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Practice management companies begin to tap the optometric market
DENVER — As more optometrists feel squeezed out of managed care plans and wonder how to compete with practices that have the latest equipment, many are looking for alternatives that combine optometry's independence with the security of a group effort, said Donald A. Hood, OD, president and CEO of the Eye Health Network here.
--- Donald A. Hood, OD
Some optometrists have been able to find an answer in the form of physician practice management (PPM) companies. These firms buy medical practices and consolidate their administrative and management functions into a single unit that draws on the combined strengths of all the practices to compete in the market, especially in managed care.
"PPMs are be ginning to impact optometry to a small degree," said Hood, also a Primary Care Optometry News Editorial Advisory Board member. "Optometry hasn't made the commitment to PPMs like ophthalmology has. Yes, optometrists are selling their practices to the big companies, but optometry has not embraced this for several reasons, one being its culture of independence."
How PPMs work
Essentially, PPMs buy practices in exchange for cash, stocks or promissory notes. The PPM pays all salaries, including the doctors'. The company should provide marketing and managed care expertise, administrative support and, most importantly, provide capital for any growth focused projects.
PPMs are starting to look more closely at optometry, Hood said, for the referral power it can provide. "Ophthalmology is an attractive acquisition to a PPM because of the size of its business units," he said. "Optometry's business units are typically so small it's hardly worth the effort of an acquisition for the same money, so optometry hasn't been as attractive to the PPMs."
Hood said once a PPM has acquired a major ophthalmology practice, it will probably want to acquire the major referring optometrists. He calls this type of acquisition "phase 2" of an ophthalmology-based PPM.
The other alternative is for optometrists to form medical service organizations (MSOs) and align themselves with an optometry managing company that brings several practices together to give everyone clout in buying power, negotiations and third-party issues.
"The MSOs formed by optometry can bring enough practices together to resist being picked off by the PPMs solely for their referrals," Hood said.
If all this sounds like the solo practice is doomed to become a thing of the past, Hood believes there will be room for both.
"In major markets particularly mature in managed care, the solo practices are disappearing," he said. "However, in rural areas the solo practice will survive longer because there is less competition. The movement is clearly headed for group practice for several reasons: economies of scale for access to managed care patients, marketing, buying and efficiencies."
Hood said optometry will likely adopt an approach that includes both PPMs and MSOs, yet he feels the latter is more in the profession's best interest.
"MSOs are a big deal in general medicine because if they have all the employees in 10 to 15 practices, they have better benefit packages and can hire quality management people," he said. "In markets where there is a lot of competition, optometry will have to decide as a whole to go one way or the other."
One ophthalmologist, Richard L. Lindstrom, MD, a Minneapolis practitioner and Primary Care Optometry News Editorial Advisory Board member, made the decision to go with a PPM. Lindstrom recently signed a letter of intent with Vision 21, a 20-doctor, private PPM based in Largo, Fla.
--- Richard L. Lindstrom, MD
He cited a desire to tap into the company's management expertise as the main reason for selling his practice.
"We're moving into an era where we just need to rise one level in our sophistication," Lindstrom said. "With marketing and everything else, we're willing to spend large dollars positioning our practices in communities, but we need more sophisticated management."
Lindstrom added that joining Vision 21 will provide him with advice and expertise in managed care contract negotiations, employment issues, scheduling patients and market opportunities, for example.
PPMs may become more popular in optometry, but when an optometrist in a competitive region spends years building and maintaining a practice, giving up the reins is frightening. So, before asking how to make a practice most attractive to a PPM, the first question to ask is: "Why?"
Follow the dollars
"Obviously, there is a certain herd mentality that says 'Because everybody else is doing it'," said Alan Reider, JD, a Washington lawyer specializing in health care. "That is not the reason to do it."
--- Alan Reider, JD
Instead, said Reider, "It's the opportunity to reduce your costs by participating in a group that offers shared services. Essentially, what we are talking about are the benefits of economies of scale."
In economies of scale, the practitioners in a PPM can rely upon the same administrative functions — billing and coding, for example — while concentrating on clinical treatments. They can even share the same computer equipment and spread the costs among all the practitioners in a region.
In addition to lowering the bottom line, consolidations increase patient volume entering a practice because larger practices can better negotiate with managed care companies for contracts.
