Pathology PPM Appears Ready To Hit Marketplace

Physician Solutions brings aboard new CEO, finalizes $20 million venture fund commitment

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CEO SUMMARY: After several months of delays, Physician Solutions recruited a new CEO and completed arrangements to receive $20 million in venture capital funding. These two milestones mean that the pathology-based physician practice management company will soon be ready to launch formal business operations.

EVENTS ARE UNFOLDING RAPIDLY at Physician Solutions. During the month of March, the company recruited a seasoned healthcare veteran to be the new CEO, closed a transaction for $20 million from venture capitalists, and announced plans to relocate from Nashville to Dallas.

Physician Solutions becomes the second pathology-based physician practice management (PPM) company to obtain major funding from venture capitalists. AmeriPath, Inc. was initially funded by venture capitalists in 1994-95 and successfully went public last October.

In contrast to AmeriPath, however, Physician Solutions intends to pursue a different plan for acquiring and operating pathology practices. It will utilize the equity model as opposed to AmeriPath’s use of the employment model.

The new Chairman and CEO at Physician Solutions is Richard D’Antoni. He was formerly Chief Operating Officer (COO) of ProMedco, a public PPM. “Richard D’Antoni brings considerable expertise to us,” stated Harold Roe, President of Physician Solutions. “At the time he joined ProMedco, it was a private company with $30 million in annual revenues. Last year ProMedco reached a $225 million run rate and successfully closed an initial public offering which raised $33.5 million.

“Now that we have closed the commitment for $20 million in venture capital funding, we are ready to enter the marketplace and tell our story to pathologists.”
Harold Roe
President, Physician Solutions

D’Antoni assumed responsibilities at Physician Solutions on March 10, 1998. Within a few weeks of D’Antoni’s arrival, the company finalized details and closed the commitment for $20 million in venture capital funding.

The $20 million funding commitment was larger than the $18M originally reported. “Given the input from D’ Antonio and revisions to our projections, the venture capital companies decided that $20 million was an appropriate amount,” explained Roe. “Also, we added an additional venture capital firm. The Sprout Group and 21st Century Health Ventures remain as participants. The new venture capital company is Salix Ventures of Nashville, Tennessee.

“Salix Ventures was formed by two executives with a long history of healthcare and PPM management,” he noted. “Chris Grant was an executive with MediVision back in the early 1980s. It was one of the first PPM-model companies at a time before the term PPM was used to describe physician practice management firms. His partner is David Ward, a former executive with MedCath, the big cardiology PPM.”

Capital Brings Credibility

The funding of $20 million from venture capital companies is important credibility for Physician Solutions. But pathologists will find two other facts equally credible.

First is the source of the venture capital. The Sprout Group is an affiliate of Donaldson, Lufkin & Jenrette (DLJ), the Wall Street brokerage firm. DLJ acted as the lead underwriter for AmeriPath’s initial public offering. Apparently DLJ likes the prospects for pathology-based PPMs.

21st Century Health Ventures is an affiliate of HEALTHSOUTH. Coincidentally, HEALTHSOUTH owns the largest number of surgicenters in the United States. Since HEALTHSOUTH’s surgicenters generate a steady volume of anatomic pathology (AP) specimens, it can be assumed that a close relationship with a possible provider of AP services was of interest to 21st Century’s parent company.

Second is the involvement of experienced executives familiar with the PPM industry. The background of Richard D’Antoni is directly relevant to the business needs of Physician Solutions. Grant and Ward, partners in the third venture capital firm funding Physician Solutions, have a similar knowledge about the PPM industry. The fact that such individuals are willing to invest time and money into Physicians Solutions indicates their confidence in the company’s potential for success.

Different Business Plan

Pathologists will find that Physician Solutions has a different business plan than AmeriPath. “Our strategy is to emphasize the local nature of pathology,” said Roe. “We want to find pathology practices with good growth potential and a solid reputation, located in metropolitan areas where pathology consolidation has yet to occur.

“This strategy calls for us identify a promising area and plant a flag there by partnering with a likely pathology practice,” he continued. “We would then go north, south, east, and west to build a regionalized pathology service organization within that metro area. For our pathologist partners, we would help them diversify their revenue.”

“Many pathology practices have most of their revenue tied up around a single hospital or healthcare system,” he added. “In many cases, the pathologists’ revenue is under the control of a single hospital administrator. One aspect of our game plan is to market pathology services and expand client accounts within that region. The increased volume of AP specimens brings higher income and creates a diversified stream of revenue.”

Roe uses the term partnering deliberately. He wants to distinguish his pathology PPM model from that of AmeriPath. AmeriPath has been using the employment model PPM. AmeriPath buys the assets of the pathology practice and puts those pathologists on an employment contract.

In contrast, Physician Solutions uses the equity model. The company will buy an ownership interest in the pathology practice. It will take a portion of practice profits in exchange for a variety of services such as administration, billing, sales and marketing. A profit-sharing formula allows both the pathologists and Physician Solutions to benefit from increased profits which result from the combined efforts of both parties.

Diversify Revenue

Pathologists should recognize that Physician Solutions’ impending arrival into the marketplace speeds up the pace of change to a sleepy profession. It joins AmeriPath as a well-funded company intent on building a significant business from anatomic pathology.

Also entering the pathology marketplace is Pathology Consultants of America (PCA). News in this issue of their recent acquisition of American Pathology Resources makes PCA the third company now building anatomic pathology revenues through selective acquisition. Several other pathology-based PPMs are known to be organizing and lining up venture capital.

These pathology PPMs will compete against each other in two ways. First, they will seek to buy or partner with a particular type of pathology practice. Since there a limited number of such practices, bidding wars may fuel a seller’s market for those pathologists lucky enough to be in such a high- profile practice.

Second, as these pathology PPMs acquire a presence in various cities, they will launch aggressive, persistent sales programs to capture market share. THE DARK REPORT sees evidence of this already starting to occur in Florida. (See THE DARK REPORT’S coverage on this topic here.)

Thus, pathologists should carefully watch the business progress of Physician Solutions and similar pathology PPMs. They represent the force of change to the quiet backwater once known as the profession of pathology.

Government Must Pay Whistleblowers $42.3 Million From SBCL’s “Labscam” Case

Last Wednesday a federal judge in Philadelphia ruled against the Justice Department and ordered the government to pay three whistleblowers $42.3 million.

After SmithKline Beecham PLC settled a $325 million allegation of Medicare fraud, the Justice Department agreed to pay a minimum of $9.7 million to the Robert J. Morena, Charles W. Robinson, Jr. and Glenn Grossenbacher. But the payment offer was good only if the three whistleblowers agreed to drop their claims for the additional $42.7 million.

In hearing the case, U.S. District Judge Donald VanArtsdalen ruled that the three men made a major contribution to the government’s case and helped bring in nearly all of the settlement. “I am left with the impression that the attorneys in charge of the Labscam investigation… seek to take far more credit for the overall success of the proceedings than is rightly due,” wrote Judge VanArtsdalen.

Judge VanArtsdalen ruled that the three individuals were responsible for all but $15 million of the amount recovered from SmithKline. He awarded the whistleblowers about 17% of the $325 million settlement. This ruling strengthens the rights of whistleblowers and will encourage further whistleblower suits.

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