April 1997 Bulletin

PPMC offer opportunities, problems

Academy report gives in-depth look at ventures

Physician practice management companies (PPMCs) are attracting a lot of attention. The following article deals with important issues involving the activities of PPMCs. The article is an edited version of an AAOS Health Policy Update on "Orthopaedic Practice Buyouts," developed by Marilyn Weisberg, MPH, senior policy analyst in the Academy's department of health policy and practice.

The mission of PPMCs is to profit through the ownership of or partnership with physician practices and to gain market share through the management, growth and consolidation of those practices. PPMCs are independent companies that can contribute a wide variety of practice management, business and financial services to the practice in return for ownership in assets of the practice, a partnership with the practice, a long-term service contract, management fees and a percentage of the practice revenue.

At this writing, there are approximately 30 "publicly-held" PPMCs. This means they buy and sell stocks in their company through the stock market, and can attract providers to their services through stock offerings. There also are approximately
60 other PPMCs, organized by alliances of investors and physicians, which are private or not yet participating in the stock market. MedPartners and PhyCor are the largest PPMCs, both of which are publicly held. Other PPMCs include Caremark, Pacific Physician Services, Coastal Physician Group, InPhyNet Medical Management, FPA Medical Management and OccuSystems.

Some PPMCs negotiate with multispecialty groups including a mix of primary care providers and specialists (PhyCor); some with single specialty groups, like cardiology, ophthalmology or providers who cover a specific disease like cancer (MedCath, OccuSystems); some with hospital-based providers in a given service, like neonatology (Pediatrix); as well as IPA networks and primary care networks.

The Academy estimates that only about 10 percent of all orthopaedic practices have been approached or "courted" by PPMCs and that less than half of these have negotiated a buyout arrangement.

The physician practice management "industry" is said to be in its infancy. But it's booming in both size and number of companies, and number of PPMCs "going public." Driving this growth is the potential PPMCs have to create wealth for themselves, investors and physicians, through the sale of stocks in their company and the returns on investments in high quality, cost-effective, efficiently-run medical practices.

Also propelling the PPMC industry are physicians who are interested in securing additional managed care contracts and growing their practices, but lack the necessary business, management and organizational "infrastructure." Many physicians who are not interested in the business side of their practice seek relief from administrative burdens and are eager for more time at their clinical practice. Some physicians also are interested in selling out prior to retirement.

PPMCs offer a variety of services to physician practices for a price, but not all of PPMCs offer the same services. These services can include the supply of capital for growth of the practices and networks, access to sophisticated information systems, access to managed care contracts, contract negotiation expertise, administrative services, management services, practice management expertise, marketing services and opportunities to share resources with larger networks of practices.

What attracts PPMCs?

PPMCs generally look for high-quality providers who are in a position to hold a significant share of a given market and remain profitable over time. PPMCs also look for physician leaders in the practice who will pursue the financial goals of the PPMC; they want individuals with an orientation to what it will take for the practice to remain competitive under local market conditions.

The PPMC, generally, buys a practice's equipment and accounts receivables with cash, stocks or notes, and assumes clinic liabilities in exchange for a share of practice revenue for an extended period of time plus an annual management fee. Usually, the PPMC sets up a local governing board or executive committee comprised of representatives of the PPMC and physicians from the practice.

Some PPMCs offer a practice five to seven times actual cash flow or the equivalent of one year's revenue before taxes. In exchange for business and management services, the PPMC can collect 15 to 20 percent of practice revenues; a fixed amount plus a percentage above a target; or a percentage of clinic revenues and revenues from ancillary services.

Physician compensation can vary from year to year and be based on the extent to which the physicians meet their productivity and utilization targets. Typically, physicians receive 80 to 85 percent of clinic revenue, less overhead; or a fixed salary plus a percentage, perhaps 50 percent of profit; or a base salary and a portion of pre-tax earnings, if targets are met.

Opportunities

Problems

The biggest problems cited by orthopaedists currently in buyout situations are those faced by the younger or remaining members of the original practice. In some cases, the senior partners may have secured the most lucrative deals in the buyout and retired from practice. The remaining members of the practice, who may not have been given the same deals, must maintain the conditions of the arrangement, which can place their incomes at risk against productivity and revenue objectives of the PPMC under 30- to 40-year contracts. Other problems might be:

This Health Policy Update provides general information and suggestions regarding issues of importance relating to orthopaedic practice buyouts by physician practice management companies. It does not constitute specific legal advice, nor does it represent the official position of the American Academy of Orthopaedic Surgeons. If you have specific questions about negotiating an arrangement with a physician practice management company, please contact your local health care attorney.


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