The Corporation: MANAGEMENT
PHYCOR AND MEDPARTNERS: WILL THESE BLOOD TYPES MIX?
The two health-care companies must fuse wildly different styles
The rivalry of PhyCor Inc. and MedPartners Inc. began as a corporate version of the tortoise and the hare. PhyCor, the $1 billion physician practice management (PPM) company, methodically acquired one clinic at a time, setting a steady, inexorable pace. Founded in 1993, five years after PhyCor, rival MedPartners compensated by snapping up whole PPM companies as well as individual clinics. MedPartners grew at a rapid but erratic rate and will top $5.5 billion in revenues this year.
But on Oct. 29, the great PPM race came to a sudden end when the tortoise announced a deal to buy the hare for $7 billion worth of stock. Joseph C. Hutts, PhyCor's normally understated chairman and chief executive, lauded the merger as "the most important combination in the history of health care." Investors did not share his enthusiasm. PhyCor's stock plummeted 20% in a day, falling to $24 a share, and has not rebounded. MedPartners' share price fell, too, and at $26 sits well below the $35 a share PhyCor's offer would have been worth had its stock not nosedived.
CHEMISTRY? PhyCor's radical change of course has disillusioned money managers who fret that the complex merger could make the company's steady earnings gains of 35% to 45% a year a thing of the past. Some fear that PhyCor is buying a company that was assembled too hastily. "PhyCor was a high-quality name, and those of us who owned the stock had a high degree of comfort with it," says Howard Schachter, manager of the Needham Growth Fund, which has unloaded its entire PhyCor holding. "I don't know how simple it's going to be to put these two companies together and how well the managements are going to work together," he says.
Hutts and his team are generally regarded as the best operators in the fast-consolidating PPM business. But PhyCor now must meld together organizations that were defined largely in opposition to one another. "There are two very different cultures," says Dr. Rudolph M. Navari, president of Simon-Williamson Clinic, a PhyCor facility in Birmingham, Ala., MedPartners' hometown.
Management style is only the most obvious difference between MedPartners and Nashville-centered PhyCor. PhyCor owns 53 group practice clinics, most of them long-established institutions. MedPartners' physician base is much more fragmented and diverse. Besides acquiring clinics, it has assembled its own physician groups of various types and even employs a large cadre of doctors based in hospitals. While PhyCor has entered mostly small- and mid-size cities, MedPartners has concentrated on large metropolitan areas. And while PhyCor has been cautious to a fault about accepting financial risk under managed-care contracts, MedPartners has gladly taken it on.
STEEP CURVE. However, in recent months PhyCor has torn a few pages from MedPartners' playbook. It has created a few physician groups from scratch, moved into larger markets such as Honolulu and St. Petersburg, and actively pursued prepaid HMO contracts in some markets. "We had very different approaches as we built up these companies, but in the last year they have begun to converge," says Larry R. House, MedPartners' chairman and chief executive. But PhyCor must climb a steep learning curve, says Dr. Thomas Donohue, president of the Lexington Clinic, which joined PhyCor in 1994: "[PhyCor executives] are very good at acquiring a clinic and making it run better, but I'm not sure they're good at putting together doctors to form a clinic."
What prompted PhyCor to go beyond adopting aspects of MedPartners' strategy and risk a decade of steady success with a daring play for its archrival? Hutts offers only a vague explanation, saying that he and the four other senior executives who form PhyCor's brain trust felt increasingly "restless" as they pondered the company's future. "We felt that for us to make as big an impact on the health-care system as we wanted," he says, "we needed to have more size."
He has it now. With nearly 35,000 doctors, managed-care contracts covering 3.2 million patients, and $8 billion in revenues, PhyCor-MedPartners will be larger than the 31 other publicly traded PPM companies combined, according to officials at Sherwood Co., an investment firm specializing in the industry.
Most observers accept Hutt's strategic premise--that bigger is better in the PPM business, through which the cottage industry of doctoring is rapidly consolidating. According to John K. Crawford, PhyCor's chief financial officer, the merger also will eliminate at least $50 million in corporate overhead. Even more important, PhyCor and MedPartners will bring more muscle to the bargaining table in negotiating long-term contracts with other health- care companies. "Each company was getting to the point of sitting down with HMOs and hospitals as an equal," says Brooks G. O'Neil, an analyst at Piper Jaffray Inc. "Now, [PhyCor] can go head to head with any player in health care." Wall Street analysts think the merged companies will earn about $350 million in 1998, up 32% from 1997.
NEW CHALLENGE. House will join PhyCor's board but was not offered a management position. Nor did he ask for one. "I didn't think it would be desirable to have me on the team," House says. "I'm accustomed to running a company." (House says he plans to start a new health-care company, most likely in partnership with PhyCor.) House had made himself dispensable by grooming a stable of young and well-regarded operating executives, many of whom have already accepted positions in the new company.
Hutts and crew are likely to face their sternest managerial challenge in Southern California, an area Hutts has long avoided because of its many powerful managed-care organizations. To better appeal to HMOs, MedPartners merged the half-dozen big group practices it acquired into a single, hierarchical organization--in sharp contrast to PhyCor's decentralized approach. It may not be working: On Oct. 30, MedPartners quietly announced that it planned to lay off 720 of its 8,000 employees in the region, including 120 doctors. "They must really be hurting for business to fire doctors, especially during open enrollment season for health plans," says one former MedPartners executive.
Hutts says he is not certain why MedPartners is cutting back but intends to find out for himself when he makes his first tour of the company's California operation, in a week or two. He concedes as well that he hasn't yet decided whether to maintain MedPartners' more monolithic management structure or reinvent it in PhyCor's image by restoring the individual clinics. A full integration plan, he says, will take another few weeks to develop. "It will be difficult and messy," he says. "But it's not like we're merging with a completely different kind of company. Doctors are doctors."
Still, the skeptical reaction has put PhyCor on the defensive in what should have been a triumphant moment. "It was a shock to Wall Street," concedes Hutts, who adds that he nonetheless sees no reason to reconsider the acquisition. "For us," he says, "this is a long-term move." But in shrugging off Wall Street's tepid response, Hutts may be putting the deal at risk. Although the boards of both companies already have endorsed the merger, it still must be approved by a majority of the shareholders. The methodical Hutts may have won the race against MedPartners. But a tortoise-like pace won't win him back Wall Street.By Anthony Bianco in New YorkReturn to top