Rise, Crash and Burn: Looking Back at a Las Vegas Medical Group Launch and the Lessons Learned

Brett Sparks, August 24, 2016

The Rise

Towards the end of 2009, I met the President and CEO of KE Medical Group, a new practice that planned to open in Las Vegas, Nevada. As a medical management consultant, I was interested to see what new opportunities might be available for physicians. The CEO agreed to share KE Medical’s vision for Las Vegas. I suspected he was also interested in what my wife, a popular primary care physician, had on her agenda.

When the CEO told me what KE Medical was planning, I experienced deja vu. KE Medical planned to give Las Vegas quality primary care absent the fragmentation with specialists that required patients to drive from office to office to see their primary care physician, cardiologist, gastroenterologist, etc. KE Medical planned to recruit only exceptional physicians from outside of Las Vegas and work with only the very best Las Vegas physicians. KE Medical was going to be the premier medical group every physician would envy.

The deja vu was that my wife had joined another group at the beginning of the year that was new to Las Vegas and planned the exact same things as KE Medical. Could it be that after years of suffering in a medical wilderness, Las Vegas was about to get TWO medical group saviors?

The CEO explained that KE Medical was the first planned expansion of K/E Centers for Advanced Medicine, a Beverly Hills clinic developed by a cardiologist and a gastroenterologist. Their plan was for a large facility in southwest Las Vegas, which was midway between affluent patients to east in Henderson and the north in the Summerlin community. KE Medical wouldn’t take insurance, so patients would be responsible for out-of-network rates. He said their demographics showed that Las Vegas could support the model.

I was skeptical that Las Vegans would be as willing to pay cash as patients in Beverly Hills or that putting the new location in between the two affluent areas of Las Vegas would attract patients from either community, but I said that I would let physicians know of the opportunity. I spoke to a couple of physicians and healthcare administrators about KE Medical, but I didn’t find much interest.

A couple of months later, KE Medical issued a press releases on PR Newswire and was featured in a VegasInc article that announced their affiliation with a local hospital system and stated that KE Medical would be, “home to an extensive roster of thought-leading specialists and surgeons, allowing patients to receive a full range of seamless, highly personalized care in a single setting.”1 Within a year, KE Medical intended to open a 60,000 square foot luxury office space as part of a multi-site expansion into metropolitan centers in the west.1, 2 KE Medical planned a one-site multi-specialty group composed of internal medicine, cardiology, endocrinology, gastroenterology, orthopedics, neurology and urology.1

In what was hailed as a “groundbreaking paradigm model,” patients would pay cash and file claims out of network to wear cloth robes and slippers instead of paper gown.2 Patients would value spending quality time with their physician team, which could include eating breakfast with the physician during the visit.2 In three years, KE Medical expected to have created 400 jobs, employ 40 physicians and care for 20,000 patients.2

Crash and Burn

Three years after their opening, KE Medical’s office closed with little notice to their ten physicians or approximately 16,000 patients.3, 4, 5 The closing was so sudden and haphazard that the state medical board notified the state pharmacy board to confiscate controlled substances and dangerous drugs that were left behind.3 The two Beverly Hills physicians behind KE Medical were unavailable for comment at the time 3 and no full accounting of the closure has been provided to the public. KE Medical was gone. The executive director of the Nevada Medical Board said he couldn’t recall a similar situation where such a large clinic closed so suddenly without a transition plan for patient records.4

Reports were that physicians were given 24-hour notice of closure, while many patients received letters dated the day of closing notifying them that KE Medical would no longer be in business. 4, 5 The state medical board stepped in to assist patients with getting records. A press release issued regarding KE Medical’s funding stated that KE Medical’s “original business model contained many flaws that were simply not addressed within a timely manner.”4 The press release also revealed that despite millions in loans over three years, KE Medical never made a profit.5 On their website, KE Medical stated, “the economics of the practice model were simply unsustainable at the practice location in Las Vegas.”3

The Lessons?

While I had been skeptical of KE Medical’s business plan, the details of its demise impressed me. Looking back there were signs of trouble of KE Medical in its brief existence.

Trouble #1. The building was big. REALLY big. At 60,000 square feet, rent of $1.50 a square foot would require $90,000 a month, which seems pretty stout for a group that started with only a couple of physicians. By all accounts, KE Medical’s office was very nice, so the tenant improvements weren’t cheap either. The down real estate market may have let KE Medical kick these costs down the road, but the landlord certainly wanted to get paid at some point.

Another concern about the size of KE Medical’s building was that it seemed to shrink. An October 19, 2011 affiliated hospital blog post said that the KE Executive Physical would open in a new 20,000 square foot clinic adjacent to KE Medical’s current 20,000 square foot clinic.7 So what was a 60,000 square foot practice became a 20,000 square foot practice and grew to a 40,000 square foot practice. Except that when KE Medical closed—which presumably meant both the original KE Medical and the KE Executive Physical located within KE Medical—it was identified as only 18,000 square feet.5 A broker’s online ad from September 16, 2013 featured space in the “60,000 square foot office building” which was “mainly grey shell.”8 Either KE Medical was using raw space that hadn’t been improved or KE Medical never was as big as they presented. Or the building could grow and shrink.

Trouble #2. The model never really made sense for Las Vegas, which might make sense if the reports are true that the backer was a British viscount living in Switzerland with a German princess who was one of the principles in ABBA.6 So maybe the model made TOO MUCH sense for Las Vegas.

