PHYCOR'S CHALLENGE

The offer to about a hundred doctors in two large St. Petersburg clinics sounded like a no-lose proposition: PhyCor Inc. would buy their practices, relieve them of paperwork and management hassles, lower their costs and line up more lucrative managed care contracts.

So in March 1997, the doctors sold their practices to PhyCor, which merged their two clinics to create the St. Petersburg-Suncoast Medical Group. It is the biggest doctors' group in south Pinellas County, with 95 doctors who see more than 500 patients a day and generate up to $80-million in annual revenues.

But 18 months after the transaction, the group has lost more than a dozen doctors, including its only pediatrician and neuropsychologist and two of three psychiatrists. Even some physicians who remain say they have yet to see much of a positive impact on their practice from ownership by PhyCor of Nashville, Tenn. And several who left say they saw one big negative: a major drop in income under PhyCor.

"PhyCor takes out its management fee and you have to pedal harder to keep up," said Dr. Michael Schwartz, one of two neurologists who left the clinic this summer. He now operates a headache center in the Hyde Park area of Tampa. "You have to see more and more patients in less and less time. It was getting difficult to do a good job. Maybe the situation will improve over the next several years, but I can't afford to stay with it. I sacrificed lifestyle and income."

Clinic officials say attrition at St. Petersburg-Suncoast Clinic has been only slightly above normal and that most doctors are happy under the clinic's 40-year contract with PhyCor. They say major improvements will come when a new computer system is introduced next year and that the clinic is already saving money buying supplies through PhyCor's high-volume contracts.

Though Dr. James Krause, clinic president, acknowledges patient care is disrupted when doctors leave, he is steadfast in arguing that PhyCor's involvement ultimately will be good for patients.

"PhyCor's expertise in getting good managed care contracts will make the dollars available to provide the kind of care we want to provide," said Krause, a urologist. "We never could have done that without PhyCor."

Patient advocates have long questioned the quality of care under the cost-cutting imperatives of corporate medicine. But increasingly, physician practice management companies like PhyCor are coming under fire by investors as well for their failure to produce profits as fast as promised, if at all.

FPA Medical Management Inc. of San Diego, once an aggressive buyer of doctors' groups, filed for bankruptcy protection in July. MedPartners, which PhyCor once planned to buy, said second-quarter profits were down 97 percent. And after PhyCor told analysts in late July that its 1998 earnings would be lower than expected, its stock plummeted more than 40 percent.

The company was also sued by investors last week who claim PhyCor officials artificially inflated the company's share price by misleading investors about long-standing problems with the business.

PhyCor's shares have continued to slide, closing Friday at $5.06\, down more than 80 percent since the company acquired the St. Petersburg-Suncoast Clinic. Fortunately for them, local doctors received cash, rather than stock, from PhyCor for their practices.

Despite its problems on Wall Street, PhyCor is still seen by many analysts as the strongest player in the quickly thinning practice management field. Watson Clinic, a 165-doctor practice in Lakeland, recently agreed to be acquired by PhyCor. And the company's second-quarter earnings were right on target, with net income of $15.3-million on revenues of $376.3-million.

Still, some local clinic members are concerned about PhyCor's long-term financial stability. They are particularly uncomfortable when they look at Jacksonville, where PhyCor acquired the practices of 110 doctors in 1995 and 1996 to form First Coast Medical Group. Today more than half the doctors have left the group. Those still with the practice, even those who supposedly have salary guarantees, were not paid in July or August.

"It's a frightening situation for them to be in," said Patrick Calcutt, a St. Petersburg lawyer who represents a dozen First Coast doctors in a breach of contract suit against PhyCor. "These were viable practices but they had the finances wrung out of them by PhyCor. It's been an economic disaster for these doctors."

Shawn Carder, a spokesman for PhyCor, said the Jacksonville group is one of four nationwide in which practices are being sold back to doctors due to continuing losses. A 60-doctor group in Tidewater in Levy County also is being sold back, with the physicians returning to individual practices. But Carder said PhyCor's problems in Jacksonville and Tidewater have no bearing on other markets and that doctors should not worry about corporate stability.

"If you look at our cash flows and the balance sheet we have, the risk of us going bankrupt is not very high," Carder said.

When PhyCor acquired the St. Petersburg and Suncoast clinics, it based the price for each clinic on the combined value of the individual physicians' practices, the medical equipment and the clinics' physical assets. Final terms of the deal were not disclosed.

St. Petersburg and Suncoast clinics then distributed PhyCor's cash among its doctors, based on their length of service and practice revenues. Some of the seeds of the current discontent were sown during the distribution, when several doctors in the former Suncoast Medical Clinic felt their practices were undervalued.

