Can Anyone even begin to figure this out?

Labor of Love
By Mike Vogel - 11/1/2005


Among the predictable trappings in the Coral Gables office of Stephen Dresnick -- family photos, a picture with Jeb Bush, a few mementos -- are a pair of bright reddish-orange boxing gloves that a friend gave him.

They were a prescient gift for a doctor who's ended up with a big fight on his hands. Sterling Healthcare, which supplies emergency room docs to hospitals, has survived the bankruptcies of two parent companies and is back in the hands of Dresnick, its founder. "I built the company. I sold it. It didn't quite work out the way I had hoped. Very few people get a second chance. I consider myself very, very fortunate to, first, get my company back and, secondly, to have a second go at creating value."

But to rebuild Sterling -- and rejoin the club of major doctor-management companies making money in Florida -- Dresnick has had to brawl with another doctor-entrepreneur who lost ownership of it but refuses to throw in the towel.

Dresnick, 54, is a veteran of Florida's medical entrepreneur scene. A Miami native, he graduated Phi Beta Kappa in premed from the University of North Carolina at Chapel Hill, graduated from the University of Miami med school and completed his residency at UCLA in 1980 en route to becoming one of the first board-certified emergency specialists. He founded the emergency medicine doctor training residency program at Orlando Regional Medical Center.

Dr. Stephen Dresnick founded Sterling in 1987 to help hospitals staff and manage emergency rooms. He sold the successful company in 1996, but the company that bought it foundered.He retains a certain ER, straight-to-the-point manner when talking about his field of expertise, whether it's finances or medical practice. For example, he says flatly, "In our experience, the No. 1 reason for malpractice suits is malpractice. After 20 to 30 years, we know not to do certain things that the young people coming out of residency still have to learn."

Tired of commuting from Miami to Orlando, Dresnick founded Sterling in Coral Gables in 1987 to help hospitals staff and manage their ERs -- for a profit. He recruited doctors, paid them, scheduled them and handled their billings. He did well enough at clinical outsourcing to take Sterling public in 1994.

A similar, separate company to handle billing, collections, cash management and payroll processing for 26 orthodontics practices flopped, but Sterling continued to prosper. From 1990 to 1995, it grew from $15.7 million in revenue to $115.7 million and from break-even to a $2.8-million profit. Sterling numbered 1,000 doctors, 101 ERs and 1.3 million patients annually. In 1996, Dresnick was named Ernst & Young's Florida Healthcare Entrepreneur of the Year.

That same year, San Diego-based FPA Medical Management, a fast-growing managed care company, bought Sterling for roughly double its stock price. Dresnick says he thought FPA's "value proposition was faulty from the very beginning. Nobody really had had a lot of experience in understanding some of these things." But, he asks, "how do you turn down multiples like that for your shareholders?" Dresnick went along in the $220-million stock acquisition as vice chairman of the FPA board. And he continued to run Sterling, getting $1 million to extend his contract and making, on paper,
$20 million in stock gains.

"Today I think managed care is nothing what we thought it would be," Dresnick says. "We thought it was going to take over the world, and it hasn't."

FPA certainly didn't. Fueled by investors, firms like FPA bid up prices -- and overpaid -- for practices and management companies. The hoped-for streamlining and cost-controls didn't materialize. "They had spent too much for the physician practices, and it wasn't enough value added," says longtime healthcare analyst Robert Wasserman, research director at Sky Capital in Boca Raton.

Dresnick, whose stock was worth $78.5 million at the peak, watched it sink. The stock he held on to eventually became worthless. "You live by the sword, you die by the sword," he says. "I think greed and avarice did them in." FPA's chief financial officer was convicted of fraud but, Dresnick says, FPA's biggest problem was that it didn't have the structure and experience to handle its own growth.

As FPA began to fail in 1998, Dresnick was named chief executive and led the firm's decision to file for bankruptcy -- the first by a major physician practice-management firm. The only viable business FPA could sell to pay its debts was Sterling. The best offer, valued at $110 million in cash and assumed liabilities, came from Coastal Physician Group, a Durham, N.C., company run by Steven Scott.

Butting heads
Like Dresnick, Scott was North Carolina-educated (Duke University) and a doctor (Ob-Gyn) who had seen opportunity in ERs. He founded Coastal in 1977 and moved beyond ERs into HMOs.

Dresnick and Scott were at odds once the deal was done. Dresnick says Scott told him he wanted him to stay on to run Sterling, then tried to lock him out of his office after the sale closed. "That's the first time I got an inkling of who the real Steve Scott was," Dresnick says.

Dr. Steven Scott bought Dresnick's company, Sterling, when its parent company ran into financial trouble. From the beginning, he and Dresnick were at odds.Scott says he never told Dresnick he would stay on and gave him four weeks to clear out. It would not be the last time they sparred over the facts. "It was a very sensitive time," Scott says. "We were trying to be compassionate."

Dresnick, bound by a three-year non-compete agreement, stayed out of the ER staffing ring and spent a lot of time fishing and learning about technology. He also started a medical billings company. Meanwhile, Scott looked to Sterling to make his money-losing Coastal profitable. In ER contracts, they were similar in size -- 151 contracts at Coastal to Sterling's 129. Scott assumed he could cut Sterling's overhead -- eliminating its executive staff, for one -- and get more production from the doctors.

He was right about the staff, wrong about the doctors. The company, renamed PhyAmerica Physician Group, later claimed that Sterling doctors, accustomed to a flat hourly wage with Sterling, resisted being moved to a productivity-pay system. The Sterling acquisition proved as unprofitable as the rest of PhyAmerica. (Dresnick says he's baffled by PhyAmerica's reported history. He says Sterling always was profitable.)

