Medical Management Firm Plans to Grow Big by Thinking Small

By LESLIE EARNEST

Oct. 29, 1997 12 AM PT

SPECIAL TO THE TIMES

In an era of health-care mega-mergers, where armies of doctors join forces and bigger often spells better, a Laguna Hills management company has built its business by thinking small.

Zeroing in on the little guy, Medical Asset Management Inc. has attempted to stake its claim on the rapidly changing health-care industry by collecting small practices, sometimes one doctor at a time.

It’s a strategy that is both rich with promise and riddled with pitfalls, insiders say. And Medical Asset has experienced both.

Burdened by a shortage of cash and some shortsighted planning, the company is emerging from a grueling transition period during which it essentially outgrew itself.

Between early 1995 and late 1996, for example, the company quadrupled its number of doctors without first installing the accounting systems needed to handle the growth, said Clarke Underwood, the firm’s chief financial officer.

“It just about caused all the company systems to implode,” Underwood said.

As a result of these growing pains, Medical Asset posted a hefty loss last year. The stock, which has traded as high as $8.50 a share, skidded earlier this month to $1.06 on the low-profile over-the-counter market. The stock closed Tuesday at $1.31, down 6 cents.

Today, Medical Asset is trying to win back Wall Street, a task that even the firm’s chief executive admits won’t be easy.

“You can be a dog one day and a star the next, and vice versa,” said co-founder and Chief Executive John Regan, the company’s largest shareholder. “I think the Street, in general, will want to see results before they get real excited about us again.”

Industry observers are optimistic about the future of companies such as Medical Asset because they offer services that are increasingly in demand.

Medical Asset signs doctors to long-term contracts, taking charge of the office equipment, billing and all nonmedical employees. Doctors gain cash and receive help snagging coveted managed-care contracts. The physicians also receive stock in Medical Asset.

In exchange, the management firm generally receives 10% of the physicians’ collections.

Today, the firm manages about 34 practices with 103 physicians. By comparison, industry leader MedPartners serves nearly 5,500 doctors.

Medical Asset, which went public three years ago, set its sights on the smaller practices because they often collect higher fees per patient and are generally overlooked by larger management firms.

It’s a huge market. Only 10% of the approximately 700,000 physicians practicing nationwide are linked to such management companies, according to Piper Jaffray, a Minneapolis-based investment firm. And nearly two-thirds of the doctors are in one- or two-person practices.

“Rarely are we in a bidding situation,” said Dennis Calvert, senior vice president of Medical Asset.

Positioning the business for further growth, Medical Asset this month launched a search for a new chief executive, saying the company now needs a leader with skills to run a multi-state organization. Regan, who previously worked as an accountant in the health-care field, is expected to remain chairman of the board.

Retired internist Edward Dickstein, who founded the business with Regan eight years ago, said Medical Asset’s problems are typical for a young company that has finally come of age.

“You need different people to run a real company than the gang that manufactured it in the first place,” he said.

If the company is changing, so too is the $1-trillion health-care industry. Driving the change is the trend toward managed care, and observers say doctors must find ways to adjust.

Physician management companies seek to sign groups of doctors, thereby giving them more bargaining power with insurance companies and HMOs. The firms also claim they can help doctors manage costs, a priority of managed-care companies, said Efrem Sigel, who publishes an industry newsletter.

“There isn’t a lot of evidence they actually can deliver,” he said, “because the industry is so new.”

Tarzana physician Samuel Spigelman said that Medical Asset has delivered for him. The urologist signed with the company 2 1/2 years ago after he quit a group practice to go solo.

Medical Asset and the doctor struck an agreement that gave Spigelman the cash he needed to start fresh. More recently, when Spigelman wanted to relocate his office, the company managed the move.

“They take care of everything,” Spigelman said. “They give me an opportunity to do what I love to do, which is practice medicine.”

But Spigelman admits that he was troubled by the loss of financial autonomy. “It took me a long time to get used to them running my financial life,” he said.

Management companies must wrestle with other thorny issues, such as the potential conflict between medical and financial decisions.

Medical Asset executives say they take pains to keep the two separate. “We have an absolutely concrete wall between the two sides of the business,” Regan said.

Still, the company has the final say in cost-cutting matters. “From time to time, these kinds of issues become a little difficult,” Regan acknowledged.

Dickstein and Regan founded the company in 1989 after discovering that they shared a belief that doctors could benefit from services that a management company could provide.

Dickstein pitched in $2 million and offered his practice as the first to be managed by the company. Regan became president.

During those early years, Dickstein said, he continued to funnel money into the new company while executives Regan and Calvert invested sweat equity to keep it going.

“We worked for very low salaries and we ran a very lean budget,” Calvert said.

Eventually, Dickstein said, they realized that, to expand, they would have to do “the traditional kind of things,” including going public to attract investors.

In 1994, they merged with Eagle High Enterprises Inc., a publicly traded company, and Medical Asset became the surviving company.

While going public brought headaches and extra expense, Dickstein said he still thinks it was a wise move.

“I think it’s critical to get one of these things public,” he said. “That’s the only way you can get any financing into it.”

Since 1994, the company has burrowed into an industry niche, picking up practices with from one to 15 doctors. Today, the firm’s 375 employees manage practices in Alaska, Pennsylvania, Colorado, Ohio, Arizona, Mississippi, Florida and in Southern California.

If the company is beginning to take flight, it is also traveling in turbulent airspace, some insiders say.

“As a generalization, this industry is running into a lot of problems, even the very biggest companies,” said Sigel, the industry newsletter publisher. “They don’t know how to manage what they’ve acquired; they don’t have the wherewithal to continue to make acquisitions.”

And being small is no advantage, he said.

“In general, the companies that are really small, they’re going to have a hard time competing for the better doctors or the best groups,” he said. “Only a minority of the companies, including the public companies, will actually succeed.”

Medical Asset learned firsthand last year how tough things can get.

Faced with what executives say was an accumulation of unusual expenses, the company posted a net loss of more than $5 million. Officials also learned that their reporting methods did not comply with new Securities and Exchange Commission requirements.

The company is restating its earnings for the last three years to meet SEC requirements, but Underwood, the chief financial officer, said the numbers won’t change significantly. He also said the company will show a profit for the first two quarters this year.

In an effort to raise more money to sign up more medical practices, the company is planning to apply soon to have its stock listed on the Nasdaq Small Cap market.

Co-founder Dickstein said he remains optimistic.

“When you start a new business like this and try to go public, it’s a very sloppy process,” he said. “Once we get over this last little blip here, it will grow rapidly.”

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Medical Asset Management at a Glance

* Headquarters: Laguna Hills

* Chairman/CEO: John Regan

* Founded: 1989

* Business: Health-care management services

* Status: Public

* Market: Over the counter

* Employees: 375

* 1996 revenue: $12.1 million

* 1996 net loss: $5 million

Growth in Services