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The Keckley Report

Is PhyCor 2.0 Ahead?

By July 11, 2016March 1st, 2023One Comment

In the U.S. system of health, physicians are trained to be the patient’s advocate, voiding outside influences and financial considerations in assessing and treating their medical needs. That’s the basis for the profession’s respect by the masses and trust by its patients.

The business of medicine is distasteful to most physicians: surveys indicate the majority are predisposed to delegating those tasks to non-clinicians so long as decisions are made with their input, their income is protected, and their clinical autonomy is secured. That explains why three out of four choose employment in a larger organization vs. starting an independent practice.

In the 90’s, PhyCor and other investor-backed start-ups created the Physician Practice Management Company (PPMC) sector to offer independent practices an option. The sector upset the health system apple-cart challenging the aggressiveness of insurers in contracting and the expanding role of hospitals in outpatient services. Founded in Nashville in 1988 by venture capitalists and former Hospital Corporation of America executives, PhyCor’s mission was “to create, with physicians, the best value in medical care for our communities.”

It acquired more than 57 multi-specialty groups in the next decade, offering each capital for growth and operating expertise to protect the incomes of its physicians and their independence from hospitals and health insurers. In exchange, PhyCor secured a 40-year commitment from the group as its exclusive management partner and a share in the profits created by the group.

In the early ‘90’s, health insurers were testing capitation as a means of controlling costs which had escalated at double digit rates annually. Hospitals countered by creating Physician-Hospital Organizations (PHOs) to represent the interests of both parties, and to fend off efforts by insurers to disintermediate medical staff-hospital collaboration. Most of the PHOs included a messenger model Independent Practitioner Association (IPA) to serve as the legal entity through the physicians could negotiate agreements with insurers. And in the process, many physicians sold their practices to their primary hospital sensing independence was no longer an option long-term.

Enter PhyCor targeting large, independent multi-specialty groups of physicians with a message that was compelling: ‘You do not have become subordinates to hospitals or be commodities to health insurers. With our capital and operating expertise, you can grow your practice by adding services the hospital offers and by contracting directly with employers and insurers. You will be positioned to recruit the best physicians and get better deals with insurers. You can remain independent, your income will increase, and your clinical autonomy will be secure’.

At its peak in 1997, the PPMC sector had 39 publicly traded companies offering services to single and multi-specialty groups achieving a combined market capitalization exceeding $11 billion. Investment analysts heralded its timeliness and sustainability presuming its productivity improvements and additional services to drive revenues up. They reasoned physicians drive revenues and control where patients receive their services. Valuations assumed revenue growth, expense reduction, improved reimbursement from insurers and growth in the numbers of physicians attracted to the PhyCor model.

The names MedPartners, FPA, Physician Healthcare Partners, ProMedco, PhyMatrix, and others joined PhyCor as healthcare media darlings. By 1992, PhyCor had acquired 13 groups and completed its public offering trading on NASDAQ as PHYC. By 1996, its revenues were $766 million and profits were $36 million; by 1997, it had $1.1 billion in revenues and $3.2 million in profits after taking charges for restructuring some of its deals; and in 1998, it owned 57 groups, reported revenues of $1.5 billion and losses of $445 million. In that period, its stock reached a peak of $36/share and plummeted to $3/share. PhyCor declared bankruptcy in January 2002 leaving its physicians with a bitter taste and the industry scratching its head about what had happened. And PhyCor was not alone: 8 of the 10 largest publicly traded PPMCs declared bankruptcy in the same period. How could analysts and industry pundits be so wrong? A sector hot one day and in complete meltdown a decade later.

Most of the groups acquired by PPMC’s continued to see patients through the roller-coaster PhyCor 1.0 era. Many of the older physicians in groups who had decided to sell had long sense taken their money to vacation homes and comfortable retirements. The same was true for the venture capitalists who had generated handsome returns from the PPMC IPOs. Left to pick up the pieces were the physicians who remained in those groups, and the hospitals where many sought protection. Several PhyCor affiliated physicians in Virginia and North Carolina, for instance, paid $150,000 to nullify non-compete agreements they’d signed so they could stay in their community, and many of PhyCor’s groups secured financing to purchase their assets back at a substantial discount to what they’d been paid originally.

All the while, malpractice costs were increasing, physician reimbursement rates were decreasing, and physician frustration across the industry was growing. Concurrently, health spending slowed thru the decade (+11% 1990 vs 1989 to +4.4% 1996 vs. 1995) but these savings benefited insurers and employers at the expense of physicians and hospitals.

A Becker’s post mortem on PPMC’s concluded: “Physician practice management failed because it was premature and poorly executed — not unsound. Twenty years later, PPMCs have a clear strategic rationale and value proposition. Indeed, the need is stronger than ever. Physician group requirements have evolved substantially from back-office efficiency to include capabilities such as advanced patient-acquisition methods, population health and risk management and clinical effectiveness “

There are clear signs in the market today that suggest PhyCor2.0 is on the horizon:

Physicians are concerned about their income and protecting their clinical autonomy. Surveys indicate the majority of physicians believe their income will shrink in coming years and have misgivings about the future of the profession. Most chose the profession because it’s a noble, worthwhile work. That hasn’t changed, but many are having second thoughts.

