PhyCor, Inc.

views updated

PhyCor, Inc.

30 Burton Hills Boulevard, Suite 400
Nashville, Tennessee 37215
U.S.A.
Telephone: (615) 655-9066
Fax: (615) 655-9088
Web site: http://www.phycor.com

Public Company
Incorporated: 1988
Employees: 15,900
Sales: $1.5 billion (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: PHYC
NAIC: 56111 Office Administrative Services

PhyCor, Inc. and its subsidiaries provide administrative management services to physician networks and medical groups. The company manages 40 medical groups with more than 2,500 doctors in 21 states and nearly 26,000 physicians through networks in 29 healthcare markets. Through PhyCor’s subsidiary, Care Wise, Inc., the company provides support and assistance to more than 3.3 million consumers in making decisions about medical care.

Pioneering New Methods of Management for Physicians

Four former executives of Hospital Corporation of America, Joseph Hutts, Derril Reeves, Thompson Dent, and Richard Wright, founded PhyCor in 1988, pioneering the first physicians practice management (PPM) company. The advent of managed healthcare plans, such as Health Maintenance Organizations (HMOs), led individual physicians and group practitioners to seek outside help in handling complex new issues. In addition to providing physicians with administrative services to meet new demands of financial management, such partnerships reduced physicians’ financial risk in working with managed care pro-grams that used a “capitated” or fixed-rate reimbursement structure. A large group of physicians or a large company absorbed the risks more easily than an individual doctor or small medical group and also benefited from the greater clout in negotiating managed care contracts. While multispecialty medical clinics benefited from referrals within the group, physicians also wanted the security of managed care contracts, which provided a stable income as healthcare profits decreased.

From the beginning PhyCor’s strategy for helping physicians address changes in the healthcare system involved the acquisition of small to medium-sized clinics that offered pri-mary care and medical specialties. When PhyCor acquired a practice, the company purchased assets in the form of equipment, accounts receivable, and, sometimes, real estate. Under a 40-year contract PhyCor then managed the clinic for approximately 15 percent of revenues from physician fees—after expenses and before physician salaries—and reimbursement of clinic expenses. Some contracts also involved a percentage of profits or interest on capital investment for PhyCor. Doctors received cash, stock, or both, but remained independent and did not become employees of PhyCor. PhyCor left medical decisions to individual doctors, while each clinic’s board of directors, consisting of three physicians and three PhyCor administrators, made general decisions, such as the purchase of new equipment.

The company’s first acquisitions were located in the South and involved 20 to 100 doctors each. Acquisitions included the Green Clinic of Ruston, Louisiana, in 1988; the Doctors’ Clinic of Vero Beach, Florida, in 1989; and the Nalle Clinic of Charlotte, North Carolina, in early 1990. PhyCor sought clinics with the most potential for growth and improvement. After five years of management under PhyCor, the Nalle Clinic reported dramatic changes to its previously unprofitable operations. Revenues rose 30 percent the first year and five percent to ten percent each year afterward. The clinic grew to 106 doctors and 34,000 capitated patients. Some of that growth occurred through the acquisition of 19 family practice physicians, which increased the clinic’s primary care doctors to 50 percent of the total. PhyCor also saved the clinic 40 percent on its malpractice insurance premiums.

In addition to lower operating expenses and increased revenues, one of the attractions for physicians in selling their practices to PPMs involved the infusion of capital for equipment and facilities. In 1990 the Greeley Medical Clinic in Colorado approached PhyCor to acquire and manage the clinic’s business operations. The physicians there wanted to remain competitive under managed care by adding ten doctors to its staff. PhyCor’s acquisition provided funds for expansion beyond the clinic’s initial plans. PhyCor added 25 doctors, opened five satellite offices, and planned an ambulatory center and diagnostic imaging center. The Southern Colorado Clinic in Pueblo could not find a lender to finance an ambulatory surgery center; PhyCor bought the clinic in 1992, providing funds for construction of the facility.