At least three doctors have left the merged group as a result of unresolved disputes over the buyout value of their practices. One of them, Dr. Joel Beatty, said Suncoast officials agreed that his accounts receivables _ the money due from payers for his services _ had been substantially undervalued, but he was told the clinic had no money to pay him the difference.

"I've yet to see that money and they've yet to formulate a reasonable plan on how to pay me," said Beatty, a neurologist who now works on temporary assignment in Key West.

But it wasn't just buyout problems that pushed Beatty and several other doctors out the door. They were confounded by PhyCor's accounting system, which they believed routinely underpaid them for their services.

PhyCor buys doctors' accounts receivables on a monthly basis, then pays the doctors a certain percent of those billings based on their historical collection rate. For example, if a doctor bills insurers for $30,000 worth of services in one month, PhyCor might provide $21,000 before expenses, based on a collection rate of 70 percent.

But PhyCor takes several deductions before the doctor sees any part of that allotment. Each doctor pays a share of the clinic's administrative costs, as well as salaries for office staff, space and equipment rental, medical supplies and insurance. Last but not least, PhyCor takes 16 percent of what remains as its fee.

PhyCor said it routinely reconciles each doctor's account, refunding any underpayments or deducting money when collections are lower than expected. But the result so far has been confusion, distrust and chaos among physicians, who have seen their monthly paychecks fluctuate dramatically, with little explanation. According to physicians who have left the clinic, it was possible for a doctor to work all month and end up owing PhyCor money.

"I had to work twice for my pay," said Beatty, who had been with Suncoast Medical Clinic for six years. "I had to earn it and then go to the clinic administration and fight for it."

Dr. James Bright Parker, an internist who left the clinic in October, said he took a 25 percent cut in pay under PhyCor's accounting system and received no pay for his last six weeks of work. "Between that and the management fee, I was losing my shirt," said Parker, who now practices in Sarasota.

Krause, the clinic's president; Mike Reed, the clinic's executive director; and Dr. Steven Cohen, former head of Suncoast Medical Clinic, deny that doctors are being shortchanged.

"I expected errors in accounting and disruption after the buyout, but I personally know that everyone's been squared up," said Cohen, head of neurology. "That may be the misperception, but frankly, doctors aren't known as the best businesspeople."

Cohen said the disruption that accompanied the PhyCor acquisition was painful but vital to the clinic's future. With PhyCor's help, he believes, the clinic will be able to gather data proving its medical expertise, which will enable it to get better managed care contracts leading to better care for the community.

"Morale among doctors has been very bad because they've lost tremendous amounts of autonomy in caring for patients," Cohen said. "But we're in the process of regaining that control by working with a large group like PhyCor that can go to the payers and say, "Give us these dollars and give us the patients.' "

But Cohen's promise of a powerful future under PhyCor has fallen on deaf ears for more than a dozen doctors who chose to retire early or practice outside of Pinellas County because of an 18-month non-compete clause in the PhyCor contract.

One of those leaving is rheumatologist Dr. Louis Ricca. After being in practice for 32 years and with Suncoast Medical Clinic for three, Ricca said he is leaving primarily to reduce his workload. But Ricca thinks PhyCor has done absolutely nothing to help the clinic, which he said had been very efficient and profitable before the buyout.

"The buyout was fine for older doctors, who got money up front for practices that they were afraid would be worthless," said Ricca, who will work for Veterans Affairs and teach after leaving the clinic in December. "But it left younger doctors with a yoke around their neck for a long time. They've pulled a reverse mortgage on their careers. And in the future, the clinic may end up with a parade of younger salaried doctors, coming and going."

St. Petersburg-Suncoast Medical Group

Owner: PhyCor Inc.

Formed: Created in March 1997 after PhyCor's acquisition and merger of two previously independent doctors' groups: St. Petersburg Medical Clinic and Suncoast Medical Clinic

Number of doctors: 95

Number of employees: 530

Locations: North Campus, 1099 Fifth Ave. N, St. Petersburg; South Campus, 601 Seventh St. S, St. Petersburg; plus eight satellite offices in Pinellas County

Average number of patients seen each day: 500

Number of patients covered by managed care contracts: 20,000

Annual revenues: $80-million

PhyCor Inc.

Ticker: PHYC

Headquarters: Nashville, Tenn.

What it does: Manages physician practices

Number of clinics owned: 60 clinics in 70 markets

Number of doctors affiliated with PhyCor: 4,045

Number of patients covered through managed care contracts: 3.5-million

2nd Quarter 1998 Revenues: $376.3-million

2nd Quarter 1998 Net income: $15.3-million

Share price (as of Friday): $5.06\

52-week range: $5 _ $33.25