Practice management firms buying more hospital-based physician groups

The companies are not acquiring primary care practices but instead are focusing on inpatient specialties.

By Victoria Stagg Elliott — Posted June 21, 2010

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Hospitals are not the only entities buying medical practices. A small number of practice management companies are in the game as well.

"Physicians need to know that they probably have options," said Michael Parshall, a medical practice consultant in Schwenksville, Pa., who has worked with physicians on the issue. However, physicians most likely to be approached by practice management companies are those in inpatient specialties.

For example, between January and June of 2010, Mednax Inc., based in Fort Lauderdale, Fla., added seven neonatal and maternal-fetal medical practices to its Pediatrix Medical Group. TeamHealth, headquartered in Knoxville, Tenn., bought or affiliated in some way with two emergency physician groups and one anesthesiology practice. IPC the Hospitalist Company, in North Hollywood, Calif., took on four hospitalist practices.

The practice management firms are all publicly traded companies, and the physician practices purchased range in size from two physicians to a few hundred. Those in the industry say some private firms also are buying, although those deals have not been made public.

Doctors asking for help

Acquisitions are on the upswing and are expected to continue growing, analysts said, in part because of corporate expansion plans. But practice management firms also said they are being approached by an increasing number of physicians. These doctors want help in managing their practices so they can focus more on care, and are looking for greater access to technology, educational opportunities and other resources, analysts said.

"It's not a new part of our business strategy. What we are seeing is an elevated interest in groups about partnering," said Jon Grimes, senior vice president of TeamHealth. "Our pipeline is more robust."

Experts noted that recent developments are very different from the heady days of the mid-1990s. Then practices were bought for what are now considered inflated sums, and investors, many of whom had no prior health experience, got involved.

"What is different is that these guys are operators. The ones before were acquirers. They were good at accessing the capital markets, but not necessarily good at operating practices," Parshall said.

Practice management companies usually are not taking out loans or selling stock to finance these deals. Most deals are for cash taken from already earned funds. This time around, the firms are focusing on hospital-based practices and are buying within certain specialties. Unlike the mid-1990s, when practice management companies had a strong interest in primary care practices, they now have very little interest in them, Parshall said. Unlike hospitals, which do have an interest in affiliating with primary care practices, practice management companies make money only off the practice, not down the line through referrals.

They also are not buying troubled assets. Rather, the purchased practices are already financially healthy and have long-term relationships with hospitals, but need a larger entity to grow, acquire technology or negotiate with third-party payers.

Purchase prices also are more modest. Hospitals no longer pay for goodwill, and this is true for practice management companies as well.

No employment guarantee

Unlike with a sale to a hospital, practice management companies don't always employ the physicians after buying the practice. Practice management companies handle administration, own the practice's contracts and take in the payments, a portion of which is then distributed to the practice. Physicians can be employees or independent contractors of the management company directly, or of the practice. How this is handled is usually dictated by local laws and styles of practice.

Experts caution, however, that although most of the practice management companies currently purchasing practices have been around for a while, the failure of so many companies in the mid-1990s casts a long shadow.

Although some companies survived that era, many didn't. Before selling, physicians should assess a company's viability as well as determine if the company is one they want to work with over the long term.

"If the company goes bankrupt, you're in trouble. Look at their governance and the track record," said Nathan Kaufman, managing director of Kaufman Strategic Advisors in San Diego.

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