Give a Shift a Week to the Company: An Analysis of the TeamHealth IPO

Robert McNamara, MD FAAEM

April 21, 2010

On October 5, 2009, TeamHealth Holdings LLC, a subsidiary of the Blackstone group, filed for an initial public offering (IPO) with the Securities and Exchange Commission. The document is available for public inspection[1] and EM physicians should strongly consider taking a look at it. One will find that TeamHealth is operating with a gross profit margin of 22% in a business predominantly based in the specialty of emergency medicine. This 22% figure represents what is in play when EM physicians place their economic destiny in the hands of a corporation. From an analysis of the IPO, it is highly plausible that each emergency physician is turning over control of up to $76,000 per year to this corporation. Looked at differently, this amounts to giving one 8-hour shift per week to the company. The question to ask is, how much of that 22% could be invested in the emergency department or the emergency physicians in a noncorporate arrangement?

By doubling the reported IPO figures ending June 30, 2009, one can project that TeamHealth will have net revenue of $1.42 billion and a gross profit of $318 million (22%) for 2009. Gross profit is defined in the IPO as the net revenue minus the "professional service expenses" and liability costs. On page 57 of the IPO, the professional service expenses are further defined as "physician and other provider costs, billing and collection expenses and other professional expenses." So, the major costs of the practice—paying the providers, malpractice expense and billing—are taken out before gross profit is calculated. This is what the IPO says; it is not my interpretation. One must ask, what else is there in terms of expenses for the specialty of emergency medicine? Looking at the IPO, one can see what TeamHealth deducts from the gross profit before arriving at earnings of $83.4 million (5.9%) for the year. TeamHealth lists things such as administrative expenses, management fees, depreciation and interest on debt (debt often incurred from buying a practice), that a local group would not have, or at least not to the scale listed here.

Let's look at the potential impact on the individual emergency physician. The total number of doctors engaged with TeamHealth is 3,500, with 2,800 of those being independent contractors. About 3,000 of TeamHealth's doctors are emergency physicians, with hospitalists comprising the next largest part of the group at 260 doctors. There are 2,500 other health care professionals, primarily PA and NP positions for the EM part of operations. The IPO on page 1 states that 79% of the net revenue comes from the ED and hospitalist operations. That would amount to a total of $1.12 billion for 2009. For calculations in this article, all of the revenue is assigned to the physicians, as it is likely that the majority of the EM extenders work with a physician who supervises them and co-signs their charts. In an independent EM practice, the extender revenue would be directed to the physician, which is the arrangement this needs to be compared with. In this simplified analysis, at a total of $1.12 billion for 2009, each of the 3,260 EM and hospitalist physicians is generating an average $344,000 of net revenue for the year.

Applying the gross profit margin of 22% to the average revenue generated by each EM and hospitalist physician, the average gross profit per physician is $75,680 for the year 2009. For that amount of money, it would be prudent for these physicians to know what expenses beyond salaries, billing costs and malpractice would be necessary if they owned the practice themselves. There really is not much else to pay for. Sure there are expenses; someone needs to get paid administrative time to run the show and interface with the hospital, and there may be need for a non-physician business manager, but what else? Benefits do not apply for the mostly independent contractor doctors of TeamHealth, and they likely fall under "professional services expenses" for the 700 employed physicians. Certainly, at the end of the day, a good sized portion of that $76,000 would be available to further compensate the emergency physicians. Additionally, this arrangement for physicians includes negatives that need to be considered, such as the possibility of termination without cause and a routine two year restrictive covenant detailed in the IPO.

Obviously, the exact figures for individual EM physicians depends on what revenue they generate prior to the application of the 22% gross profit margin. Clearly, however, there is the potential of added salary if one was to practice independent of this corporation. Even if the opportunity lost was $50,000 per year, it would still represent a million dollars over 20 years; something that one could use for their kid's college fund. In this analysis, we can also see the reason physicians who work for corporations generally do not see what is collected in their name. If the corporate expenses and derived earnings were reasonable to the eye of the EM physician, there should be no cause to shield them from this data. The potential amount of money involved per doctor also points to why it is highly advantageous for TeamHealth to be viewed as an accepted part of the fabric of emergency medicine through a relationship with EM professional meetings and organizations. Take the IPO information, and perform your own analysis; you may see it differently, but at least you will have explored this important issue. At the potential cost of a shift per week, one ought to take this matter seriously.