Don't believe party line: Big isn't always better

July 1, 2006
Eric Trefelner, MD

"Bob, can I ask you, uh, a question?"

"No. I will not take your call this weekend."

"That's not it, but thanks for nothing."

"So, what is it?"

"I've known you for years and you are my best friend. Do you think that size matters?"

"Oh my God! I can't believe it. You've been talking with my wife. Of course size doesn't matter. This, from a woman who thinks ..."

"For goodness sake Bob, everything isn't about you. I haven't been talking to Doris."

"Oh. In that case, of course size matters."

"I'm talking about our practice."

"Oh."

A few weeks ago I curled up to watch some Nazi propaganda films from World War II. Dave Kehr, the New York Times critic, recently reviewed the work of Leni Riefenstahl as exceptional examples of this genre. Both Riefenstahl's films were particularly disheartening, proving that history can only repeat itself. Old ideas never die; they are resuscitated, dusted off, and presented as new again and again.

Both documentaries are mere variations on a theme that once again is all the rage: Bigger is better. Become the largest country, corporation, athlete, or radiology group and you are assured success. Such thinking seems to run in cycles, but is it true? Based upon the deluge of spam in my e-mail, size matters very much. I'm assured that if I buy these drugs or herbs I will be "huge," and therefore successful.

I'm not knocking profit as a motivator, but huge publicly traded companies are driven by profit and not necessarily concerns about patients. There is no better example than the pharmaceutical industry. For decades, FDA regulations limited these companies from direct-to-consumer advertising. In 1997, many of these restrictions were dropped and propaganda began to trump science. Bypassing physicians, the first television ads for Claritin resulted in record growth and profits for Schering-Plough.

Other drug companies took note and quickly followed suit. Pop lifestyle drugs have become the golden goose, while critical research into less glamorous life-saving drugs like antibiotics has fallen by the wayside. Dubious drug trials that are often stacked in favor of the sponsoring drug company now prevail, and have resulted in numerous scandals due to glossing over patient safety concerns.

The top 10 drug firms spend an estimated $84 billion a year on marketing and administration, far overshadowing what they spend on R&D. In 10 years, the pharmaceutical sales force has tripled to 100,000. In 2005, Sepracor spent $215 million on advertising for just $329 million in sales for its drug Lunestra. In the past two years, as many patents expire, thereby threatening their profits, the top 10 pharmas have been punished by Wall Street with a loss in market share of $130 billion! Like a drug addict looking for the next quick fix, this has led to even more hyping of questionable off-label uses of drugs to drive sales. Many of these companies may end up being crushed by lawsuits because of an executive's decision to boost profits by ignoring unfavorable safety reports. Merck alone has over 10,000 Vioxx lawsuits pending; its second suit resulted in a $13.5 million verdict for the plaintiff.

Sanjay Kumar, former CEO of Computer Associates, recently pleaded guilty to orchestrating a multibillion dollar fraud to inflate profits to meet Wall Street analysts' expectations. The move also garnered bonuses of $1.1 billion in 1998 for Kumar and his top two executives. He joins the Hall of Fame that includes HealthSouth, Tenet, HCA, Enron, and WorldCom. You wouldn't see a doctor doing that. Or would you?

Dr. William McGuire, a pulmon-ologist and CEO of UnitedHealth, is the target of a federal lawsuit and investigations by the SEC and the attorney general of Minnesota over stock options granted him to the tune of $1.6 billion. The granting of his stock options seems to have almost always fallen, amazingly, on the most favorable day of each year. Analysts calculate the odds of this occurring naturally to be about one in 200 million or greater. Such a practice is called "backdating" and is unethical, if not actually illegal, and certainly trashes UnitedHealth's mission statement: "Making healthcare more affordable."

CAUTIONARY TALE

Is it any wonder that 37 states have laws against the corporate practice of medicine? There has been a rash of IPOs for outsourcing companies and more are in the pipeline, but let's look at one example: AMR/EmCare. The company has been in business for 33 years, contracts with 4500 physicians in 38 states with 5.3 million patient visits, and generates net revenues of $1.6 billion. In 1998, the company was sold to Laidlaw for $336 million. The curious thing is that Laidlaw is primarily an operator of school buses and solid waste management. Good match.

Crippling losses from Laidlaw's management of Greyhound Lines and Safety-Kleen forced it into bankruptcy protection. Laidlaw subsequently sold AMR/EmCare for $828.8 million to the Onex Corporation, described on Wikipedia as "a Toronto-based investment firm." It was founded in 1983 by Gerry Schwartz. Today it is a publicly traded company, but Schwartz has 67.6% of the voting control and continues to serve as chairman and CEO.

Onex specializes in buying firms in Canada and the U.S. that are undervalued or in need of restructuring, then selling them at a significant profit. These restructuring efforts often involve wage cuts, workforce reductions, and outsourcing. The money raised from AMR/EmCare's recent IPO is going to pay off that debt.

"We intend to leverage emergency medical services' competitive strengths to pursue our business strategy: Increase revenue from existing customers (and) grow our customer base," Onex notes in its SEC filing. I just hope they are not going to run over people with buses to get more patients into the ER.

SURVIVE AND PROSPER

Such stories make me nostalgic, since I once was part of a radiology IPO that had similar dreams-American Physician Partners, which eventually became Radiologix. This was in 1997, a time when radiology groups were feeling particularly vulnerable due to intrusions by HMOs and big insurance companies. The mood of the era was that only large groups would survive and prosper. Size mattered.

The idea of a nationwide radiology group was proposed by venture capitalist John Pappajohn, with seven large radiology groups as the seeds using a physician practice management model. In a September 1997 article in Forbes by William Green, Pappajohn said, "You don't know anybody who makes money easier than I do;" and "I don't have to account to anybody." Those at the top of the company did do very well, as did the numerous CEOs that came and went. But failure to meet revenue and profit expectations of Wall Street analysts took its toll. Radiologix stock recently traded at $1.50 per share. Why does this matter? Because some of the groups I'm working with are feeling insecure. They talk about the need to acquire or merge with other groups so they can benefit from economies of scale and leverage their size in contract negotiations. Such advantages do exist, but bigness for bigness sake can be a perilous path if not well considered. My own practice has reached a fork in the road and as a result, we are doing a lot of soul searching. How big do we want to be?

If you face a similar dilemma, I recommend Bo Burlingham's book, Small Giants. Burlingham is editor at large for Inc. magazine. His book challenges that notion that bigger is better by featuring numerous companies that have rejected such thinking while still staying phenomenally successful. The book may not answer your individual questions, but it will certainly stimulate your thinking.

Small firms are easier to manage, can be more flexible, and can respond more nimbly to challenges. They focus on the long term, not short-term profits. My favorite quote is from Danny Meyer of the successful Union Square Hospitality Group in New York: "I've made much more money by choosing the right things to say no to than by choosing to say yes to." Many huge companies have faltered if not failed due to overzealous growth.

Don't believe all the propaganda, even your own. Annexing the radiology group across town won't assure you success and happiness. There are always risks.

Dr. Trefelner is a radiologist and cofounder of NightShift Radiology. He invites comments by e-mail at ericxray@pacbell.net or fax at 650/728-5099. He also answers questions posed by readers in the "Ask Eric" column on diagnosticimaging.com.