FROM THE CHAIRMAN

by Michael Gregory, M.D., Chairman

Winds of Change

October 17, 2008

For those of you who have been around Apogee for a while, you notice that the only constant is change. Not long ago houses sold in days and real estate and mortgage brokers were earning more than most physicians. Arizona and the country had an economic surplus and all was well. However, things do change. It is impossible to foretell the future with any real consistency. So we make plans, hopefully with contingencies, and work hard to make our plans realities. Our business is no different from any other in that we are faced with change.

About three years ago we were running a very successful division with about nine physicians who focused on managed care patients. This team did such a good job that the health plans granted them virtually unlimited resources when it came to patient care. If a physician wanted a test, procedure or specialist, it was pre-authorized automatically. The physicians were bonused based on the outcomes they produced, not the number of visits they made. We made a decision to grow this division because it allowed us to pay our doctors more, generate more earnings for reinvestment, all while giving our patients the best care possible at a price the health plans could afford. For complex reasons, the market changed and this division was no longer viable. Fortunately, we were able to redeploy the vast majority of the physicians we had hired and lost very few. Unfortunately, we now find ourselves in a similar situation.

Early this year, Apogee made a decision to partner with those who wanted to partner with us. This means that we only operate hospitalist programs where we have exclusive contracts to do so. Non-exclusive agreements don’t provide the revenue to maintain Apogee U, Program Director training, recruiting and other infrastructure, all of which we feel is necessary to run our model in addition to paying our doctors and keeping the lights on at the home office.

Our senior leadership, and ultimately I, have made the decision to divest our Banner Baywood, Baywood Heart and BPHO contract to IPC. This was not an easy decision and one that particularly Dr. Cervi-Skinner and I agonized about. Ultimately, we can’t run two models. Baywood is a big hospital in a major metro market. We do not have an exclusive contract with Baywood and despite enormous efforts; we have been unsuccessful in securing a contract for more than six years. We could have closed the program and asked our physicians to move. However, most of our physicians have children in school as well as houses that are worth far less than they were two years ago, if they could sell them. Bottom line, this decision offers our physicians a chance to join a national company that has proven successful in major metro markets without exclusive contracts. This allows our Baywood physicians to keep their jobs in the hospital they work in, and allows Apogee, and our more than 300 other physicians, the opportunity to focus on what we do well, providing exclusive hospitalist services to our partner hospitals.

I am sure that many of you will be shocked by this announcement. However, please know that it was a decision we did not make lightly and one that I sincerely feel is in the best interest of our Baywood physicians and their families.

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