Overexposed to the corporates
In July 2000, Sydney radiologist Adam Steinberg wrote to the professional body that represents his medical specialty. At the time, it was all the rage for doctor partnerships to sell their traditional practices to sharemarket-listed companies.
Soon more than half the private X-rays, ultrasounds and other radiology services in Australia would be provided by just three companies. Investors were keen to gain economies of scale by expanding and doctors welcomed the opportunity to hand over the paperwork to professional managers, not to mention the chance to cash in.
But Steinberg's letter to the Royal Australian and New Zealand College of Radiologists called it "a new and dark era". "We are the new pariahs of the medical fraternity," he wrote. "Pseudo quasi businessmen masquerading as doctors, seen as completely money-orientated, happy, willing and seeking to sell ourselves, our services and our souls to the highest bidder."
In a comment that resonates with the crisis in child care triggered by the collapse of ABC Learning Centres, Steinberg warned of "taking money away from the public hospital system [where we all trained] to allow non-medical, non-radiology 'shareholders' and businessmen [overseas and local] to profit from taxpayers and the health-care dollar".
Eight years on, investors have done well from so-called "corporate medicine".
Sonic Healthcare and Primary Health Care - the two biggest companies running clinics staffed by general practitioners, radiologists and pathologists - have grown dramatically and profitably.
Even in these gloomy times, the sharemarket values them at $5 billion and $1.7 billion respectively, and stockbroking analysts are lauding their "defensive" or recession-proof outlook, buffered by Medicare rebates. Until the credit crunch began to bite a year ago, the sector also attracted the attention of private equity firms with billions of dollars to invest.
But it has not been a universally happy ride for doctors. On Monday the first of 15 planned radiology clinics in NSW opened its doors. The practices will be owned and run by an old-fashioned partnership of the radiologists and nuclear physicians who work in them. The 35 specialists involved have experienced three different versions of corporate medicine in the past eight years. Now they are returning to the model they discarded in 2000.
The name PRP Diagnostic Imaging is new. But the heart of the company is the long-established Pittwater Radiology Partnership. The chairman of the partnership, Michael Jones, acknowledges he and his colleagues will be returning to a system they viewed as having drawbacks in 2000. "The difficulty with our business is the extent of capital required; we need a lot of money to fund the equipment," Jones says.
The humble X-ray is now accompanied by the ultrasound, the mammogram, computerised tomography, magnetic resonance imaging and positron emission tomography. Radiology clinics are time-consuming to run, with each specialist typically supported by seven or eight technical staff, such as radiographers, and several front-office employees.
Jones says the partners were attracted to the concept of leaving business decisions to managers. "Like a lot of people in small business, they imagine that someone out there can do it better than they can, has more knowledge about how things should be done," says Jones. "I think we all went into it with great optimism; the hope was that we would have more time to spend on radiology."
Back in 2000, the partners of Pittwater Radiology merged with similar practices around the country and listed on the sharemarket as Medical Imaging Australasia. It was majority-owned by doctors and three of the six directors, including the managing director, were radiologists. Their days as an independent company ended in 2004 when, with a share price languishing well below the float price, MIA was taken over by DCA Australia, an investment company that several years earlier had decided to diversify into radiology and aged care. The Pittwater partners found themselves an even smaller part of a conglomerate.
Two years later, DCA was courted by CVC Asia Pacific, the private equity group that is now struggling to pay the interest on the billions of dollars it borrowed to buy a majority stake in the Nine Network and the Australian Consolidated Press magazine group. CVC paid $2.7 billion to privatise DCA, and last year sold the aged-care business for $1.2 billion. There is now a hole in CVC's remaining investment, thanks to the walkout by the Pittwater Radiology partners.
Back in 2000, they made a decision that would prove crucial. Unlike many of their counterparts who dissolved their partnerships and signed up individually with companies, the Pittwater partners decided to stick together. Jones says it had long been a "harmonious, productive, successful partnership" with strong social links. "We just thought there was no point in dissolving it."
The partnership signed a contract to provide radiology services to MIA, and later DCA. That meant that when they wanted to leave, they had the critical mass to start new clinics. That point came in late 2006 when they learned that DCA was selling to the private equity firm.
James Christie, a PRP partner and member of the executive committee that will oversee the new clinics, says the third change in six years came as the partners had been gradually losing enthusiasm for the corporate structure. There was too much focus on profit and too little consultation about long-term investment, particularly in equipment.
But the main trigger was that the radiologists didn't like "being bought and sold without any say in the process," Christie says. "We just decided that was going to keep happening to us and it was probably going to happen again very quickly." In 2006 the newspapers were full of articles about the modus operandi of private equity, which typically involved buying full control of a company, cutting costs away from the scrutiny of the sharemarket, and then selling for a profit within three to five years.
The Pittwater partners terminated the contract, which obliged them to give two years' notice, a period that expired in November. PRP plans by February to have clinics open on Sydney's North Shore, northern beaches and north west, on the Central Coast, in the Illawarra and in the Central West.
The partners have leased the equipment, hired the technicians and support staff and rented the 15 premises. A partnership executive committee will meet several times a month with an operational manager and financial manager. As older partners retire, young radiologists will be invited to buy their shares in the partnership.
Steinberg sees this as far preferable to older radiologists selling an entire practice to a company. "It sells the next generation into some sort of slavery," he says. "It's totally selfish and I just don't believe medicine should be like that. Everyone wants to earn a good income but one of the big things about radiology which has changed and caused a lot of upset is that radiologists have lost ownership."
He says relations with patients were not greatly affected under corporate ownership, but "the appetite for young radiologists to join if you have nothing to offer them except working for a corporate was very limited". The technical and support staff were also unsettled by "this constant cloud of uncertainty about where the business was going, who would own it and what the future was".
Naturally there is no guarantee the new venture, which requires a big upfront investment by the partners, will work. The CVC clinics with which they will compete are already established, in carefully chosen locations. Perhaps more importantly, Medicare rebates for the most lucrative radiology work - magnetic resonance imaging or MRI - are limited by a government licensing scheme.
The Pittwater partners will leave behind the MRI licences held by CVC. They will only do MRI scans for patients willing to pay the high cost from their own pockets. On the other hand, a successful radiology business depends on referrals from general practitioners and specialists.
The Pittwater partners have their own networks, and, while demand for newer technologies is increasing, X-rays and ultrasounds still account for more than 80 per cent of Medicare-funded radiology work.
Jones says the partners have come to terms with the failure of their search for a better structure. "You get to the end of that road and realise that it doesn't exist and that you did it the best way the first time around," he says. "So we have that. It's like a second marriage. You use all of the knowledge that you have gained to that point to make it work."
If the new venture succeeds, he cannot envisage PRP being tempted into a corporate expansion. "The thing that makes our partnership survive is that we all meet fairly regularly, we all know each other very well, we are all close friends," he says. "If we had twice as many or three times as many we wouldn't have that. Then we would just be an organisation."
