to one year, says Bette Waddington, a consultant with Englewood, CO-based MGMA Consulting Services.
Waddington offers one example of an ophthalmology group practice she worked with. A PPM they were negotiating with offered to give the physician owners an average of $250,000 each for the practice. When the physicians scrutinized the management costs over a five-year period, it turned out they were paying back that profit in management fees. "If they hadn’t stopped and taken a close look at the financial pro forma to see this impact, the deal would have gone through like this," she says.
What’s next for the PPM industry? Scroggins says some physicians groups are forming their own practice management company (Physician’s Managed Care Report will run a story covering one group’s experience in our September issue). He also predicts three other major trends: more consolidation within PPM companies, aggressive geographic expansion by existing players, and an increasing likelihood that the new generation of medical school graduates will be employees rather than owners. What that means to practice productivity and patient care remains to be seen.
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