American Academy of Emergency Medicine

Venture Capitalists Set To Profit from MedPartners Trouble

by Geoffrey Mitchell, MD FAAEM

Much has been written regarding the intermingling of business and medicine. For quite some time the news media was focused on the practices and problems of for-profit hospital chains such as Columbia HCA. More recently the news has been dominated by the recent problems at what was once the nation's largest physician practice management company (PPMC), MedPartners. MedPartners has suffered massive loss of shareholder equity over the past three years and their California operations were recently seized by the state. Is this the end of the story for for-profit PPMCs? Is patient care likely to improve as a result of these recent events? Unfortunately the answer to both of these questions is no.

MedPartners has elected to abandon its core business, physician practice management, and devote its energies to its pharmaceutical services business, Caremark. In order to accomplish this goal, MedPartners has sold the PPMC component, TeamHealth, for an estimated $335 million. Who would be interested in the purchase of such an operation?

The answer is venture capitalists. The TeamHealth PPMC business was sold to three venture capital firms-Madison Dearborn Partners, Cornerstone Equity Investors, LLC, and Beecken Petty & Company, LLC-and Team Health's current management team in a recapitalization agreement.1 All three of these companies are known as "Venture Capital Firms." A venture capital firm is an investment company that invests its shareholders' money in startups and other risky but potentially very profitable ventures.2

The American Heritage Dictionary emphasizes this risky nature, describing a venture as: (1) a venture that requires extensive planning and work; (2) a venture depending on chance: speculation, bet, crap-shoot (US, colloquial), gamble, wager, wagering, risk.3

Why are venture capitalists beginning to invest in health care? Has health care become that risky or is it simply that these investors have found creative ways to make health care investments yield the level of returns to which they have become accustomed? Returns traditionally associated only with high risk investments? A brief review of their own literature indicates the latter. Each one of these firms boasts returns in the range of 40% per year.

Beecken Petty & Company gives us a glimpse of their overall investment strategy. "The Fund's strategy is to make investments in service companies operating in the health care industry. The health care service industry is estimated to be in excess of $1 trillion in the United States, or almost 15% of gross domestic product."4 Health care is a huge industry and more and more business people want a piece of the pie. An article in Crain's Chicago Business, May 19, 1997, describes the philosophy of Beecken Petty.

"Forget the nationwide assault on rising health care prices. David K. Beecken and William G. Petty, Jr., think there's gold in backing fledgling health care providers." . "They'd better be, because Beecken Petty has lofty goals, having targeted returns on investment north of 30%."5

Cornerstone Equity Investors is one of the largest private equity investors in the United States. "Cornerstone Equity Investors participates in investments which range in size from $10-50 million in which the firm can serve either as the lead or sole investor."6 . "On average, the firm currently commits $20 million to individual transactions."7 . "At a minimum, a prospective portfolio company should be capable of producing annual revenues of at least $75-$150 million over a 3 to 5 year investment horizon."8 Thus a $20 million initial investment which grows to $1.2 billion over 4 years represents an annual return on investment of 54%. If they really mean "annual revenues" as they say, this represents annualized returns of 460%. Sixty percent per year is probably the more realistic figure. Even a 60% return should be considered excessive in a business which depends upon taxpayer funding.

Madison Dearborn Partners is also a large Chicago-based venture capital firm. Madison Dearborn Partners was formed in 1993 through a spin-off of the venture capital subsidiary of The First National Bank of Chicago. Madison Dearborn Partners also has had an average rate of return on investment of approximately 40%.9

Thus, all three of these companies claim to offer returns of approximately 40% on their investments. How do they do it? By charging exorbitant fees to "manage" physicians. Investment groups like these have learned that there are large profits to be made in health care. As long as physicians refuse to stand up for their patients and themselves, such arrangements are likely to continue.


1 MedPartners, Inc., Friday, March 12, 1999, PRNewswire, http://www.prnewswire.com
2 InvestorWords investing glossary of investing terms, http://www.investorwords.com/v1.htm#venturecapital
3 American Heritage Dictionary
4 http://www.beeckenpetty.com/bpcompany.asp, paragraph 1
5 http://www.beeckenpetty.com/r_news_0397.asp, Crain's Chicago Business, May 19, 1997
6 http://www.cornerstone-equity.com/investment_strategy.html, paragraph 2
7 http://www.cornerstone-equity.com/overview.html, paragraph 3
8 http://www.cornerstone-equity.com/investment_criteria.html, paragraph 7
9 http://www.viewgroup.com/advisors.htm