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Securities and Exchange Commission
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(A)
of the Securities Exchange Act of 1934
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[X] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
Coastal Physician Group, Inc.
(Name of Registrant as Specified in its Charter)
Steven M. Scott, M.D.
(Name of Person Filing Proxy Statement)
------------------------------
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1)
or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to
Exchange Act Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules
14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction
applies: N/A
(2) Aggregate number of securities to which transaction
applies: N/A
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set
forth the amount on which the filing fee is calculated
and state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
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[X] Fee previously paid with preliminary materials.
[ ] Check box if any part of the fee is offset as provided
by Exchange Act Rule 0-11(a)(2) and identify the filing
for which the offsetting fee was paid previously.
Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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STEVEN M. SCOTT
3711 Stoneybrook Drive
Durham, North Carolina 27705
September 17, 1996
Dear Coastal Physician Shareholder:
I am enclosing some materials I believe you may find of interest in
connection with the proxy solicitation at Coastal. I will also forward hard
copies of the same material to you later today for your convenience. I look
forward to speaking with you shortly.
Sincerely,
Steven M. Scott, M.D.
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Index of Documents
Tab
---
Comparison of Priorities ................................................... 1.
The History and Future of Emergency Medicine ............................... 2.
Quarterly Historical Financial Results ..................................... 3.
Press Release Relating to American Hospital Association .................... 4.
Graph Demonstrating Percent Changes in Hospital Emergency Visits ........... 5.
Comparisons of Five-Year Cumulative Returns ................................ 6.
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[TAB 1.]
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Steven M. Scott Coastal Management
- --------------- ------------------
Priority: Transactional Solution Priority: Operational Solution
Fall-Back Position: Operational Fall-Back Position: Transactional
Solution Solution
o Multiples in practice management o Return to "core business"
hospital based groups are expected
to decline o Loss of "core business" management and
staff
o Transactional solution removes or
lessens shareholder risk in event o Need to attract new business
of failure of operational solution
o Need to attract new management
o Stabilizes management
o Need to control SGA
o Stabilizes staff
o Loss of investment banker (Morgan
o Stabilizes key accounts Stanley); failure to select new
investment banker for more than one
o Assures continued quality care month
for patients
o Inability to divest assets in orderly
o Resolves management and share- manner for more than six months
holder disputes
o Management confusion; unclear line of
o "Pooling" transaction authority
o Halts prospective sales of prime o Continued substantial operating loss-
assets to fund continuing losses es; expect continuation while attempt
while Coastal attempts to return return to "core business"
to "core business"
o Losses for six months ended June 30,
1996
o Lack of time and capital for
turnaround
o If operational solution fails, trans-
actional solution may not be available
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[Tab 2.]
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The History and Future of Emergency Medicine
Emergency medicine has been an exciting growth field for more than a decade.
However, in mid-1994, with the rapid change in health care delivery systems to
managed care and the pressure on costs for health care delivery, it started to
become clear that the future for emergency medicine would in no way be similar
to what had occurred in the past. During the good years of 1985 to 1994, each
year one could raise fees approximately 6% to 7%; assume to collect about 5% in
additional fees; increase doctors' compensation; and improve margins. Risks at
that time were simply the cost of malpractice during hard and soft cycles, but
otherwise costs remained relatively constant and stable with an appropriate
annual rise in physician direct expense.
The future of emergency department visits has now become worrisome, and I
believe the future value of physician emergency medicine companies is in doubt.
The following reasons enumerate what I believe to be serious concerns about the
emergency medicine business, why I believe going back to the "Core Business" for
Coastal is a mistake, why I believe multiples in the industry will continue to
deteriorate over the next two years and why I believe that prompt consideration
should be given to a sale of Coastal in its entirety.
1. Number of Emergency Department Visits. The number of emergency
department visits according to the American Medical Association
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declined about 2.2% for the first time in calendar year 1994. Although this was
not a significant decrease, it was the first time since records have been kept
that the number of visits actually decreased. In addition, the relative
percentage of nonpaying patients vs. paying patients continued to shift to the
nonpaying category, causing more and more cost shifting to the paying patients
and higher and higher fees. Although the final numbers for 1995 are not yet
available, it is expected that the number of emergency department visits across
the entire country decreased by some 3% to 4% and that decrease will probably
accelerate due to the increased penetration of managed care. In Southern
California last year where managed care is now approaching 55% penetration of
the commercial market, emergency department visits decreased approximately 12%.
