MedPartners To Divest Hospital-Based MD Unit

Team Health is a $690 million division with 2,240 ER doctors and radiologists

CEO SUMMARY: Hospital-based pathologists are increasingly the target of buy-out offers by the emerging group of pathology based physician practice management (PPM) companies. But MedPartners decided that managing hospital-based physicians was something that was not in its best interest. What message should pathologists read into MedPartner’s exit from managing hospital-based doctors?

PATHOLOGISTS MAY WANT TO PAY close attention to what happens with Team Health, the hospital-based physician management division of MedPartners, Inc., the $6.3 billion physician practice management (PPM) company based in Birmingham, Alabama.

MedPartners announced on June 23 that it intended to sell all Team Health operations. Team Health is large, with $690 million in annual revenues. It manages 2,100 emergency room physicians and 140 radiologists. There are also a few anesthesiologists and intensive care specialists. The company’s reach is significant, as it has 268 hospital-based contracts and 58 radiology services contracts in 30 states. That is about 5% of all the hospitals in the United States.

No Pathology Management

According to company officials, Team Health has no management arrangements with pathologists. Business-minded pathologists will probably ask two questions. First, if PPMs really add value to the management of hospital-based physicians, why does Team Health not have contracts with any pathologists? Second, if the nation’s largest PPM, MedPartners, wants to exit the business of managing hospital-based physicians, does that mean PPMs cannot do much to boost the revenues and operating profits for hospital-based physicians?

Relevant Questions

Both questions are highly relevant to the future of pathology. At least three pathology-based PPMs have sizeable amounts of venture capital money and bank credit. They are now in the marketplace seeking to acquire pathology practices. PPMs generally claim that they can manage a doctor’s practice better than the doctor by lowering costs, improving operating profit and boosting revenue through sales and marketing.

These concepts have yet to be validated in the pathology world. AmeriPath, Inc. went public just nine months ago, in October 1997. It will it take several years before the company demonstrates its ability to deliver sustained economic benefits which are attributable to its management of pathology practices. Because dermatopathology specimens orginating outside the hospital comprise a sizeable portion of AmeriPath’s revenue, the company is not a pure play on hospital-based pathology.

Pathology PPMs

Competing pathology PPMs, such as Pathology Consultants of America, Inc. and Pathology Partners, Inc. (formerly Physicians Solutions, Inc.) are just now entering the marketplace. Like AmeriPath, it will take several years before an accurate judgement can be made as to their effectiveness in running pathology practices.

The PPM industry itself is at a crossroads. After many years of increased profitability, several closely-watched PPM companies lost money in 1997. The investment community is watching to see if these losses were one-time hiccups or the first signs of sustained financial problems.

“MedPartners recognized that managing hospital-based physicians and managing multi-specialty clinics are two different businesses,” said Tom Dingledy, Corporate Communications Director at MedPartners.

Core Competency

“This decision to sell Team Health had nothing to do with the performance of that division,” he continued. “It was a decision by MedPartners to emphasize our core competency in the management of multi-specialty clinics. We intend to concentrate our resources on the multi-specialty segment.”

Dingledy’s comments seem to reflect a recognition by MedPartners that the growth and profit potential of multi-speciality clinic management is greater than that of hospital-based physicians. The reason may be the way hospitals contract with hospital-based physicians for services. Cost-cutting by hospitals is widespread and hospital-based physicians find themselves being asked by their hospital to accept less money at each contract renewal.

Another relevant aspect to the Team Health operation is its lack of pathologists. Although Team Health has 2,100 ER physicians, 140 radiologists, some anesthesiologists and a modest number of pediatric and adult intensivists, not one pathologist is represented by the group. Apparently the financial aspects of hospital-based pathology caused Team Health to avoid involvement in that physician specialty.

If an experienced physician practice management company like Team Health, with thousands of doctors and almost $700 million in revenue, deliverately avoided hospital-based pathology, what is it they have learned which the pathology-based PPMs don’t yet know?

Marketplace Signal

As a signal in the marketplace, the Team Health divestiture says two things. First, a major PPM has decided to get out of the business of managing hospital-based physicians. The challenges of succeeding in the hospital environment are tough compared to the family practice and multi-practice environment.

Second, despite doing business with 5% of the nation’s hospitals and managing 2,200 hospital-based physicians, Team Health never went so far as to bring pathologists under their management umbrella. Apparently the fundamental economics of hospital-based pathology discouraged them from this step.

Team Health’s experience may demonstrate that pathology-based PPMs face a market environment (hospitals) which is unfavorable for achieving sustained, long-term financial success, both for themselves and the pathologists they manage. If true, hospital-based pathologists should carefully consider the reasons for selling their practice to a PPM.

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