"Some people go into this for the simple reason of protecting their patient base," Reider said. "You see managed care going into many markets, and there's a real concern among a lot of physicians that their practices will erode considerably. They want to forget about expanding and just maintain the status quo."
Finally, PPMs allow for networking among former competitors in the same eye care market. Not only can ophthalmologists and optometrists end their turf wars, but optometrists can take advantage of opportunities that simply did not exist before, Reider said.
Optometrists can form peer review programs or exchange information within their specialties. The PPM can develop best-practice protocols, utilization review assessments or quality assurance programs.
What will you get for your practice?
Optometrists who decide to sell their practice to a PPM are not necessarily giving up their autonomy, Hood said. "It does mean that with most models, but some systems are structured so optometrists don't have to give up their autonomy," he said. "It's a negotiable issue."
The first element to consider is what each PPM will pay for a practice. Joseph Palmer, an Akron, Ohio, management consultant who guides professionals in all fields through the PPM negotiation process, said many doctors have misconceptions about what the PPMs will offer for their practices. Very few companies offer all cash for a practice, for example, and they do not offer enough to retire on.
Those who sell their practice should expect to receive only about 20% of the practice's value in cash and the rest in either restricted or free-trade stock or promissory notes, Palmer said.
Restricted stock cannot be sold for 2 years, and after that time practitioners must follow federal regulations that limit stock sales to 1% of the total holdings in any 90 days. Free-trade stock can be sold at any time after the deal is completed.
The trade-off, Palmer said, is that PPMs will typically offer more restricted stock than free-trade stock because it is a higher risk. PPMs usually offer about 20% cash and 80% restricted stock, or 20% cash, 40% to 50% in free-trade stock and the balance in restricted stock.
Because only a few PPMs are publicly traded, most doctors can expect to receive a combination of cash and promissory notes or private stock. In some cases, promissory notes constitute 100% of the deal.
"What [doctors] really need to do is ask for their companies to be priced all-cash purchase price, and then one other alternative," Palmer said. "If they are quoted on a combination of cash and lettered stock, they need to ask that buyer to quote them on all cash. Once they see the difference, they can conclude where the risk considerations are and have a greater understanding of the leap of faith they are taking."
One way of testing the faith is to consider how much future income a practice will gain or lose in the managed care market, he continued. Doctors can expect to give up one-third of their future revenues if they join a PPM.
If competing practices or increased capitation could cut next year's revenues by more than 24%, then doctors should consider selling. Conversely, doctors who see their bottom lines increasing by more than a third should sell to a PPM. Practitioners who are not expecting to lose 24% of their revenue stream or gain 34% have no strictly financial basis for selling, Palmer said.
Don't tackle it alone
Optometrists who are considering selling their practice to a PPM should talk to several people, Hood said, starting with their spouse. "I've seen deals fall apart or bad feelings develop because the spouse didn't understand what was going on," he said. "It's important to talk to your spouse about your goals."
Next on the list of advisers is the optometrist's accountant, attorney or other management consultant, he said. "Hire a lawyer who has experience in health care acquisitions," Hood advises. "Even the PPMs will appreciate that. You need someone who understands these issues and brings expertise to the decision process."
Practitioners usually begin the process of selling to a PPM by taking stock of the practice's elements, said Michael Stark, JD, in practice in Akron, Ohio. In addition to examining accounts payable, doctors must evaluate corporate holdings and legal commitments, whether they involve real estate, managed care contracts or employment contracts with younger practitioners.
This is the time for optometrists to evaluate their options with several companies, Hood said. "This is the most important thing in your business, so why not shop around?" he said.
Hood advises ODs to find out who the board members are at the PPM, call references, check the PPM's financial position and determine its history in relation to optometry.
"Optometry tends to be the minority shareholder in a PPM and, therefore, has no say in a public company," Hood said. "The big issue is, don't panic. The PPMs may try to panic you into signing a letter of intent in 30 days, for example, but there will be opportunities down the road when a company comes into town and buys the major practices."
Once the doctor and PPM have agreed to speak more formally, the next step is to sign a confidentiality agreement, Stark said. This allows the two sides to exchange information about one another, such as financial statements or patient information.