At the same time, the entire Pacific region of the U.S. saw a 13.9% decrease in
emergency department visits in one year. This had a substantial impact on both
the physician companies and the physicians in terms of income.
2. Reimbursement Per Visit. It is my experience that there has been an
industry-wide erosion of reimbursement per visit over the last 18 months. At
Coastal, this was initially attributed to our computer conversion. However, as
the computer conversion has neared its completion, it has become apparent that
reimbursement per patient visit is down because of the shift of the payor class
to the nonpayor category or the lower payor category such as Medic-
2
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aid and the increased managed care which directs patients to self help urgent
care and other less expensive forms of treatment.
3. Excess Capacity. There are many reports from the American Hospital
Association and various consulting companies indicating an over capacity of
hospitals and hospital beds that approaches 30% to 40% depending on which study
is used. There have been many predictions that approximately 20% of the
hospitals in the country will close in the next 3 to 5 years, and indeed, we
have seen Columbia, Orinda and other hospital chains actually buy hospitals in a
given community, merge them and close one. This has the effect of decreasing the
number of hospital clients potentially available for ER companies such as
Coastal to pursue. Last year I believe Coastal lost several clients as a result
of mergers by the proprietary hospitals and nonprofits where Coastal was
providing service to one of the smaller hospitals in the community and when the
merger occurred the other group, usually a local emergency physician group,
would prevail to keep the service. Today, there are approximately 5,000
hospitals that have emergency departments, and that number is expected to
decrease to approximately 3,500 to 4,000 within the next three to four years.
With approximately 50% of the hospitals outsourcing their emergency departments,
the number of clients available for companies like Coastal will be significantly
reduced.
3
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4. Reimbursement Per Visit. As indicated, reimbursement per visit on an
industry-wide basis has continued to gradually decrease, and I believe will
continue to decrease over the next five years. I believe the reasons for this
decreased reimbursement are:
(a) Shifts in the ER population. There is a shift in the ER population
from commercial to more self-payor or inability to pay patients with
increasing numbers of Medicaid and underinsured patients. Obviously the
commercial patients as they move into a managed care environment as well as
"a managed indemnity environment" are being increasingly triaged away from
emergency departments with either self help, urgent care or care the next
day. Certainly, based on the California numbers over the last year, I would
expect this trend to continue as managed care penetration continues.
(b) Reimbursement from Medicare and Medicaid. Clearly the country is
not able to adequately support Medicaid and Medicare reimbursement to
physicians. It has continually been decreased over the last three years,
and I believe will continue to decrease over the next five years. I believe
that most Medicaid patients and eventually Medicare patients, will be
either forced or
4
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financially induced to be in managed care plans. This will likewise lead to
decreased reimbursement for any visits from managed care companies to
emergency departments as well as a decreased number of visits.
(c) Managed care penetration. Although it was believed that managed
care penetration would move more slowly throughout the country than it has,
industry data indicates that in south Florida the market went from
approximately 12% penetration to approximately 40% penetration in just over
24 months. With all major HMOs buying or starting plans in that market, and
with businesses being driven by cost, it is my understanding that managed
care currently has 40% of the commercial market and is still climbing. This
phenomenon took approximately 10 to 12 years in California, but because of
its significant cost benefits to the employers, I believe managed care will
continue to grow in larger metropolitan areas at very rapid rates followed
by more suburban rural areas over time.
(d) Physician availability. One of the driving forces for many
communities to hire groups such as Coastal was the short supply of
qualified physicians, both Board certified and family
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practice internal medicine or emergency medicine, to fill the shifts in
their emergency departments. However, as the physician availability over
supply has become clear, particularly in the medical subspecialties, like
gastroenterology, cardiology, and even family practice, these physicians
are now actually seeking the contracts for themselves to manage emergency
departments. Many of these physicians have long standing or favorable
relationships with hospital administrators and are in a prime position to
make themselves available with a more than adequate supply of their
colleagues to provide service. This eradicates one of the major reasons
Coastal was called into accounts.
