By Jeffrey Peters
It wasn’t long ago that physicians were hoping to get rich and avoid dealing with managed care and the frustrations of modern medicine by selling their practices to physician practice management companies (PPMC). Unfortunately, physicians who have sold their practices haven’t always benefitted or experienced a more relaxed competitive situation.
Before physicians accept an offer for their practice they need to pay attention to whether the practice price will be paid in cash or in stock as well as the nature of compensation formulas, the length of the management agreement and restrictive covenant, and processes for exiting the contract.
PPMCs are no longer the financial darlings they once were. In recent months, their stocks have declined dramatically, with companies such as MedPartners having already lost 66 percent of their stock value.
Other companies are equally troubled. A Midwest-based infertility PPMC recently filed for bankruptcy. Physicians who sold their practice to this company are now concerned about getting the money owed to them.
In many cases, physicians have become financial victims in this merry-go-round of buying and selling. Typically, the purchase price of physician practices is based on the value of PPMC stock. If the stock declines, the practices loss their value.
All PPMCs recover their acquisition costs by charging management fees on revenue from practice operations. A common PPMC formula calculates distributable income as gross collections minus practice expenses. While 84 percent goes to the physicians involved, 13-16 percent goes to practice management company.
The bottom line is that practice expenses must be paid before physicians receive their money. Unfortunately, once physicians sell out to PPMCs, they no longer control expenses. They receive money only if they produce revenue, if the PPMC is successful at collecting that revenue, and if that revenue exceeds expenses; however, the physicians no longer have much control
The length of management agreements associated with acquired physicians practices are typically for 25-40 years, which is far too long for the majority of physicians. In structuring agreements, physicians should agree to terms of no more then seven years. While many physicians might prefer three- to-five year contracts, they will find it difficult to negotiate contracts shorter than seven years with most practice management companies.
In response to these trends, physicians are increasingly bolting from PPMCs. Experiencing neither desired stock returns nor more efficient practice operations, they often find themselves working for no additional income. In exiting contracts, physicians are typically expected to give back the practice purchase price plus one year’s compensation. A better approach is to negotiate a contract up front, where the physician can exit a contract by paying back no more than was originally paid for the practice plus a penalty of no more than $25,000 to $50,000.
While some PPMCs have already lowered their management fees to appease disgruntled physicians, many physicians have turned to hospitals and health systems to map out a creative strategy for exiting a PPMC deal. Such a scenario was recently played out in the southeast where a multi- hospital health system joined forces with seven physicians to buy back their practices from a PPMC. Just eighteen months earlier the PPMC had appeared on the scene, claiming it could boost physicians’ incomes while making it easier for them to practice medicine.
Sadly, however, physicians acquired by the PPMC have already lost 20 percent of their income. Physicians have also experienced a growing number of practice hassles from billing and collections, reduced staff and a more bureaucratic decision making process.
In response to physicians’ complaints, the local health system is helping physicians identify financing that will allow the physicians to buy out of their restrictive covenant with the PPMC. The health system also has a management services organization (MSO) to provide physicians with an alternative to PPMC for the management of their practice. The MSO provides a state of the art information technology system, billing/collection, marketing and full operational support. Yet, physician own their practice; the MSO does not. The health system is offering physicians a chance to leave the PPMC and retake control of their own practice managed by the MSO.
The move will not only protect physicians who have been burned by the PPMC, but also will discourage other physicians from being seduced by extravagant PPMC claims. Moreover, the MSO will help solidify the physicians’ partnership with the health system. Physicians will once again define their own office hours, staffing and which managed care contracts they wish to exclude from their practice.
In responding to PPMC deals gone bad, physicians have three options: sue the PPMC for not meeting its contractual obligations and mismanaging physician practices, buy out of the contract for $200,000-plus, or join forces with a hospital or health system to buy back practices.
While a growing number of PPMCs are caving in to lawsuits and settling out of court, many physicians cringe at the prospect of a lengthy legal battle. Others who have already experienced unanticipated income declines have little interest in spending time and money on attorneys to fight their battles.
For many physicians, developing partnerships with hospitals and health systems may be the best opportunity for recovering from PPMC losses. With more than a few PPMCs now interested in divesting practices, physicians and hospital health systems can now pick up practices at reduced prices—if they act quickly.
Whether physicians choose to ally themselves with PPMCs or with hospitals and health systems, preventive maintenance is essential. Physicians should discuss contract provisions that will make it easier for them to exit the contract if expectations aren’t being met early in the process of contract negotiation.
Especially important are contract performance standards for collection rates, minimum and optimum staffing levels, minimum days in accounts receivable and net collection ratios. While these standards tend to vary over time, those developed by organizations such as the Englewood, Colorado-based Medical Group Management Association (MGMA) indicate that a practice should be able to collect 95 to 98 percent of charges. If the PPMC or MSO is collecting only 80 percent of charges, physicians have a clear reason to exit the contract.
Like everything in life there are no “free lunches”. Physicians need to exercise caution when considering selling their practice or even signing a management agreement. Consider not only the “contract” terms, but the motivations of the buyer. Are the buyer’s motivations the same as yours? And more importantly, how long do you expect to practice and how long do you expect the person negotiating with you to be involved?
Jeffrey Peters is president of Health Directions Inc., an MSO company based in Illinois.