PPMs: Fortune Chronicles Rise and Fall of MedPartners
This week's Fortune profiles Medpartners, the "onetime Wall Street darling that has cost investors billions and given about 13,000 American doctors nightmares," as a "cautionary tale" to "those considering sinking their savings into The Next Big Thing." The magazine notes that the Birmingham, AL-based MedPartners was among the best-known of the physician practice management companies formed earlier this decade to muster clout against ravenous managed care companies. But its dreams of using economies of scale to reduce administrative headaches, save money for doctors, and negotiate superior managed care contracts failed miserably. And in its feature entitled, "Vulgarians at the Gate: How ego, greed and envy turned MedPartners from a hot stock into a Wall Street fiasco," Fortune places the blame squarely on CEO Larry House.
HealthSouth CEO Richard Scrushy created the PPM with $1 million in seed money and appointed House to lead what was intended as a small business to garner referrals for HealthSouth's rehabilitation services. However, "House led MedPartners on an incredible binge," launching an IPO after a single year and reaping $6 billion in revenues after just four years. While House "envisioned someday marketing MedPartners as a national medical 'brand,'" he failed to realize that the market for medical care is local and that claiming a majority of physicians in a community is key to gaining profitable HMO contracts, according to Fortune. At Wall Street's urging, House "stoked his company's growth with huge deals at eye-popping prices." The article includes a full-page arial shot of House's fantastical Alabama mansion, which sits on impeccably tended grounds landscaped in the shape of a guitar.
What Went Wrong
House failed to fulfill Scrushy's vision of providing rehabilitation referrals. And in addition to piles of unpaid claims, MedPartners' bureaucracy cramped physician offices, requiring them to wait months before receiving authorization to hire staff or spend more than $500. A primary competitor, PhyCor, briefly merged with the company, but soon backed out after its executives realized MedPartners' state of financial chaos. Finally, Scrushy convinced House to resign, while turnaround expert Mac Crawford took over the business and is selling off PPM operations, a project slated for completion by year's end, while retaining a more profitable prescription benefit management (PBM) division. "Intuitively, the concept of aggregating physicians makes sense," Crawford said, adding, "I don't think there's a company out there that can manage a doctor's practice that much more efficiently" (Elkind, 6/21 issue).