Buying Physicians

A few years ago, I invested in a company called PhyCor Inc. It was one of several hot roll-up companies that grew through the purchases of physician clinics — including the Holt-Krock Clinic in Fort Smith and another family practice clinic in Jonesboro.

Thankfully, I took a nice profit and bailed out a few years ago to buy a house. Of course, PhyCor soared another 30 or 40 points, but today Nashville, Tenn.-based PhyCor has sunk to the $6 a share range from its 52-week high of $33.25. (The company’s reward is a class-action lawsuit that has become common with substantial stock plunges.)

The concept has gone awry because physicians who sold their clinics to companies like PhyCor are abandoning the company. The doctors liked the economies of scale for equipment and supplies and enjoyed not having to deal with the business end of medicine, but they abhorred many of the corporate policies that affected the way they practice medicine. New opportunities to make money also figure into the picture.

In the case of 38 Fort Smith physicians at Holt-Krock Clinic, they were among those who decided to abandon PhyCor. That naturally led to a lawsuit because PhyCor believed it had a noncompete agreement with those physicians.

Considering the bulk of the assets that PhyCor purchases involves physician-service agreements with noncompete clauses, it’s very problematic to have a judge rule the agreement unenforceable. That’s just what Circuit Judge Don Langston did in a huge loss for PhyCor this month involving Fort Smith ophthalmologist Gary Bodiford.

The court essentially said a company can’t make a physician practice medicine or prevent him from practicing medicine, so PhyCor ultimately could be left with a $47 million investment that will never pay off in Fort Smith. The only break PhyCor has gotten involves a new agreement with many of the remaining Holt Krock physicians.

The Sept. 21 edition of Forbes has an article that shows many of these management groups — including MedPartners Inc. of Birmingham, Ala., and the bankrupt FPA Medical Management Inc. of San Diego — are failing for various reasons. “The Motley Fool” notes that PhyCor, which late last year proposed a merger with MedPartners, is using those two firms as a scapegoat for its poor stock performance. However, a continuing success story for now is American Oncology Resources of Houston, which is focusing on cancer specialists.

Perhaps the biggest mistake PhyCor and others made is paying mostly cash for the acquisitions instead of making stock-heavy transactions for the clinics. The physicians are off the hook and free to bail out without consequences.

For example, PhyCor purchased five clinics during the first six months of 1996 for $158 million, broken down into cash (68 percent), liabilities (27 percent) and convertible notes (5 percent).

Among the “assets” that PhyCor purchased in these deals were service agreements, also known as contracts for physician services. These are 40-year agreements, which seemingly would cover the time of practice by the physician.

The real lesson to be learned here is to be wary of the brain power transaction and unenforceable noncompete agreements. You can’t force a person to think if he doesn’t want to, particularly if there are no financial consequences.

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Independent Counsel Kenneth Starr’s report to Congress was the most anticipated document ever and was delivered promptly to Americans via the amazing Internet.

Productivity came to a halt at many Arkansas offices as the report became available, although I hear a few prominent offices actually sent out memos warning workers not to download or read it on company time.

I never imagined anything so disgusting and detailed. I’ve never seen so many journalists forced to dance around saying and writing what they really want to in the interest of maintaining some sort of decency.

As bad as the situation looks for Clinton, my gut feeling says he’ll survive once again — though far more damaged than ever.

The Republicans will figure out they don’t need Vice President Al Gore in the White House. They won’t get him in the campaign finance investigation, and otherwise there’s every reason to believe he’s squeaky clean. He would carry on the Clinton administration’s fundamental policies and coast to election in 2000.