Are you thinking of selling to a PPMC?
Are you thinking of selling to a PPMC?
If so, rethink your asking price
For the last several years, the prices physician practice management companies (PPMCs) have been willing to pay for practices has been on the upswing. But according to one market watcher, that trend is coming to a quick end, in part because of increased scrutiny of PPMCs by the Securities and Exchange Commission (SEC) and because of new accounting rules that will affect their bottom lines.
"There are several important issues right now that will have an affect on PPMCs,"says Elaine Scheye, president of The Scheye Group Ltd., a Chicago-based consulting firm. First, there is a case in Florida in which the state board of medicine ruled that the PPMC getting contracts and sending patients to those offices is considered practice enhancement, Scheye says. "If that case is upheld, it means that management companies can't charge physicians to provide practice enhancement. This will cut those companies' revenues, make them less attractive to Wall Street, investors, and analysts, and will thus cut the price they are willing to pay for a practice."
How will SEC rulings affect amortization?
Another issue is whether the SEC - the body which regulates publicly traded companies - will continue to allow PPMCs to amortize the practices they purchase over long periods of time or whether they will make the companies do it over a shorter period. Currently, PPMCs amortize over 20 to 40 years, allowing them to pay a lot of money for the goodwill of the practice, says Scheye.
If that term is shortened, then the amount PPMCs are willing to pay for a practice will undoubtedly go down - Scheye estimates by 20% to 25% in the next five years.
The final question is whether a change in accounting rules will alter how PPMCs consolidate their balance sheets. Scheye says this could also have a negative affect on their bottom lines. "If I can't show that I employ all of the physicians, then the practice isn't a subsidiary, and I can't consolidate my balance sheet. This means my earnings are more normal, I offer less to the practices, and they don't get sucked into deals as easily. The luster is definitely off and the go-go days are over."
Some PPMCs insist that nothing will change for them. Paul Keckley, PhD, vice president of strategic development at PhyCor in Nashville, TN, says his company won't be impacted by the potential changes in accounting rules. "We've only used consolidation once in 55 deals," he says. He also sees no change in the prices his company will offer to practices.
Not that Keckley doesn't see any changes in his business. "There is a growing sophistication among physicians and practices," he says, meaning they enter deals with PPMCs from a broader knowledge base. "But we still have problems with physicians who don't like to lose their autonomy and are shocked when, after PhyCor comes in, things aren't exactly the same as before."
Scheye agrees that there is still some naivete among practices. "Small practices think they can get a large quantity of money if they sign a 20 to 40 year management services contract. But they forget that there is a monthly fee and a percentage of revenue they have to pay. They see their buddies getting six or eight times their yearly salary, but they forget what they have to pay over time."
She says PPMC arrangements work better when a practice knows what to expect from a management company - and also what it really needs. "They may not need a proprietary computer system or any help with their accounts receivable," she says. "They may not need everything a PPMC has to offer. They may do better with a one-time service where they solicit bids."
There is also a misguided notion among some practices that linking with a PPMC guarantees good quality managed care contracts. "That just isn't so," she says. "You have to be sure that the PPMC has a local presence and reputation, and that it knows the local marketplace."
Keckley thinks deals work best when practices have adequate information. "The best objective analyses are done by the investment banks," he says. Keckley recommends practices contact one for some of their analyses of the publicly traded and privately held PPMCs.
Scheye says PPMCs can offer practices some benefits - computerization, help with accounts receivable, billing and coding, and managed care contracts.
"If a practice is in a place where it should be growing and needs help, this is a way to get the capital you need," she says. "But you can't forget that the provision of medical care is the means, and the end is maximization of profits and dividends for shareholders. The focus has to be on medical care, not on profits."
· Paul Keckley, PhD, Vice President of Strategic Development, PhyCor, Nashville, TN. Telephone: (615) 665-8115.
· Elaine Scheye, President, The Scheye Group Ltd., Chicago. Telephone: (773) 989-9315.
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