(e) Decreased margins. Margins in the emergency department business
have continued to decrease. Over the last 10 years I have personally looked
at virtually all the emergency department companies in the country. In each
case, I have seen margins being eroded. On a industry-wide basis, a
well-run, well-managed company might have a goal to have a 5% operating or
pre-tax margin as we move forward in this industry. However, over 2 to 3
years, I would not be surprised to see even lower margins.
6
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(f) Collection cycles. The days sales outstanding or accounts
receivable will continue to be a significant problem causing a significant
use of cash in any emergency department company. We have seen managed care
companies spend months denying claims and forcing us to seek compensation
from the patient who then goes to the employer, who then complains to the
HMO. This is a cycle that usually goes on for at least 90 to 120 days
before it is finally resolved and settlements made on a given claim usually
are paid at substantially less than the charges that were initially
submitted. I think the days sales outstanding problem will continue to grow
and the standard in the industry, because of this delay both by commercial
and indemnity carriers as well as by managed care companies, will
unfortunately cause this number to remain at approximately 120 days on
stable accounts. On new accounts or terminated accounts I would not be
surprised to see this number go to the 150 or even 180 day range.
(g) Consolidation. For the last 12 to 18 months, if one were to review
Inphynet, Emcare, Sheridan and Sterling, one would begin to see that the
internal growth rate (that is, actual growth in the business generated by
new contracts) has actually become flat or in some cases has even
decreased, forcing the
7
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industry to move to a consolidation mode. With consolidation, obviously one
must be in a position to have either cash or stock to offer to a potential
seller. I believe that Coastal for the next three and probably five years
will not be in a position to have adequate cash or an adequately traded
stock price to be able to participate in the consolidation play. Therefore,
I believe Coastal should be a seller and not a buyer in this market place.
I believe that for the above reasons the future of the "Core Business" of
Coastal presents a substantial downside risk. Even though the business at
Coastal is underperforming, I believe we could receive a better price today than
we would even with a better performing business two years from today, because of
the earnings having dramatically changed, and the dynamics of the business
continuing to erode. In my judgment this is a business that one does not go back
to as its core business, but one where prompt consideration should be given to
selling the entire business in an expeditious and prudent manner. That is not to
say that Coastal should be sold at any price, but simply to say that we should
certainly be looking for offers and make Coastal available for sale with the
assistance of a qualified investment advisor.
Steven M. Scott, M.D.
September 17, 1996
8
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[TAB 3.]
<PAGE>
Coastal Physician Group, Inc.
- --------------------------------------------------------------------------------
Quarterly Historical Financial Summary
(Dollars in thousands)
Revenues
1995:
Third Quarter $209,989
Fourth Quarter 181,197
1996:
First Quarter 152,734
Second Quarter 146,038
SG&A Expenses(1)
1995:
Third Quarter $25,432
Fourth Quarter 30,270
1996:
First Quarter 24,901
Second Quarter 31,215
Physician & Medical Expenses
1995:
Third Quarter $186,904
Fourth Quarter 175,919
1996:
First Quarter 137,742
Second Quarter 137,221
Operating Losses(1)
1995:
Third Quarter $-2,347
Fourth Quarter -24,992
1996:
First Quarter -9,909
Second Quarter -22,398
Pre-Tax Losses(1)
1995:
Third Quarter $-4,913
Fourth Quarter -48,822
1996:
First Quarter -11,730
Second Quarter -24,860
Tangible Net Worth(2)
1995:
Third Quarter $77,048
Fourth Quarter 92,535
1996:
First Quarter 81,759
Second Quarter 58,699
- ---------------
Source: Company SEC filings and press releases.
(1) Fourth quarter figures do not include a goodwill impairment loss of $20,648
related to certain Coastal acquired operations.
(2) Tangible Net Worth equals Shareholders' Equity less Intangible Assets.
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Coastal Physician Group, Inc.
- --------------------------------------------------------------------------------
Quarterly Historical Financial Results -- Revenues
(Dollars in thousands)
Revenues
1995:
Third Quarter $209,989
Fourth Quarter 181,197
1996:
First Quarter 152,734
Second Quarter 146,038
- ---------------
Source: Company SEC filings and press releases.
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Coastal Physician Group, Inc.
- --------------------------------------------------------------------------------
Quarterly Historical Financial Results -- SG&A Expenses
(Dollars in thousands)
SG&A Expenses(1)
1995:
Third Quarter $25,432
Fourth Quarter 30,270
1996:
First Quarter 24,901
Second Quarter 31,215
- ---------------
Source: Company SEC filings and press releases.
