When Washington state approved a new capitated Medicaid program last year, Highline Community Hospital in Seattle cobbled together a physician-hospital organization and joined an insurance plan known as Healthy Options, effective Jan. 1.
After three months of participation in Healthy Options, Highline's PHO has realized $350,000 more in savings for the hospital and physicians than it would have under the old fee-for-service program in the same period a year ago, said Bert Colburn, Highline's assistant administrator. The 226-bed facility had net income of $1.7 million on $116 million in gross revenues in 1993.
Much of the PHO's early success in Healthy Options is a result of its physicians' ability to reduce utilization of Highline's emergency department services by many of the 7,000 enrollees under their care.
"The emergency physicians have done a good job of referring patients to the primary-care physicians," Mr. Colburn said. That's important, because Healthy Options pays the PHO a lump sum each month based on enrollment to provide care. That payment equals about $130 per enrollee per month, or a total of $10.9 million for all of 1994.
"We're beginning to see hospitals and their medical staffs move beyond the rhetoric to develop collaborative organizations with common goals," said Allan Fine, Chicago-based vice president and director of the Center for Managed Care of Quorum Health Resources, the managing and consulting unit of Quorum Health Group, Nashville, Tenn.
Mr. Fine surveyed some 400 acute-care hospitals with more than 200 beds chosen at random by MODERN HEALTHCARE. The survey sheds some light on factors that affect the creation and development of new integrated organizations by many hospitals and physicians in preparation for health reform.
Hospitals are forming such ventures with physicians in hopes of protecting or boosting their share of local markets that are being roiled by managed care and other cost-containment efforts. Many of these new organizations are competing with health insurers or brokering their networks to expansion-hungry health maintenance and preferred provider organizations.
According to the survey, 43 hospitals-45% of respondents-said they have formed an integrated delivery system in the last 12 months.
Also, the survey found that 58 integrated systems were expected to be created within the next year.
Fixed budgets.About one-quarter of the hospitals that responded to the survey said their PHOs had at least one contract based on capitation. Under risk-based programs such as Healthy Options, physicians and hospitals must find ways to provide appropriate specialty care as well as primary care on fixed budgets.
About one-third of Highline's group of more than 100 physicians are involved in primary care, an average apportionment of network physicians, according to the survey. Primary care includes pediatrics, internal medicine and family practice.
"Healthy Options was the catalyst (for the PHO) because we had to bid on the contract as one unit and only in capitated form," Mr. Colburn said.
The PHO is learning how to control its costs "as we go along," he said. To accomplish that, Highline's PHO divided its 36 primary-care physicians into five family practice groups to better compare how well each group refers enrollees to specialists.
The hospital's physicians monitor their own performance through peer utilization review and practice protocols that have been developed internally. The PHO also scans third-party payment reports to find ways in which its physicians can improve their performances, he said.
Capitated payment programs are becoming a familiar staple of state-supported programs such as Healthy Options. Risk-based Medicaid programs have been growing at a 12% clip for the last five years, according to HCFA's Office of Managed Care.
Enrollment in various managed-care-based Medicaid projects recently climbed to 5 million indigent and uninsured people nationally, the HCFA office said. Some 32.9 million Americans are eligible for Medicaid. Another 2.6 million of 36.3 million elderly Americans are enrolled in some 200 Medicare risk programs that have sprung up around the country.
Managed Medicare.Mr. Colburn said the PHO is planning to enter another managed-care venture involving Medicare that's offered by Preferred Health Resources, a local unit of PacifiCare Health Systems.
Cypress, Calif.-based PacifiCare's Medicare product, which is called Secure Horizons, puts providers at financial risk by placing them on a fixed monthly budget based on enrollment. In King County, that amounts to $363.49 per enrollee per month. Secure Horizons is the nation's largest Medicare health maintenance program, covering 318,000 enrollees.
The most common forms of integrated systems under development around the country involve a pooling of capital and some sort of shared governance system, Mr. Fine's research showed. Depending on the governance structure, they most often are called management services organizations, group practices without walls or simply PHOs.
"These organizations aren't static," Mr. Fine said. "The needs and wants of physicians, along with changes in market demands, will influence their future development."
For example, Charleston (W.Va.) Area Medical Center created a PHO called CareLink in 1992. CareLink's eight-member board includes four hospital members and four members of Charleston Health Associates, an independent practice association formed several years ago in anticipation of the development of insurance alternatives to fee-for-service.
Of the physician representatives on the board, one must be a primary-care practitioner, said John Marks, CareLink's executive director.
Long-term strategy.About 16% of the respondents to the survey said their new integrated delivery systems absorbed or replaced an IPA. "CareLink represented a long-term strategy for creating a system to maintain links between the medical center and its medical staff," Mr. Marks said.
Some 350 physicians-about three-fourths of the hospital's medical staff-are members of CareLink. The PHO was established to improve physicians' mix of payers and to help boost their income.
