PPMs: New kids on the same-day surgery block
PPMs: New kids on the same-day surgery block
By Stephen W. Earnhart, MS
President and CEO
Earnhart and Associates
Dallas
PPM Does it stand for physician practice management or private placement memorandum? Well, actually, it could stand for both, but for the sake of this month’s column, we’re going to talk about physician practice management companies and how they can affect your surgical volume. I’ve had a rash of calls about this topic over the last couple of months.
Form vs. function
Here’s the concept: XYZ company identifies all the OB/GYN practices in a certain town. (There are actually PPM companies for almost all specialties now.) XYZ company meets with the individual practices and explores the concept of essentially merging them into a large practice kind of like a union. The physicians sell part of their practice or their "cash flow" to XYZ. That company is now essentially going to run the business for them.
There are usually "economies of scale" associated with the merger. Often, XYZ company will attempt to consolidate the practices into one location if possible. Therefore, instead of having five large practices in five locations with five managers and 50 nurses and five office leases and five phone systems, etc., they now have only one manager, one office lease, one system, and fewer nurses. The overhead of these five (now one) practices is now significantly reduced. And, unburdened by competing against each other, more time can be spend growing the practice. On paper, it make a lot of sense unless, of course, you’re one of the 50 nurses or five managers.
Physicians should see a huge reduction in their office overhead. And that is what they contributed a sizable chunk of their cash flow toward: cost reduction.
Many of these PPM companies are publicly traded on Wall Street, which is a further inducement to the physicians to join. Eventually we all wish to retire and go to the beach. Many of us need an exit strategy’ or a plan to accomplish our goal, and physicians are no exception. However, you can only sell something, regardless of how good it is, if someone is willing to buy it. Therefore, XYZ company may offer stock to the physicians as well as offering tremendous overhead reduction, the premise being that everyone’s stock value will increase as the company becomes more profitable. Then someday, physicians can sell their stock and retire. It can work.
At the end of the day, the individual physician sits down and calculates what he or she is paying XYZ company from the practice revenue vs. what benefit or "added value" XYZ has contributed to the practice. Obviously, the difference can be extraordinarily high.
Same-day surgery enters the picture
However, for XYZ company to continue to prosper and grow, it needs to pick up the benefit of the combined surgery of this now mega- practice. This is where we enter the picture. Say XYZ owns 25% of this new mega-practice. Assume that an office visit is $45 per patient. Let’s say the overhead of this practice, now that it is merged, is only 30% or less. That means that the potential profit on that visit of $45 to XYZ company is only $7.87 ($45 - 30% x 25% ownership). Is Wall Street excited about this? Hardly.
Let’s say this consolidated OB/GYN practice performs more than 3,000 surgical cases a year at your hospital or surgery center. What a dud. And guess what? XYZ is going to build a surgery center! They probably will own about 80% of the center and sell 20% to the physicians.
Assume that this ASC has a net revenue of $3.6 million on OB/GYN cases (3,000 x $1,200). I know that $1,200 is low. Be conservative! They do everything right and end up with a profit margin of 50%. Now you have XYZ company receiving $1.44 million from the ASC ($3.6 million x 50% = $1.8 million x 80% = $1.44 million). The remaining 20% or $360,000 will be split among all the operating surgeons. That is why you hear so much about PPM’s companies!
What can you and I do about it? Probably not much except continue to make our centers the best things since sliced bread to the physicians. However, this is another reason hospitals are building their own centers and joint venturing with their surgeons: to offer alternatives to their physician base. The pie is very big, and it is better to have a piece of a big one than own 100% of nothing.
[Editor’s note: To offer feedback or suggest further column ideas, contact Stephen W. Earnhart, Earnhart and Associates, 5905 Tree Shadow Place, Suite 1200, Dallas, TX 75252. E-mail: [email protected]. World Wide Web: http://rampages.onramp.net/~ surgery.]
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