By Anthony V. Coletta, M.D.

Chairman

Millennium PO

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Basically, these companies take the three principle components of a small business (in this case the physicians practice which they purchase): a revenue stream, profit and growth potential and leverage these on the open market to raise capital in order to build infrastructure. In order to make their quarterly earnings and thus remain Wall Street darlings they must "increase same store sales" which basically means drive more revenue through each practice, either by having more patients seen or by providing a higher volume of exisiting or new services within the practice. Additional profit from the practice can be extracted by "driving down overhead," a process that has proven very difficult in the real world. In fact, only PhyCor, a PPM in business for 10 years has been consistenly able to "hit the numbers." MedPartners is a close second.

Although "consolidation" may be a more expedient term, basically these PPM's leverage the revenue streams of practicing physicians. The market for such companies, however, has become increasingly depressed on Wall Street as analysts realize that the true service products are lacking, i.e., the demonstrated ability to actually manage the resources associated with medical care. In fact, practices are currently being acquired on the basis of economic criteria which, in a fee for service environment hardly translates to a true measure of efficiency.

Wall Street is watching closely the product development of this service oriented industry. Fewer and fewer companies are able to enter the public market and raise large sums of money without an operating history demonstrating their ability to do more that just "increase same store sales." True medical management is the key to the development of a successful service based provider product. Physicians must ask themselves if they must sell their practice in order to develop such medical management capabilities. The answer to that question remains to be seen.