Physicians face enormous operational challenges resulting from unwanted regulations and unwelcome attention. Meaningful Use requires use of certified electronic medical records or be penalized. Medicare requires participation in alternative payment models of get reimbursed less. And social media abound with report cards comparing their performance, many using publicly accessible data about their practice patterns, billings, patient experience scores and errors.

Payers are moving toward risk sharing relationships and narrow networks.  Medicare is leading the charge with shared risk programs like Accountable Care Organizations and Bundled Payment programs. Large employers and private insurers are following suit. Physicians resent payer-intrusion. They resent efforts by payers to change their referral relationships and “1-800 May I” authorization. The transition from volume to value is unwelcome to most physicians.

And investors sense an opportunity. Private-equity backed physician acquisitions are picking up. Oak Street, Audax, Welsh Carson and other investors are making bets in the sector. Insurers are also doing deals i.e. United Healthcare acquired Monarch; Cigna acquired Alegis and others. And some big names in healthcare like Davita and McKesson have diversified into the PPMC space in recent years. 

These investors are taking advantage of lessons learned by PhyCor and its peers in the first wave of PPMC activity:  

  • Physicians expect to see their income increase regardless of market forces, operating costs or circumstances. Investments in technologies and operating models that show no near-term improvement in their take-home pay are rejected.
  • Physicians want to control all decisions in their practices, regardless of who provides the capital or takes the risk.
  • Physicians want no interference in their clinical practices: they expect to be the captain of the ship.
  • Physicians want to be heard. They have strong opinions about every issue inside and outside the group.
  • Physicians believe their role is more important than any other: they do not value the work of “the suits” and are suspicious of data however valid and reliable.
  • Physicians believe the value of their practice is higher than parties wishing to buy it: paying too much is a recipe for disaster to investors.
  • Physicians under-value the importance of practice operations—staff and HR, supply chain, contract negotiations, patient education, information technology, performance management et al.
  • And after the wedding with a new business partner, the marriage is rocky unless these four requisites are met. It’s a tough business. Operating a large medical practice is challenging even when market constraints are benign. As pressure builds, things get tough.

Recognizing these realities, PhyCor 2.0 is a new and improved version. These new entrants are willing to buy groups and invest in their growth.  They bring operating expertise that’s state of the art. They bring cloud-based solutions and clever financing arrangements so medical groups are able to access the technologies and facilities they need with minimal hit to their incomes. They bring data so contracts with insurers and hospitals are better informed. They bring marketing expertise to build the reputations of their groups in the digital health world.  They promise to grow the groups, defying narrow networks and hospital alignment in favor of independence. They bring clinical expertise to help groups align their practices with evidence-based best practices and reduce unnecessary utilization. They bring capital so the scope of the group’s services can expand and referrals outside the group minimized. And they offer hope to physicians who do not want to work for anyone but themselves.

PhyCor 2.0 is a significant and growing option for physicians. For hospitals, who employ more than 245,000 physicians nationwide, the pressure’s on. In most hospitals, the challenge is how to serve physicians who are employed while also addressing the needs of those who remain independent. Deploying capital for infrastructure that enhances the efficiency and effectiveness of their medical groups is an imperative. Implementing mechanisms to change physician behavior without compromising their professional pride using valid and reliable data and skillful physician leadership equally essential. Recognizing that physicians have options other than selling their loyalty to a hospital or insurer a necessary is the starting point. Bringing both clinical and operational expertise on par with the most sophisticated PPMC 2.0 players is imperative. And perhaps most important, physicians expect to be paid well and have the final say on almost every decision.

As health costs escalate and as payers (Medicare, employers, insurers, Medicaid) require physicians to assume both clinical and financially risk via clinically integrated networks, the table is set for PhyCor 2.0.

Is PhyCor 2.0 ahead? No. It’s here already. And physicians know it.


P.S. Our nation is reeling from collective pain about the seven killings in Baton Rouge, Minneapolis and Dallas. We’re grieving about the losses in families and frustrated by incivility. My reflection always leads to the caregivers who are there in each community forced to tell loved ones the tragic news and offer hope to those expected to recover. Like first responders, they see their role as service. Unlike some, they do not seek the spotlight nor politicize the situation to gain advantage. I am proud to be part of an industry where to serve is more than words.


Medscape Physician Compensation Report 2016; Medical Group Management Association Physician Employment Data 2016; PhyCor, Inc. – Company Profile, Information, Business Description, History, Background Information on PhyCor,Inc.; “Do Physician Practice Management Companies (PPMCs) Provide Sound Investment Opportunities? The Healthcare Investor March 20, 2010; Physician Practice Management Companies: Too Good to Be True? “Robert P. CarlsonFam Pract Manag. 1998 Apr;5(4):44-56 “Physician Practice Management — A New Chapter” Becker’s Hospital Review February 19, 2014.
















One Comment

  • I remember Joe Hutts coming to speak at the Owen Graduate School of Management (Vanderbilt University) back in 1997. At the time his vision for PhyCor seemed almost ahead of its time. Today’s market conditions lend themselves to a PhyCor 2.0 or evolved PPMC offering and it will not be surprising to see it take shape.