Managing more and more doctors isn’t the cure for ailing physician practice management companies (PPMs)– but managing more kinds of medical services might be.
In the early 1990s, PPMs formed to organize physicians’ practices along more businesslike lines. The PPM bought practices and clinics from the doctors and, for a percentage of revenues or profits, took over billing, dealings with insurers and other office functions so the doctors could concentrate on treating patients.
As PPMs grew and went public, Wall Street initially hailed them as a way to contain costs and help doctors work more efficiently by banding together to contract with health insurers. But they grew too fast, acquiring practice after practice, paying between $500,000 and $1 million, by some estimates, only to be plagued by poor performance.
About 5 percent of the nation’s 700,000 physicians are affiliated with physician practice management companies, so boosters say there is plenty of opportunity for the industry to grow. But after a fast start, PPM stocks have taken a nose dive, and Wall Street now is looking for the right business model.
One of the companies catching the Street’s eye is Chicago-based NovaMed Eyecare Management, which not only manages physician practices, but owns facilities where optometrists and ophthalmologists can provide their medical care–thus sending more revenue to the company’s bottom line.
“Although financial performance of much of the PPM industry has so far been gloomy, the record and prospects appear brighter in certain niches,” says Mimi Willard, an analyst with New York-based investment bank Donaldson, Lufkin & Jenrette.
“Those are companies that create physician-driven operating profit leverage via new revenue sources that do not require commensurately more doctors,” Willard said. “The original idea with physician practice management companies was that they would go in and make the individual physician’s practice more efficient, but that hasn’t worked.”
Physician practice manager MedPartners of Birminghan, Ala., for example, became the nation’s largest PPM two years ago when it acquired Northbrook-based Caremark International Inc.
At that time, Caremark owned some physician practices–since sold off–and a pharmacy benefits manager, which buys drugs in bulk and acts as a middleman between self-insured employers and patients getting prescriptions filled.
MedPartners is affiliated with more than 13,000 physicians, including 260 with three of the company’s groups in the Chicago area. By following the traditional model focused on managing doctors’ practices, MedPartners’ stock price had tumbled to $3.75 a share Thursday, about one-ninth its 52-week high of $32 a share.
MedPartners now is selling off some of its underperforming physician practices and plans to keep Caremark, its $2.5 billion pharmacy benefits manager, as the key to a new, scaled-down company. Indeed, analysts now regard Caremark as MedPartners’ crown jewel.
Meanwhile, MedPartners also is considering consolidating some of its physician practice operations in markets like Chicago with Birmingham, Ala.-based HealthSouth Corp., which operates surgery centers and outpatient rehabilitation clinics in the Chicago area.
Such a move would bring MedPartners closer to the model pioneered by NovaMed, which is using physician practices as a sideline to its other health-care businesses– notably, surgery centers.
“I don’t think the fundamental (PPM) concept has ever been tenable,” said James Unland, president of The Health Capital Group of Elgin. “When you think about it, PPMs are just adding another layer of profit-taking.”
Surgery centers have become attractive to health insurers because they provide medical care at lower costs than inpatient acute-care hospitals.
Ophthalmological outpatient surgery is the fastest-growing and largest segment, making up more than 35 percent of the outpatient surgery market, according to Chicago-based SMG Marketing Group.
Founded in 1995, NovaMed owns 10 ambulatory surgery centers and manages a total of 80 doctors in the Chicago area, Kansas City, Louisville, St. Louis and Richmond, Va. The company began operations in January 1996 and now, with annual revenue of $100 million, employs more than 600 nurses, optical technicians and clerical staff.
“Between 70 and 80 percent of our revenue and profits come from ancillaries, like surgery centers, optical dispensaries where we sell glasses and optical labs,” says NovaMed’s president and chief executive, 35-year-old Stephen Winjum.
The Kirk Eye Center in River Forest is the most profitable such ancillary for NovaMed in the Chicago area, generating $6 million in annual revenues from 20,000 patients a year. Founded by brother ophthalmologists Scott and Kent Kirk, the center affiliated with NovaMed on Jan. 1, 1996, and “revenue has increased every year,” Winjum said.
NovaMed is affiliated with many such eye surgeons whose practices include doing corrective vision procedures known as refractive surgeries. This outpatient sugery essentially corrects the shape of the eye. The most successful results leave patients able to see properly without glasses or contact lenses.
However, refractive procedures are considered cosmetic surgery, which means patients pay out of their own pockets–insurance companies don’t cover it.
The doctors and clinics are not only freed from insurance paperwork, they can set their own fees without having to contend with insurers’ requirements or changes in coverage.
NovaMed’s revenues are divided about equally between private-paying patients and Medicare. The federal government has doubled the number of outpatient surgery center procedures it will reimburse in the last six years.
Dr. Douglas Williams sold his ophthalmological surgery center in Hammond, Ind., two years ago to NovaMed, which now provides management services to his practice and several others that consolidated into what is now known as Brodersen-Williams Eye Institute.
“We physicians know we are under pressure from (the federal government) in terms of fee cuts, but we can’t let up in the amount of services we provide for our patients,” Williams said. “We could see that we needed a partner. Out of the money we made as doctors, we didn’t want to give that up to develop our own practices.”
With NovaMed’s cash developing surgery centers and other ancillaries, physicians affiliated with NovaMed say they can concentrate on boosting the volume in their practices. “My personal productivity has increased 40 percent in the last two years,” Williams said. “I have used more (NovaMed) technicians and I concentrate on taking care of patients face-to-face.”
Analysts say the physician practice management companies in financial trouble have had problems with doctors simply wanting to sell their practices and retire, or get out of medicine altogether.
“One of the challenges for your basic PPM is that these physicians in effect sold their practices and went to sleep on the job, having no motivation to work as hard when they didn’t own their own practice anymore,” Willard says.
NovaMed says it is picky about its doctors.
“It’s very easy to tell when doctors want to take a coffee break because they are the ones who want to retire,” Winjum said.
“We want the doctors who want to build the right practice. We’re not looking for exit-strategy docs. If you have a doctor who wants to sell too quickly, that raises a red flag.”
