August 1998 Bulletin

PPMC industry turmoil called a sign of growing pains

The physician practice management industry is going through its growing pains, says Kenneth R. Weakley, vice president, Merrill Lynch, Pierce, Fenner & Smith, New York.

The volatility of the sector in the last two years is due more to the "ramp-up" from being an infant industry to one with some staying power, than to the underlying economics in the health care delivery environment, says Weakley. He places some of the blame on entrepreneurs who did not establish operating infrastructure and managerial oversight to effectively manage growth.

Throughout the 1990s, the sector has been developing gradually with more than 15 initial public offerings and a number of very large consolidations. However, Weakly says, "over the last two quarters, the sector has been roiled by CEO changes, major earnings disappointments and a host of operating difficulties." He cites the termination of the proposed merger of MedPartners, Inc. and PhyCor, Inc., "operating difficulties at MedPartners, balance sheet issues at FPA Medical (Management, Inc.), write offs at PhyCor and ongoing troubles at Physicians Resource Group." FPA filed for protection under chapter 11 bankruptcy laws on July 19, 1998.

Although Weakly says the underlying fundamentals remain very positive, he observes that "these events have called into question not only the sector's growth, but also its very viability. We do not believe that the sector will overtake the hospital sector in terms of health care delivery nor fall by the wayside like other 'fad' industries. Rather, the past year represents another page in the sector's development and this development is being driven by economic pressures which are in no way diminishing."

Weakley points to the "underlying economics in the physician industry: slow income growth, increasingly costly medical technology, administrative and financial pressures from managed care and the loss of clinical autonomy."

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