PhyCor’s expertise in negotiating managed care contracts became a cornerstone of the company’s success. On the advice of PhyCor, the executive director of the Greeley Medical Clinic renegotiated a capitated contract with an HMO at a reimbursement rate 28 percent higher than the previous contract. Revenues at that clinic increased 34 percent overall after three years of PhyCor’s management, funding a ten percent increase in physician salaries. Another example was the Virginia Physicians Group, where reductions in Medicare reimbursements had deleterious effects. Affiliation with PhyCor facilitated the negotiation of managed care contracts that covered both primary care and specialty care, rather than two, separate contracts, thus reducing financial risks of managed care plans.

PhyCor grew rapidly, especially after it became a public company in January 1992. After three years of operation revenues increased from $1.2 million in 1988 to $90 million by the end of 1991. An initial public offering of 2.5 million shares of stock at $16 per share raised $40 million for the purchase of additional multispecialty medical clinics. With the acquisition of six medical practices, located in Texas, Virginia, New York, and New Hampshire, 1992 revenues reached $136 million through 14 clinics in nine states.

PhyCor lost $13.7 million in 1992, however, as problems at the Miller Medical Clinic led to an $18.6 million write-down. Conflicts between the clinic and the local HMO, from which the clinic received most of its business, preceded PhyCor’s owner-ship of Miller Medical. The clinic lost the contract shortly after PhyCor’s acquisition in 1989. PhyCor gracefully exited the problem when it sold Miller Medical to a local, nonprofit hospital for the assumption of debt. From the experience executives at PhyCor learned to look for a mix of payers when buying a medical practice.

The company grew through improvements at existing clinics as well as through acquisition. PhyCor assisted the clinics with the recruitment of physicians, sometimes merging individual medical practices with local clinics. In 1993 same-clinic revenues experienced an average increase of 8.5 percent. With the January offering of $50 million in convertible subordinate debentures, the company acquired four clinics in 1993, in Texas, Alabama, and Illinois. In 1994 the company acquired six physician practices, including larger clinics such as the Lexington Clinic in Kentucky, the Holt-Krock Clinic in Fort Smith, Ar-kansas, and the Burns Clinic in Petoskey, Michigan, each with 100 to 175 doctors.

PhyCor also found opportunities to provide practice management services and to develop physician networks. A 1994 agreement with MetLife HealthCare engaged PhyCor to provide medical management and to form physician networks in six markets where MetLife had launched managed care. PhyCor cofounded PhyCor Management Corporation (PMC), investing a minority interest in it as a separate entity. PMC was formed to develop and manage Independent Practice Associations (IPAs), organizational networks by which independent physicians contracted with managed care plans and shared management re-sources. At the end of 1994 PhyCor operated 25 multispecialty clinics and 11 IPAs while earnings reached $11.7 million.

In February 1995 PhyCor purchased North American Medical Management Company, Inc. (NAMM), a limited service provider for physician practice management. The company did not provide billing, collections, staffing, or scheduling functions, but PhyCor planned to extend those services to NAMM clients. NAMM managed 36 IPAs in seven states, including the Central Florida IPA, a target market for PhyCor. The following September NAMM obtained a contract to manage two IPAs, Tampa Bay Physicians Healthcare, Inc., with more than 260 doctors, and Healthsavers, Inc., with more than 100 doctors, both in Tampa. NAMM immediately found the Tampa IPAs new HMO clients.

Accelerated Growth in Mid-1990s

PhyCor accelerated the number of acquisitions to nine in 1995 and 13 in 1996. These acquisitions were funded by a June 1994 offering of stock, which raised $58.7 million, and a July 1995 offering, which raised $110 million. Notable acquisitions included the Arnett Clinic in Lafayette, Indiana, with more than 100 doctors, and the Guthrie Clinic in Sayre, Pennsylvania, with more than 200 doctors. In September 1995 PhyCor acquired the Casa Blanca Clinic of Mesa, Arizona, one of the largest clinics in Arizona. PhyCor was chosen out of five PPMs for its expertise in negotiating contracts with managed care companies. With 84 doctors, the five-year plan for Casa Blanca involved the addition of three satellite clinics and 80 more doctors. The clinic also chose PhyCor because of the potential opportunities to network with other providers on national contracts. Notable acquisitions in 1996 included the Hattiesburg Clinic in Missouri and the Lewis-Galle Clinic in Roanoke, Virginia, with more than 100 physicians each.

