Local doctor groups split up as PPMs fail

Clinical Associates buys itself back from parent

others ailing

Health management

April 24, 1999|By M. William Salganik | M. William Salganik,SUN STAFF

Baltimore-area physician groups, which came together over the past few years to win and manage HMO contracts, are separating again, as companies that consolidate doctor practices continue to falter.

Dr. Richard Maffezzoli, chairman and chief executive of Clinical Associates, said yesterday that his group, with nearly 100 doctors, had bought itself back, splitting off from locally based Flagship Health and its Massachusetts parent, Physicians Quality Care Inc.

And Dr. Michael T. Rudikoff, chairman of the steering committee of the 47-doctor Flagship, said his group is also negotiating a buy-back from PQC, and might then regroup as the dozen or so practices that came together to form Flagship.

The shake-ups on the business side should be invisible to patients, both said. Flagship and Clinical Associates doctors will continue to see the same patients in the same offices; the only change will be in how the doctors are paid.

When Flagship formed three years ago, the idea of "physician practice management" companies, called PPMs, was hot. They hoped to win major contracts from HMOs and to generate profits by managing care efficiently.

Clinical Associates decided to join with Flagship and PQC because "we thought if we weren't large enough to command the attention of the managed care companies, we wouldn't be able to negotiate the kind of contracts we had enjoyed," said Dr. Gary Manko, director of physician recruitment for Clinical Associates.

But PPMs didn't work out the way they were supposed to.

"Most physician practice management companies thought they could make up for their [management] fees with better contracts and better management," Maffezzoli said. "That theory has not proven correct."

Rudikoff agreed, saying: "The economic benefits were not sufficient to outweigh the accounting and management costs."

And Dr. Dana Frank, a founder of Flagship and, for a time, an officer of PQC, said, "The number of physicians you need to have an impact on the marketplace was understated," so the groups never got large enough to achieve their goals.

In a filing last week with the federal Securities and Exchange Commission, PQC reported 1998 operating losses of $10.6 million -- nearly double the 1997 losses -- on revenue of $8 million.

Within the past six months in this area, the largest of the physician groups in the Baltimore area, Doctors Health, filed for bankruptcy. Premier Medical Associates dissolved. Pioneer EyeCare sold the practices it had acquired. And two hospitals that bought practices, Sinai and Northwest Medical Center, turned the practices back to the doctors.

Nationally, publicly traded PPMs, hot stocks just a few years ago, have undergone bankruptcies, sell-offs of practices or, at best, losses on the balance sheet and stock prices in the doldrums.

PPMs have had to raise capital to develop large information systems and "redundant infrastructures," said J. D. Kleinke, a Denver-based health economist. Then, PPMs found themselves unable to control doctors' practice patterns. "The technocratic approach to managing is anathema to the culture of physicians," Kleinke said.

With PQC posting big losses, it turned to its physicians last fall to renegotiate terms, Maffezzoli said. When they couldn't agree, they negotiated a plan for Clinical Associates to buy itself back.

PQC bought Clinical Associates for $3 million and PQC stock, which is now worthless. Clinical Associates bought itself back for about $4 million, Maffezzoli said, but the group had grown by about a dozen doctors in the interim.

He said Clinical Associates hopes to continue to acquire practices, but to grow gradually, by perhaps 10 doctors a year.

PQC said in its SEC filing, "The company does not have sufficient capital reserves to fund operating losses at the current levels for the remainder of 1999." PQC officials could not be reached for comment yesterday.

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