To keep afloat, PhyAmerica sold its receivables to Dublin, Ohio-based National Century Financial Enterprises. But the money from the sales didn't cover PhyAmerica's cash needs, so PhyAmerica also sold receivables for business it had performed, but not billed for, and for business it hoped to do -- to the tune of $186.5 million by 2001. The company lost $328.2 million over five years, investors fled and Scott took the company private in 2002, buying the shares he didn't own for 15 cents apiece.

National Century failed in November 2002, and PhyAmerica followed it into bankruptcy court. A PhyAmerica creditors attorney, Joel Sher of Baltimore, says creditors will recover just "pennies on the dollar."

Some of those pennies were to come from the sale of Sterling. Scott wanted it back. Dresnick did too.

Dresnick says the entrepreneur in him drove the decision: "We do what we do because we love what we do." After a 17-hour court proceeding in 2003, Dresnick, backed by a New York investment firm, won the decision with a bid valued at $90.5 million. He says he expected to rebuild the company "in what I thought was a relatively painless way, but it didn't work out that way."

Uproar
Indeed, Dresnick took a punch right away -- a low blow, as he sees it. One of Sterling's biggest profit centers was its three contracts with the Fort Lauderdale-based North Broward Hospital District, a government body that runs four major hospitals and styles itself one of the five largest public healthcare systems in the nation. The contracts represented $8 million in annual profit, according to Dres-nick. He says that Scott, although bound by a non-compete agreement, set up new corporate entities, cut a deal with the district to replace Sterling on the contracts and lured Sterling's doctors away with promises to indemnify them from legal action for breaking their non-competes with Sterling. "We've always competed, and up until this time we always competed on a fair basis," Dresnick says.

The deal created a tempest in Broward. Local newspapers noted that Scott is a prominent contributor to Republican causes and that Gov. Jeb Bush had appointed all the district board members. Also, a Scott attorney, Bill Scherer in Fort Lauderdale, happened to be the district's general counsel. J. Luis Rodriguez, the board chairman at the time, now says Scherer had an "obvious" conflict of interest and that Scott shouldn't have the contract.

Scherer's firm lost the district's business in August. Scherer's spokesman, Kevin Boyd, says Scherer had no conflict because he didn't make a recommendation on the contracts and because he didn't represent Scott or the district -- Scherer brought in another firm for the district -- on the contracts.

A bankruptcy court judge found Scott in contempt of an injunction barring him from meeting with Sterling employees and interfering with its contracts. Lawyers for PhyAmerica's creditors sued Scott, his companies and the district in bankruptcy court in Baltimore; Dresnick sued earlier this year in Broward Circuit Court. Scott "and I certainly don't share the same value system," Dresnick says. "I don't think Steve Scott believes the rules are made for him."

Scott denies doing wrong. One of his attorneys, Scott Baena, says the district made it clear before Dresnick won Sterling back that it wouldn't extend Sterling's contract and that the contempt order dealt not with the lost contracts but with meetings Scott had with a few Sterling doctors.

With his baby back, Dresnick moved to get it healthy. With the North Broward chunk of Sterling's revenue and profit gone, Dresnick quickly laid off 200 Sterling employees in its former North Carolina headquarters. Learning from FPA and Coastal, he plans to avoid debt and intimates a public offering may come. He has expanded Sterling into pediatricians, hospitalists -- doctors who specialize in hospital care -- radiologists and anesthesiologists. He projects $275 million to $300 million in revenue this year and says the company became profitable in the second half of last year. It has nearly 2,000 doctors, 215 ERs and a way to go before it can contend against clinical outsourcing heavyweight Team Health, based in Knoxville, Tenn., which posted $1.6 billion in revenue last year and has 450 hospital contracts nationally and contracts to run 23 ERs in Florida.

Guidance
A selling point in winning new contracts will be bringing technology to a field where much is still tracked on grease boards. Dresnick says Sterling is developing software that enables doctors to write prescriptions and discharge instructions, keep medical records and provide correct insurance-coded billing information to billing offices -- all electronically.

The software also provides guidance from lessons learned from two decades of malpractice complaints. For instance, ER doctors seeing a 50-year-old man complaining of back pain will be instructed to check for a ruptured aortic aneurysm.

"I've always been enamored with technology," says Dresnick. "That's what turns me on. I can sit here all day long and think of these things, but if I don't have an organization to implement them, they're just thoughts."

Why not start anew rather than rebuild Sterling? "I'm too old. Once you run a big company, it's very hard to start all over. The things you did when you were in your 30s and 40s aren't so easy anymore -- and you don't have to."

Clinical Outsourcing / Practice Management

PainCare Holdings, Orlando, a 310-employee pain management company, acquires practices and sells services to independent practices. Under CEO and co-founder Randy Lubinsky, it has grown quickly since its start in 2000. The company expects to show a $14-million to $14.5-million profit this year on $59 million to $60 million in revenue.

Pediatrix Medical Group, Sunrise, specializing in neonatal care and high-risk pregnancies, was founded in 1979 as a two-doctor practice in Fort Lauderdale. Under co-founder and CEO Roger J. Medel, an M.D. and MBA, it has grown to staff more than 220 neonatal intensive care units nationally and has 800 doctors (625 neonatal care) in 32 states and Puerto Rico. Describing itself as a "national group practice," the company also does research and claims the world's largest neonatal database. Last year, it turned a $98.3-million profit on $619.6 million in revenue.

AmeriPath, Palm Beach Gardens, a pathology company, last year had $1.5 million in profit on $507.3 million in revenue. Owned by New York private equity investment firm Welsh, Carson, Anderson & Stowe, AmeriPath has 400 pathologists, 15 regional labs, 36 satellite labs and performs in-patient diagnostic and medical director services at more than 200 hospitals.



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