Company Perspectives

The PhyCor Mission: To Create, with Physicians, the best value in medical care for our communities.

While doctors at some clinics struggled with new managed care guidelines, others, including the PAPP Clinic in Newnan, Georgia, expressed a concern for changing with the trend toward managed care. Acquired by PhyCor in May 1995, the PAPP clinic needed capital and experienced managers to implement information systems and to recruit primary care physicians, as providers of managed care tended to prefer primary care physicians to specialists. The clinic also needed experienced negotiators of managed care contracts to reduce the risk of working with managed care providers.

By the end of 1996 PhyCor owned and operated 43 clinics in 24 states, which provided healthcare in up to 30 specialties each; its IPAs had 8,700 physicians in 15 markets. Revenues reached $766.3 million and garnered $36.4 million in profit. Between 1993 and 1996, managed care as a percentage of revenue almost doubled from 24 percent of revenues to 42 percent in 1996.

PhyCor continued its accelerated growth strategy with 13 acquisitions in 1997, including two management service companies. Of the 11 group practices, Straub Clinic & Hospital in Honolulu was the largest, with nearly 200 physicians. The March 1997 acquisition of the St. Petersburg Medical Clinic and the Suncoast Medical Clinic involved a merger of the two, then renamed St. Petersburg-Suncoast Medical Group. In addition to strengthening PhyCor’s presence in Florida and Indiana, the company entered markets in California, Washington, and Maryland for the first time.

PhyCor found ways to create new business and to improve the business of clinics it managed. As the number of multispecialty groups for potential acquisition declined, PhyCor began to combine single-specialty groups to form new multispecialty groups in 1996. In addition to assisting clinic recruitment, PhyCor merged 103 individual practices into clinics in 1997 and assisted in the creation of new group medical practices, which then signed long-term service agreements with PhyCor. By developing physician networks for affiliation with its clinics, PhyCor gained greater leverage in negotiating man-aged care contracts.

PPMs Suffering Turbulence in the Late 1990s with Increase in Healthcare Costs

In 1997 and 1998, the rising cost of healthcare and related problems at its clinics led to a series of write-offs. After several years of expanding profits, PhyCor realized only a $3.2 million profit on $1.1 billion in revenues in 1997. An asset revaluation charge of $83 million in late 1997 was one of many such write-offs. In 1998 write-offs included a $20 million charge after dissolution of a merger with MedPartners and a $65 million charge to reorganize four unprofitable clinics. Another $120 million restructuring charge was related to duplicate information systems at multispecialty clinics created by PhyCor by merging single-specialty clinics.

As financial difficulties mounted, the company changed direction, preferring management service contracts without the risk of acquiring clinics. In March 1998 NAMM signed a contract with New York and Presbyterian Hospitals Care Net-work. Services involved the formation of more than 40 small IPAs for physicians in the network. The IPAs were self-governing, risk-sharing physician-organized delivery systems (PODS) with 25 to 50 primary care doctors in each group.

PhyCor acquired only two medical groups early in 1998 as its acquisition strategy shifted to the purchase of other PPMs, including the remaining interest in PCM. PhyCor purchased First Physician Care, Inc., of Atlanta, a physician management company that had contracts for four multispecialty groups, owned a New York IPA with 395 physicians, and provided medical services through three subsidiaries. Morgan Health Group of Atlanta owned an IPA with more than 2,600 physicians. In November 1998 PhyCor acquired Prime Care International, Inc., an Ontario, California-based PPM with more than 2,200 physicians at its IPAs and clinics. PhyCor diversified with the acquisition of Care Wise, Inc. of Seattle, which provided demand management services in the form of support to patients making medical decisions.

While executives at PhyCor tried to learn from their difficul-ties, in 1998 and 1999 the company was plagued with lawsuits from physicians and clinics who wanted to break their agreements with PhyCor. Although a minor percentage of doctors sometimes left a group practice upon acquisition by PhyCor, preferring more autonomy, in 1998 and 1999 doctors resigned from PhyCor-owned clinics in large numbers. Many complained of management practices, but generally steep declines in pay led to the final break. At the Holt-Krock Clinic in Fort Smith, Arkansas, purchased by PhyCor in 1994, physicians cited a ten percent decline in income for primary care physicians and a 17 percent decline for specialists in the second half of 1997 due to the cost of a computer system.

