THIRD IN A SERIES
WHAT DOES IT MEAN WHEN the largest companies in a multibillion dollar industry announce that they will “get out” of that business?
That is the question which must be answered after MedPartners, Inc. joined PhyMatrix Corp. in publicly declaring that they would abandon the physician practice management (PPM) business.
MedPartners announced its decision on November 11, startling Wall Street in the process. PhyMatrix had disclosed its decision in August. MedPartners, with over $6 billion in revenue, is the largest PPM and has agreements with more than 11,000 doctors. PhyMatrix, with 8,000 doctors, has been one of the PPM industry leaders.
Divesting PPM Operations
What will MedPartners and PhyMatrix do after divesting their physician management operations? Those answers are revealing. MedPartners will shift emphasis to pharmacy services. It owns Caremark, the drug distribution network it purchased in 1996. Caremark has 53,000 affiliated pharmacies and a mail order distribution center. CareMark has annual revenue of $2.6 billion. It represents 38% of MedPartners’ revenue, but 64% of its earnings before taxes.
At PhyMatrix, the emphasis will shift to clinical trials site management organizations. PhyMatrix will use existing hospital and physician clinic relationships to develop this business. “We see clinical trials site management as a fragmented, low penetration, high-growth business,” stated Robert Miller, President of PhyMatrix.
Warning To Pathologists
Taken together, these actions by the nation’s larger PPMs companies should provide a warning to pathologists: tread carefully when a PPM approaches your practice with an acquisition offer. The marketplace has yet to validate the concept of a physician practice management company.
For clinical laboratory executives, there is a different message. As PPMs cease to be a major player in physician practice management, the vacuum may be filled by hospitals and integrated delivery systems. If this comes about, it will alter how clinical laboratory services are marketed and sold to physician offices.
A physician practice which is owned or managed by the local hospital represents a different sales challenge to a clinical laboratory than a physician practice owned and operated by a PPM with corporate headquarters in Birmingham (MedPartners) or West Palm Beach (PhyMatrix).
PPMs are the market consolidators for physician practices. For that reason, the emergence of PPMs has given clinical laboratories a new marketing and sales challenge. For example, in Southern California, over 4,000 physicians are affiliated with MedPartner. Whenever a clinical laboratory approaches a doctor’s office to sell its testing services, MedPartners becomes an additional factor in the sales closing cycle.
“They (MedPartners) are selling into a buyer’s frenzy…either the physicians want to buy it back or the local health system has a priority to buy it.”
Analyst, Security Capital Trading
For pathologists, market consolidation is a real threat. In just seven years, upwards of 42,000 of the nation’s 600,000 doctors have sold their practices to PPMs. This number does not include those physicians who sold their practices to hospitals and integrated delivery systems.
Such widespread activity to consolidate ownership of physician practices finally began to spill over into the pathology profession. AmeriPath, Inc. of Riviera Beach, Florida went public in October, 1997 and became the first pathology-based PPM. Since that date, AmeriPath has grown into an organization employing 226 pathologists in ten states.
Pathology is highly-vulnerable to consolidation. Of the 3,300 pathology practices in the United States, more than 67% number three or fewer pathologists. Almost a third of pathology practices represent solo practitioners.
As clinical and operational integration of healthcare becomes a realty, these fragmented pathology practices are destined to become evolutionary dinosaurs. They will be gobbled up by business-minded pathologists who recognized the reality of today’s healthcare marketplace and acted accordingly.
Are PPMs The Answer?
But will pathology PPMs be the right market answer to pathology practice consolidation? The jury is still out. Problems seen at MedPartners, FPA Practice Management, PhyMatrix and other PPMs have not yet surfaced at AmeriPath.
The newest pathology PPMs, such as Pathology Consultants of America, Pathology Partners and PathSOURCE, are moving slowly in their efforts to build a book of pathology management contracts. Their executives are carefully watching the PPM industry and hoping to avoid the negative experiences of that industry.
Meanwhile, another business model which is gaining strength within the pathology profession is Pathology Service Associates (PSA), based in Florence, South Carolina. PSA is a national pathology network organization. It has statewide networks in eight states. Collectively, there are 31 owner practices representing 250 pathologists. With those numbers, PSA actually represents more pathologists than AmeriPath.
“Do Nothing & Wait” Strategy
The rapid growth of both AmeriPath and PSA demonstrates that many pathologists realize that a “do nothing and wait” strategy is unacceptable. Survival in the managed care world requires a proactive business strategy.
Since most pathologists are risk-averse, they find it difficult to deal with the uncertainties of the marketplace. After all, it is difficult to predict what will happen in coming years to each local healthcare market. Which HMO will become dominant? Can individual hospitals remain independent and not go bankrupt? Will one integrated delivery system outcompete others in the area?
For pathology practices looking at strategic business options, making the wrong choice can be disastrous. However, making no decision at all is even more dangerous.
THE DARK REPORT believes that pathology PPMs will mutate into a different type of business operation. Survivors will be sustained because their activities at consolidating two-man and three-man pathology practices will leave them with a consolidated pathology practice that has market clout within its metropolitan area.
As clinical services undergo extensive integration, THE DARK REPORT predicts that, in the future, pioneers at pathology practice consolidation may well find themselves favorably positioned to provide services, acquire managed care contracts, and build market share. Fragmented pathology practices which resisted consolidation in preference to preserving their independence will be the ones to find themselves locked out of lucrative opportunities.
From that perspective, the problems now plaguing MedPartners, FPA Practice Management, and other struggling PPMs were timely warning to the pathology industry. Pathology PPMs and their evolutionary spin-offs must organize themselves differently if they are to add value to pathologists and bring enhanced services to the clinical marketplace.
How they accomplish this will be determined by three factors: 1) unique differences in healthcare between communities; 2) the organizational structure of the pathology PPM; and 3) management’s ability to successfully implement the business plan.
Taken collectively, this means that pathologists need to understand their local healthcare market, choose an appropriate consolidation vehicle, and work with a competent management team that knows how to win. Achieve that, and financial success should follow.
California Path Group Signs With PCA
Associated Pathology Medical Group (APMG) of Los Gatos, California recently signed a management agreement with Pathology Consultants of America (PCA).
APMG is a diversified pathology practice. Its ten pathologists serve three hospitals from an independent histology laboratory in Los Gatos. APMG also contracts to provide medical direction and pathology services to Unilab’s San Jose laboratory.
PCA is a Nashville-based pathology practice management (PPM) company. (See TDR, January 19, 1998.) With the APMG contract, PCA is now involved with eight practices and 80 pathologists in various areas of the United States.
This is PCA’s first transaction in a number of months. The company is choosing to move deliberately. Up until now, most of its activities have been centered in Nashville, Memphis, St. Louis, and Denver.
Expect to see PCA sign additional management contracts in the San Francisco bay area in the coming months. The company’s strategy is to build a consolidated pathology practice around its core management contract in a region. APMG gives PCA a financial foundation from which to build such a consolidated pathology practice.
Pathologists should see this as a sign that the pathology PPM movement will not go away, despite current financial problems within the PPM industry. Regardless of such problems, the move to consolidate and integrate physician practices will continue and PPMs will have a role in that process.