Even if KE Medical’s market research was right and there were enough affluent people to support their model, assuming that the affluent of Beverly Hills were similar to the affluent of Las Vegas seems to have been a mistake. KE Medical started out as an out-of-network, resort-like medical center featuring cloth robes and slippers, but in 2013 they caved and started credentialing with insurance—probably because the number of people in Las Vegas who would pay cash for medical luxuries was far fewer than in Beverly Hills. There may have been enough people in Las Vegas with the money to support KE Medical, but that didn’t mean they would spend their money on KE Medical.

And, of course, no model was prepared for Las Vegas in the wake of the housing meltdown. KE Medical secured a beautiful building next to a new hospital. Unfortunately, it was one of many new buildings adjacent to one of THREE new hospitals that opened within several miles of each other. Due to the brilliant planning of the three competing hospital systems in Las Vegas, each committed to building a new hospital in southwest Las Vegas to capture the “boom” population. By the time KE Medical opened at the end of 2010, the boom population had gone bust. The southwest, full of new housing acquired on the home loans that fueled the housing bubble, was especially hard hit.

Trouble #3. Starting a multispecialty group from scratch is really difficult, especially in a market with a shortage of primary care like Las Vegas. Years ago when my wife and I were building “Version 1.0” of her practice, I asked a gastroenterologist who worked closely with the practice if he would consider forming a multi-specialty group. His answer was that when he joined with a primary care, he would have to be willing to lose all of his referrals from other primary care doctors because he couldn’t count on those doctors supporting him anymore. As a result, he projected that my wife’s practice would need at least eight full-time primary providers to support just him, (he also had a midlevel provider).

Having enough primary care to support specialists is a necessary economy of scale for a multispecialty group. I think the primary care demands of building a large multi-specialty group may have been lost on the two specialists who founded KE Medical. It’s unclear exactly how many primary care physicians KE Medical had when it opened, but when I saw they were adding my father’s endocrinologist, I thought they must have added a bunch of primary care physicians. They hadn’t. In fact, they had added as many specialists as primary care physicians. When KE Medical closed, they had five primary care, two cardiologists, a neurologist, a rheumatologist and my father’s endocrinologist.6 Not too many multispecialty groups survive with a one-to-one PCP to specialist ratio.

The Summary

I don’t bring up KE Medical’s past to salt the wounds of those involved, (in fact I have purposefully avoided using any names), but to provide a synopsis of a new practice’s entry into a new market and the challenges they face. New entrants in an established market often have to make bold and brash claims to get noticed. The practice my wife joined ran some cringe-worthy ads in a “Want a Better Doctor?” campaign. (Even worse was that some patients thought the blond doctor in the stock photo was my wife. “Aren’t you that doctor in the ad?” they would ask. “Let’s not talk about that,” Amy would say and shudder.)

New medical practices also often feel like they need to “fake it until they make it” in order to continue to attract patients and providers. Nobody wants to receive care or work at a struggling practice. Everyone wants to think that their practice is stable and secure—which just doesn’t describe many start-up companies or expansions in many markets. New medical practices always push the message of success from the beginning—such as a brand new 60,000 square foot medical mecca—even if the message doesn’t make much sense.

Why would a start-up with just a couple of doctors need 60,000 square feet? It wouldn’t. It just makes for an exciting press release. And how could KE Medical have started with the seven or eight specialties it promoted, especially when this would require around a dozen primary care providers to support? Unless it had funding from some British viscount who was dating some disco-era diva—well, even then, it would be really difficult. It sounds like KE Medical had significant funding, but it wasn’t enough for KE Medical to reach critical mass. What’s more, the financial backer sounds like he had little faith that additional time would help.5

The lessons from KE Medical’s rise, crash and burn have all been taught before. Marvin Gaye sang: “Believe half of what you see…and of what you hear.” Be wary of big-hat, no-cattle salesmen telling you how special you and the opportunity are, no matter how flashy their watch or slick their suit. Take time to think of how much sense the business plan makes and ask others for their opinions. The lessons are old, but the mistakes are made anew with each new shiny practice opportunity. And providers and patients get hurt.

In case you are wondering, the “medical group savior” my wife joined was sold to one of the two dominant corporate Las Vegas groups in 2011, less than three years after she joined. She returned to her own practice in 2013—about the same time that several of the primary care physicians from KE Medical started working for the local hospital system affiliated with KE Medical in KE Medical’s former offices. Who knows? Maybe they’re using all 60,000 square feet now.

RESOURCES
1. “K/E Centers for Advanced Medicine Set to Open Comprehensive MultiSpecialty Facility in Las Vegas,” PR Newsire, November 16, 2009.
2. “Medical practice aims to attract wealthy Las Vegans,” Nicole Lucht. VegasINC, November 20, 2009.
3. “I-Team: Patients Frustrated by Medical Group’s Sudden Closing,” Nathan Baca & Alex Brauer. Nexstar Broadcasting: Channel 8 Las Vegas Now, November 18, 2013.
4. “State officials investigating abrupt closure of KE Medical Group,” Paul Harasim. Las Vegas Review Journal, November 18, 2013.
5. “Clinic’s closure remains mystery,” Paul Harasim. Las Vegas Review Journal, December 9, 2013.
6. “Investor connected to British royalty in mix of medical group’s closure,” Paul Harasim. Las Vegas Review Journal, December 15, 2013.
7. “St. Rose Dominican Hospitals Collaborates with K│E Centers for Advanced Medicine to Provide Personalized Executive Physicals,” St. Rose Dominican Hospitals’ Blog, October 19, 2011.
8. “Desert Professional Center,” LoopNet. Last Updated September 16, 2013.

©2016, Brett Sparks, e3Business.