The confidentiality agreement could also include other clauses that restrict what can be done after either side decides not to continue. For example, hiring restrictions can be built into the contracts to protect key employees the PPM would want to hire away from the practice if negotiations failed. Or, the PPM might want doctors to agree not to speak to any other PPMs during negotiations.
Take advantage of due diligence
If both sides perform the cursory examination and decide to continue, they usually sign a letter of intent. The letter sets forth in a nonbinding statement a deal's structure, purchase price and which assets and liabilities will be included in the purchase.
It also includes a drop-dead date by which both sides must sign a contract, typically 2 months after singing the letter of intent, although this date varies from one deal to another. After signing the letter, both sides will conduct a process known as due diligence.
During due diligence, each side exhaustively reviews the legal and financial elements of the other to provide the basis for further negotiations. For example, before signing his letter of intent with Vision 21, Lindstrom said he checked out every PPM and personally visited five of them. He spoke with other physicians in each company and investigated references.
Acquisition teams investigate you
Due diligence is also a time for the practitioner to examine his or her own practice in terms of corporate status, shareholder records, contracts and leases, or even outstanding debts.
The PPMs use experienced acquisition teams that do 50 to 60 transactions annually, in some cases. Such teams consider details such as employment contracts, malpractice insurance and shareholder records. "They know the questions to ask," Stark said. "Do your due diligence before you talk to them."
Based upon the work done during due diligence, attorneys for each side negotiate specifics for the purchase price, how that purchase price will be paid and what management services will be given for that price. Other elements of negotiation include leases for any property the PPM may want to buy or employment contracts for key administrators it wants to hire.
The letter also includes a date by which an agreement must be reached. If negotiations go beyond that date, either side can terminate discussions.
Stark describes the process of closing this deal as a business transaction, one involving tax and legal issues, contracts and even health care components.
Glossary of Managed Care Terms | |
| Capitation | A physician payment method that shifts risk by giving a provider a fixed amount of money per patient, regardless of actual services rendered. |
| Carve-out | When a managed care company separates specialty areas such as radiology, mental health or eye care from the rest of its contracted services and offers them in another contract. |
| Consolidation | The acquisition or merging of physician practices to reduce costs, increase efficiency and gain bargaining power with managed care companies. |
| Due diligence | A process in which each side of a negotiation attempts to verify claims and financial information made by the other party. For the physician practice management company it involves an audit of the practice's records. For the physician, it involves verifying statements made in the company's sales pitch. |
| Economies of scale | The savings achieved by combining the administrative functions, such as billing or buying, of all the physicians in an area. |
| Health maintenance organization (HMO) | A system that provides a comprehensive health care plan and controls the cost and use of medical services through primary care physicians. |
| Integrated delivery system | An organized, closed delivery system of physicians and hospitals that acts as a single delivery system. It can be organized by a hospital or by physicians. Also known as a physician hospital organization. |
| Independent practice association (IPA) | A loose affiliation of physicians that contracts as a group with multiple payers. It offers doctors a chance to join together and negotiate contracts with employers, insurers and third-party administrators. Typically, it is driven by primary care providers and restricts the number of specialists. |
| Letter of intent | A nonbinding agreement that sets forth the basic elements of an agreement between a physician practice management company and a physician. |
| Management services organization (MSO) | A company that employs all administrative and possibly some allied health personnel; owns or takes over leases of equipment; and contracts to provide management and ambulatory surgery or diagnostic services. It also markets services to managed care companies. |
| Physician practice management (PPM) company | A unit that handles administrative functions of a doctor's office for either a fee or for a share of ownership in a practice. These companies operate as management service organizations. |
| Physician-hospital organization (PHO) | A hospital-physician organization that creates a health care delivery network that subcontracts with HMOs and other payors. Its own hospitals may purchase group practices to create the network. Also known as an integrated delivery system. |
| Preferred-provider organization (PPO) | A group of physicians who contract directly with a payer to provide services. A PPO encourages members to visit its list of providers by offering benefits or reduced out-of-pocket expenses. It allows independent physicians to bid for managed care contracts with employers or insurers on a discounted basis. |
| Provider-sponsored network | A delivery network organized by providers, usually physicians. |
| Third-party administrator (TPA) | A business unit that pays health care claims for payors or networks. However, it does not take on the financial risk of providing health care. |