PhyCor hoped to improve doctors’ incomes in the future by developing a new model for future acquisitions of medical groups: to charge a lower fee, reduced to 12 percent of revenues after expenses, and to buy fewer assets. This addressed the concerns of younger doctors who faced paying these fees throughout their careers. This issue did not concern older doctors who expected to retire soon. In April 1998, PhyCor already had adopted a policy of 25-year contracts.

The troubles at PhyCor had just begun, however. PhyCor’s share value dropped from more than $36 in mid-1997 to less than $10 per share in mid-1998 and the company recorded a loss of $111.4 million on more than $1.1 billion in revenues in 1998. By mid-1999 PhyCor began to negotiate the resale of certain clinics back to the practicing physicians. This included the company’s largest clinics—the Holt-Krock Clinic, the Burns Clinic, the Lexington Clinic, and the Guthrie Clinic. In November 1999 PhyCor announced plans to reduce the number of clinics to about 30 during the next year. PhyCor wrote off large losses of value in the clinics, $393.4 million in the third quarter alone. The company ended 1999 with losses of $445 million, though revenues reached $1.5 billion. The company’s stock value continued to decline to less than $3.00 per share.

Key Dates

1991:: Revenues reach $90 million in third year of business.
1992:: Initial public offering is completed.
1995:: Company acquires 13 medical practice groups.
1998:: Company begins divestment of several clinics.
2000:: Mounting difficulties result in change in leadership.

Nationwide PPMs descended from the rapid rise to success as quickly as PhyCor, finding that they were unable to provide appropriate health care at the reimbursement rates that HMOs and managed care insurers wanted to pay. MedPartners, the leading practice management company, founded in 1993, closed its PPM division in late 1998. FPA Medical Management filed for bankruptcy and PhyMatrix quit the business altogether. Some people concerned with health care management viewed PPMs as a failed experiment. Economies of scale did not occur as predicted, many doctors were dissatisfied with the management, and PPMs had overpaid for physician practice assets.

PhyCor reoriented the company’s goals toward medical net-work management and continued management of its core of successful clinics. In late 1999 PhyCor signed a contract with the Rockford Health System to manage the hospital system’s clinics, as it separated management of hospital and clinic operations. For a flat service fee PhyCor managed its HMO, Rockford Health Plans.

PhyCor’s involvement with physician practice management through ownership continued to be besieged with problems in early 2000 as several doctors resigned their posts because of dissatisfaction with PhyCor management. At Lewis-Gale Clinic 44 doctors quit in six months’ time. More than 90 doctors resigned at the Nalle Clinic after they received paychecks for $1,500 each in March. Many paid the $150,000 noncompete penalty in order to continue practicing in the area. A nearby hospital hired several doctors, and others joined or started single-specialty practices. A trend back to single-specialty practices resulted from its efficiency and the lower likelihood of conflicts over reimbursements or equipment purchases. The Casa Blanca clinic closed three clinics in June 2000 because of the resignation of 35 of 100 doctors since January.

Amidst increasing difficulties, two founders of PhyCor re-signed from their positions at PhyCor in June 2000—Joseph Hutts, CEO and chairman, and Derril Reeves, vice-chairman, executive vice-president, and chief development officer. Another founder, company President Thompson Dent, replaced Hutts as CEO and chairman. Under new leadership, PhyCor began to initiate contact with each of the 25 clinics left in its ownership to negotiate a repurchase of some or all of their assets and to terminate or restructure management agreements, as appropriate. Whether PhyCor would have any equity after debt had been paid was open to question. PhyCor faced delisting from the NASDAQ stock exchange, but Dent posed a reverse stock split to increase per-share value as an alternative.

PhyCor continued to provide management services in the health care service sector. A new contract for Care Wise involved the Great Lakes Health Plan of Southfield, Michigan, and CarePlus Health Plan in New York City, providing 24-hour telephone assistance to nearly 100,000 Medicaid members.