(1) Fourth quarter figures do not include a goodwill impairment loss of $20,648
related to certain Coastal acquired operations.
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Coastal Physician Group, Inc.
- --------------------------------------------------------------------------------
Quarterly Historical Financial Results -- Physician & Medical Expenses
(Dollars in thousands)
Physician & Medical Expenses
1995:
Third Quarter $186,904
Fourth Quarter 175,919
1996:
First Quarter 137,742
Second Quarter 137,221
- ---------------
Source: Company SEC filings and press releases.
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Coastal Physician Group, Inc.
- --------------------------------------------------------------------------------
Quarterly Historical Financial Results -- Operating Losses
(Dollars in thousands)
Operating Losses(1)
1995:
Third Quarter $-2,347
Fourth Quarter -24,992
1996:
First Quarter -9,909
Second Quarter -22,398
- ---------------
Source: Company SEC filings and press releases.
(1) Fourth quarter figures do not include a goodwill impairment loss of $20,648
related to certain Coastal acquired operations.
<PAGE>
Coastal Physician Group, Inc.
- --------------------------------------------------------------------------------
Quarterly Historical Financial Results -- Pre-Tax Losses
(Dollars in thousands)
Pre-Tax Losses(1)
1995:
Third Quarter $-4,913
Fourth Quarter -48,822
1996:
First Quarter -11,730
Second Quarter -24,860
- ---------------
Source: Company SEC filings and press releases.
(1) Fourth quarter figures do not include a goodwill impairment loss of $20,648
related to certain Coastal acquired operations.
<PAGE>
Coastal Physician Group, Inc.
- --------------------------------------------------------------------------------
Quarterly Historical Financial Results -- Tangible Net Worth
(Dollars in thousands)
Tangible Net Worth(1)
1995:
Third Quarter $77,048
Fourth Quarter 92,535
1996:
First Quarter 81,759
Second Quarter 58,699
- ---------------
Source: Company SEC filings and press releases.
(1) Tangible Net Worth equals Shareholders' Equity less Intangible Assets.
<PAGE>
[TAB 4.]
<PAGE>
American Hospital Association
Liberty Place
Washington Office NEWS RELEASE
325 Seventh Street, N.W. FOR IMMEDIATE RELEASE
Suite 700 Contact:
Washington, DC 20004-2802 Carol Schadelbauer 202/626-2342
202-638-1100 Camille Sorosiak 202/626-2963
NEW REPORT SHOWS DROP IN HOSPITAL EMERGENCY ROOM VISITS;
SUGGESTS MANAGED CARE HAS INFLUENCE
Washington (March 4, 1996) -- For the first time in a decade, the number of
hospital emergency room visits in 1994 declined, according to a new American
Hospital Association (AHA) report. The report suggests managed care has had the
most significant effect on the overall drop in hospital emergency room visits.
Since 1985, U.S. hospitals have experienced a steady rise in the number of
visits to emergency rooms. In 1994, there were 90.5 million emergency room
visits, down from 92.6 million in 1993, according to the report, Trendlines in
Ambulatory Care, produced by the AHA's Society for Ambulatory Care Professions
(SACP).
The Pacific region experienced the most dramatic decline in the number of
emergency room visits at 13.9 percent. But in some areas -- particularly in the
Eastern and Central regions -- the number of visits increased a few percentage
points despite significant managed care penetration. "Emergency room use depends
greatly on how aggressive managed care organizations are at curtailing visits
for non-urgent care and how well patients understand the system," said Susan
Cahn, issues analyst and research specialist for SACP.
The marginal increase of visits in some regions supports the findings of a 1991
General Accounting Office study that showed much of the care provided in
emergency departments is
(more)
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SACP Trendlines/Page 2
for non-urgent conditions, especially in rural and inner-city communities where
access to primary care providers is limited or unaffordable.
Trendlines also notes that hospitals are facing increased competition from
urgent care providers, ambulatory care centers and physician offices. "Many
hospitals are successfully integrating non-urgent care into their expanding
outpatient and primary care capacity -- taking non-urgent conditions such as the
flu or minor cuts, out of the emergency room," says Susan Cahn.
