PPMs emerge as the new customers on the block

September 1, 1997

Pharmaceutical Representative

The growth of physician practice management companies.

As managed care organizations became more powerful forces in health care in recent years, choices previously made by M.D.s, such as which clinical guidelines to follow and what products to prescribe, fell into the hands of M.B.A.s. Perhaps more importantly, the potential to grow a practice and prosper from that growth appeared to follow suit, leaving physicians wondering how to reposition themselves more profitably.

The answer for a growing number of doctors is physician practice management companies. A relatively new phenomenon in health care, PPM companies integrate small and mid-sized practices to improve physicians' negotiating power and lower the overhead costs of practicing. At the same time, they allow physicians to maintain independence and an important decision-making role. As MedPartners Inc., the nation's largest PPM company states, "We manage everything about a physician's practice…except the practice of medicine."

Because they are still an emerging phenomenon, how PPM companies operate is not singularly defined. Plus, PPM companies are often able to customize relationships on a practice-by-practice basis. There are, however, two prevailing models, or definitions. Both are based on the assumption that physicians are assuming more financial risk in order to achieve greater gain. The PPMs offer incentives for parallel gain and loss.

In the first model, PPM companies are defined as administrative middlemen who act as a business office for practices that have joined together. A PPM company might be responsible for the administrative, contractual and financial sides of the practices, which then allows the physicians to spend more time with patients. The PPM company purchases all of the practice's hard assets and ancillary staff. In return for "buying" the practices, it collects a percentage of the profits.

In the second model, PPM companies don't buy the practices as much as they become affiliated with the providers. The physicians retain an equity or ownership stake in the PPM company as partners in a long-term agreement. The theory is that, as business partners, physicians will have a strong incentive to improve the quality of their practices and keep costs low. They will also have the power to make decisions about contracts and formularies. The PPM company collects an administrative fee for managing the practice and, in some cases, the physicians draw their salaries from what's left after the bills and fees are paid.

PPM companies present physicians with an chance to take more control of their destinies, according to Gary Swoik, district manager for Zeneca Pharmaceuticals, Chicago. "They have a wonderful opportunity to become a controlling influence," said Swoik. "You'll still have managed care plans out there but the doctors will assume a lot of the risk so they'll have the power."

But convincing physicians that this is the best direction to go is a challenge for PPM companies. As Swoik joked, "Getting doctors to agree on anything is like trying to herd cats." Older, independently practicing physicians may believe they can bear down for another six to seven years, while younger physicians may be eager for more immediate change. Physicians may be less likely to collaborate in larger, more metropolitan markets than in smaller markets. Specialists may hesitate to take on the risks associated with membership in a PPM company.

A few larger PPM companies are successfully finding ways to overcome these concerns. They are not, however, taking identical approaches to building their core bases of doctors. For instance, Birmingham, AL-based MedPartners Inc., is tackling major metropolitan markets by developing physician group "cells" of approximately 200 primary care physicians and specialists per 1 million resident populations. PhyCor, Nashville, TN, seems to be taking a more regional approach and has a strong presence in secondary markets. PhyMatrix Corp., West Palm Beach, FL, appears to be positioning itself in various markets that have been leading locations for trailblazing health care trends of the past.

The web sites of all three publicly held companies strongly emphasize their beliefs in partnering with physicians and offering parallel incentives.

Preparing for a power shift

Companies are formulating and, in some instances, reformulating their plans to address this potential new customer group among pharmaceutical companies, according to John Moore, a senior associate consultant in the integrated health care consulting services practice of Coopers & Lybrand, LLP.

"They're a customer type that a lot of companies haven't really defined very clearly yet," Moore said. "While there's a role to understand, they're just starting to show up on the radar screen… As they evolve, and as larger players are created, you'll see more companies begin to sit up and take notice."

At least one company doesn't plan to be caught by surprise. Bristol-Myers Squibb, New York, is in the process of preparing to specifically work with PPM companies.

"No one shoe fits all in the physician practice management company arena, but it's growing in influence," said David Fortanbary, the company's director of medical groups. "We believe that this will be a most significant component of the market."

Fortanbary estimated that approximately 33% of HMO pharmaceutical sales are generated through PPM companies. He also predicted that the percentage may jump to more than 50% within three to five years. Bristol-Myers Squibb is willing to get its feet wet now so its sales force can better understand PPM companies' needs in the future.

"In general, as physician organizations become more sophisticated on their own as part of PPM companies, they are taking on more risk, which means less revenue," explained Fortanbary. "They're having to see more patients. What that means for the rep is less and less time with the physicians. Access is being closed down. As this becomes more common across the country, reps will have to find ways to gain access and create more value to promote their products."

Aside from surmounting obstacles to physician access, John Anderson, associate manager of managed health care training, sees another good reason why reps need to establish unique relationships with PPM companies: "We see groups springing up of 30, 40 or 100 physicians. And when you have so many physicians, the group starts having a need for a chief executive officer, a chief information officer, a medical resources director. It starts to look like an HMO and you need sales reps who understand those roles."

The problem, however, can be that those decision-makers - the administrators - don't want to see reps. "They have bigger fish to fry," said Swoik. "Decisions are being made at higher levels that reps don't come into contact with."

So what do pharmaceutical representatives need to do as PPM companies more firmly define their roles and importance? Moore, of Coopers & Lybrand, believes what reps can do is keep their eyes and ears open, and report what they see to their marketing departments. "The rep's role at the beginning is to gather information about how [PPM companies] might impact the utilization of their product," Moore said. "Who are they? Reps need to get that information back to the home office and share it with their peers and others in sales management."

Day to day, there may not be much evidence that change is on the way. But be alert as doctors have less time to spend in even the briefest of conversations. Pay attention to how they team up with other physicians. Try to stay on top of how widespread their associations may be, as this may affect territory lines and invite a team-selling approach. Don't be left behind if or when change suddenly happens. "If you haven't talked to people ahead of time, it'll be tough to come in and say, 'we'd like to have a relationship with you and contract with you on drugs,'" Swoik said.

"There's not much reps can do, but they should be aware of what's going on," he continued. "They need to understand who will be making the decisions." Reps can talk to medical directors and get a feel for independent practice associations and how they're evolving. And then, if reps find themselves in a contract situation with PPM companies three years from now, they might be more successful because of the trust they've built today. PR

Visit the web sites of MedPartners Inc. at http://www.medpartners.com, PhyCorp at http://www.phycor.com and PhyMatrix Corp. at http://www.phymatrix.com.