April 1996 Bulletin

Should you sell to PPMC?

by Michael J. Parshall

Michael J. Parshall is president of health care personnel consulting and vice president of The Health Care Group, a national medical practice consulting firm based in Plymouth Meeting, Pa.

Selling your orthopaedic practice to a Physician Practice Management Company (PPMC) can bring your practice success and profit you in a managed care environment, or it can ruin your practice and cost you money.

PPMCs are potentially powerful investment vehicles that are designed to bring management expertise, managed care patients, and profits to physicians who sell their practices to PPMC networks. Depending on an acquired practice's needs, local marketing conditions, etc., a typical PPMC may provide expertise in risk contracting, information systems/management, group purchasing, billing/collections, and marketing.

A PPMC may reorganize an acquired practice's contracts with managed care organizations and others, develop a business plan for the practice, fund needed equipment, provide resources for risk contracting, and survey patients and referring physicians to determine what should be done to maintain or boost satisfaction levels.

Some PPMCs have been remarkably successful, earning them rave Wall Street reviews. This has encouraged other entrepreneurs to enter the PPMC business, occasionally without adequate resources, personnel, or planning.

Typically, a PPMC pays for a practice with both cash and stock, assuming a 50-50 split which is common. Therefore, if the sale price of a practice, including hard assets, accounts receivable, and intangible factors (collectively called "goodwill value"), is $1.2 million, the physician receives $600,000 in cash and $600,000 worth of stock.

Physicians sell their practices to PPMC networks because they believe that PPMCs will increase their practice revenue streams, improve practice management, and sell stock that increases in value. Consider these following two hypothetical cases, which are based on actual experience in light of these expectations.

Case number one: This PPMC's pre-public stock was valued at $2 per share. At its initial public offering (IPO), the per-share value was $19. Less than a year later, the per-share value is $30, a 15-fold increase of the original $2 value. Simply knowing that this rather large step-up in value is possible attracts increasingly more investors because, even those who might have paid $6 or $7 a share realized an impressive step-up in value to the $30 mark.

Case number two: This PPMC's post-public stock was valued at $40 a share; in less than a year, that value dropped to $12 per share.

If, at the time you sell your practice to the PPMC, its stock is valued at $2 per share, you receive 300,000 shares; if the stock then increases in value to $30 per share, the stock you hold is worth $9 million. If it is valued at $40, you receive 30,000 shares in lieu of $1.2 million of practice value; if it then decreases to $12 per share, the stock you hold is worth $360,000, about one-third of its original worth.

Suppose, hypothetically, that you sell your practice to the wrong PPMC. It mismanages your practice and its stock starts to look worthless. You may be able to buy your practice back from the PPMC, but probably will have to do so under the same terms and conditions under which you sold it. If you signed a restrictive covenant, you may need to relocate to start a new practice.

A year ago, the PPMC paid you $600,000 cash at settlement. You paid about 30 percent of that-about $180,000-in federal capital gains and other taxes, and you spent some of that $600,000. Perhaps $300,000 remains. Add another $180,000 from the sale of your PPMC stock, if you find a buyer. Can you "buy out" of your deal on $300,000 to $490,000? Most PPMCs, if they allow for a "buy-out," want all their money back. Many physicians in this situation stay with the PPMC and hope for the best.

If you are considering selling your practice to a PPMC, perform your due diligence, seek out competing offers, and comparison shop for the best PPMCs. Research each PPMC you consider to determine its fiscal and managerial stability, the background and expertise of its key people; and its experience at running practices like yours.

Look for people with substantial experience in:

If the PPMC has these people, it increases the probability that your practice will be managed successfully and fare well in a managed care environment, and that the PPMC will attract solid investors, and make wise investments.

Find out how the PPMC has fared in the past. Is it financially stable? Has it changed ownership or top-level management during the past five years? If so, how often? Have these changes resulted in continuing improvement or do they suggest a struggling PPMC?

Has the PPMC run orthopaedic (or similar specialty practices) successfully in the past? If the PPMC representative responds that the company has experience running hospitals, ask yourself, "Do I want a hospital CEO running my practice?"

Before you sell your practice to a PPMC, do your homework. Most orthopaedic surgeons fail to do so, because he or she:

Orthopaedists see patients all day, conduct their practice business in the evening, and then meet with PPMC representatives once or twice a week in lengthy, intense negotiating and planning sessions. After 60 days, the PPMC asks the physician to sign a letter of intent, which contains a no-shop clause that obliges the orthopaedist not to negotiate with any other PPMC for another 60 or 90 days. At this point, loathe to start this process again, the orthopaedist sees two options: take this deal, or take no deal.

PPMC network developers are firmly convinced that the physicians who join their networks will benefit tremendously. If they have the track record to prove it, this claim is entirely acceptable.

Like other physicians, orthopaedic surgeons are concerned about the future. Many believe that managed care will reduce their income, increase their expenses, and make their businesses less profitable. They know that PPMCs have been in the media and that joining a PPMC may improve practice management, provide managed care involvement (which is better than losing business), and earn them stock that may increase in value.

As an orthopaedic surgeon considering a PPMC deal, it is vital to know whether the PPMC you are considering has a reasonable chance to deliver on its promises. That means doing the research and analysis yourself or hiring a professional to do it for you. The alternative is to leave it to chance.

©1996 The Health Care Group

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