The report is an illustrated compilation of relevant studies and data reported
by individual community hospitals responding to the AHA's 1994 Annual Survey of
Hospitals. Trendlines is available by calling 800/AHA-2626; item #016222. Cost
to members is $10; $20 for non-members. Members of the media should call Camille
Sorosiak at 202/626-2963 to obtain a copy.
The AHA is a not-for-profit organization of health care provider organizations
that are committed to health improvement of their communities. The AHA is the
national advocate for its members, which includes 5,000 hospitals, health care
systems, networks, and other providers of care. Founded in 1898, AHA provides
education for health care leaders and is a source of information on health care
issues and trends.
Note: Permission from the American Hospital Association to distribute copies of
this press release to shareholders of Coastal Physician Group, Inc. has
been neither sought nor obtained by Steven M. Scott, M.D.
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[TAB 5.]
<PAGE>
PERCENT CHANGES IN HOSPITAL EMERGENCY VISITS
Per 1000 Population 1990 and 1993
For selected Metropolitan Areas
Chicago Approx. -1.00%
Dallas-Ft. Worth Approx. +2.75%
Denver Approx. -3.50%
Detroit Approx. -11.00%
Los Angeles Approx. +2.33%
Minneapolis-St. Paul Approx. -25.50%
District of Columbia Approx. -2.50%
SOURCE: AHA Annual Survey, 1993; U.S. Bureau of the Census
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[TAB 6.]
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COMPARISON OF CUMULATIVE TOTAL RETURNS
Corporate Performance Graph
The following graph compares the yearly percentage change in the Company's
cumulative total shareholder return on the Common Stock for each of the last
three fiscal years with the cumulative total return of (i) the S&P 500 Index,
and (ii) a composite of eight managed care/health care services companies. This
composite consists of: Phycor, Inc.; Pacific Physicians Services, Inc.; Medaphis
Corporation; Humana Inc.; Healthsource, Inc.; U.S. Healthcare, Inc.; Coventry
Corporation; and Physicians Corporation of America. The Company has selected
these peer issuers based on the greater similarity of their businesses to the
Company's business than those companies included in the S&P Health Care
Composite Index.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG COASTAL PHYSICIAN GROUP, INC., S&P 500 INDEX
AND MANAGED CARE/HEALTH CARE SERVICES COMPOSITE INDEX
Managed Care/
Health Care
Services
Coastal Physician Composite S&P 500
Group, Inc. Index Index
----------------- ------------- -------
June 21, 1991 Approx. $100 Approx. $100 Approx. $100
December 31, 1991 Approx. 210 Approx. 95 Approx. 110
December 31, 1992 Approx. 210 Approx. 100 Approx. 115
December 31, 1993 Approx. 330 Approx. 120 Approx. 110
December 30, 1994 Approx. 215 Approx. 135 Approx. 110
December 29, 1995 Approx. 100 Approx. 195 Approx. 165
Source: Coastal Physician Group, Inc. 1996 Proxy Statement, Page 23.
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COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG COASTAL
PHYSICIAN GROUP, INC., S&P 500 INDEX AND MANAGED
CARE/HEALTH CARE SERVICES COMPOSITE INDEX
Managed Care/
Health Care
Services
Coastal Physician Composite S&P 500
Group, Inc. Index Index
----------------- ------------- -------
Steven Scott, MD, Director - 1977;
John Hemingway, Director - 1982;
Stephen Corman, Director - 6/91,
EVP/CFO - 5/95; Robert Hatcher,
Director - 6/91; Bertram Walls, MD,
Director - 6/91.
June 21, 1991 Approx. $100 Approx. $100 Approx. $100
December 31, 1991 Approx. 210 Approx. 95 Approx. 110
December 31, 1992 Approx. 210 Approx. 100 Approx. 115
Joseph Piermont, SVP/General Counsel
- - 8/93, EVP - 5/95, President/CEO -
5/96, Director - 8/96.
December 31, 1993 Approx. 330 Approx. 120 Approx. 110
Jacque Sokolov, MD, Chairman of the
Board - 12/94; John Mahoney, MD,
Director - 12/94.
December 30, 1994 Approx. 215 Approx. 135 Approx. 110
Norman Chenven, MD, Director - 9/95.
December 29, 1995 Approx. 100 Approx. 195 Approx. 165