The PHO improved cash flow for many primary-care physicians and provided access to well-heeled private and commercial payers, he said.
After the hospital and physicians created CareLink, it was offered to some of the largest commercial insurers operating in West Virginia, such as the Prudential Insurance Company of America, Newark, N.J.; and Aetna Life and Casualty Co., Hartford, Conn. Their client lists include the local work sites of Bell Atlantic Corp., Philadelphia; and Union Carbide Corp., Danbury, Conn.
Such a strategy met the needs of payers that were shifting into managed care, yet it involved no financial risk because the PHO usually was paid a discount off regular charges much like a PPO. "Lots of employers were anxious about moving from free choice to more restrictive products," he said.
To prepare for the future, the PHO also developed an all-inclusive hospital, physician and ancillary fee structure for capitated contracted services.
Growing enrollment.CareLink had about 20,000 enrollees in 1993, compared with 11,000 in 1992, according to a survey of provider-sponsored HMOs and PPOs by MODERN HEALTHCARE (May 10, 1993, p. 26).
"Since then, employers have become more sophisticated and better informed about their healthcare options," Mr. Marks said. "The need to be more proactive is probably more intense today than two years ago, when the PHO was developed," he said.
As a result, the hospital has decided to seek an HMO license and compete head-on with insurers on a capitated basis for employer groups of fewer than 100 workers, as well as government payers.
"We know what our local market opportunities are," Mr. Marks said. The HMO will be able to negotiate from a strong base, as Charleston Area Medical controls as much as 65% of the local market for specialty medical care, Mr. Marks said.
The HMO also hopes to beef up its primary-care services. "We're looking at ways of supporting the growth of primary care" through more aggressive recruiting, primary-care physician buyouts and other methods of bolstering family-practice services, he said.
Plans call for the PHO to be absorbed by the HMO, which will continue to monitor medical utilization and measure quality outcomes internally and through third parties. The hospital will provide sales, administration and other financial support at least until the HMO is launched.
The HMO "represents a substantial change for employers, beneficiaries and providers," Mr. Marks said. "Things are spinning quickly here" toward managed care and direct relationships with payers, he said.
Some 8 million people-about 9% of Americans living in the South-are enrolled in HMOs, according to industry reports. West Virginia has 75,000 residents enrolled in HMOs, or about 4% of the state's population.
Not for everyone."It would be a mistake to assume that PHOs are panaceas simply because many organizations seem to be heading in that direction," Mr. Fine said. "Hospitals and physicians need to examine the competition carefully."
For example, Loyola University Medical Center in Maywood, Ill., hasn't decided whether a PHO is necessary to accomplish its goals, said Paul F. Primeau, associate vice president for healthcare system development. "The market is changing slowly" because of uncertainty over the future direction of healthcare reform, he said.
Loyola recently established a department of family medicine and likely will continue to recruit primary-care physicians to the faculty of 570-bed Foster G. McGaw Hospital on the medical center campus, he said.
The university's short-term goal is to create a "balanced faculty," he said. Right now, that balance is about 4-to-1 in favor of specialists over primary-care physicians. "We believe a 50-50 goal is not unreasonable," Mr. Primeau said.
Opportunities to gain control of developing markets were among the lures for the creation of Mississippi Health Partners, a PHO organized by Mississippi Baptist Medical Center and St. Dominic-Jackson Memorial Hospital, both in Jackson, Miss.; Rankin Medical Center, Brandon, Miss.; and some 350 of the hospitals' physicians.
The six-month-old PHO already has contracts with three local self-insured companies representing some 1,000 beneficiaries as well as three managed-care insurers, said Mark A. Reitan, assistant executive director of Mississippi Baptist.
That's not the only benefit of creating an PHO. "We have a true window of opportunity to work in partnership with physicians and managed-care providers," he said.
"We want to focus on outcomes, not just on cutting prices," he added. "Employers are getting interested in what we're trying to say about reducing medical costs."
Reports that show customers how providers have added such value to their care are under development by the PHO, Mr. Reitan said.
Room to grow.Less than 1% of Mississippi's 2.7 million residents are covered by managed care. That means there's still time for providers to work together through the PHO to develop competitive premiums and provide the appropriate levels of care for consumers before the "crush of HMO discounting" distorts the market, he said.
However, the success of a PHO depends on strong physician leadership, Mr. Reitan said. "Physicians want to provide high-quality care, but they realize there will be increasing pressure to reduce their charges," he said. The PHO was created when five local physicians gave the hospitals the permission to form it.
Physicians provided 50% of the roughly $1 million in capital needed to establish the PHO. Some 100 primary-care physician members each contributed $1,100; more than 200 specialists provided another $1,500 apiece. That investment was matched by the three hospitals.
The organization is controlled by two classes of voting stock. Physicians control 10 votes, while the hospitals have another six votes. Most issues require a simple majority of each voting class, Mr. Reitan said.
