The creation of a formal physician subgroup is critical to the success of a physician-
hospital organization, says a new national report on PHOs, and it doesn't hurt to throw a little money physicians' way, either.
The 103-page report is the result of a 10-month study of PHOs underwritten by the American Medical Association and state medical societies from Illinois, Indiana and Michigan. PHO Services, a Crystal Lake, Ill.-based consulting firm, conducted the study on behalf of the sponsors.
The sponsors released the report on June 20. MODERN HEALTHCARE disclosed the existence of the ongoing project last fall (Nov. 29, 1993, p. 44).
Physician-hospital organizations are newly created legal entities put together by a hospital and a group of physicians to jointly pursue contracts with third-party payers and employers. It's not known how many PHOs are in operation, but most experts agree that the development of PHOs is accelerating because of pressure from payers to negotiate with providers for a full range of medical care. The pace also is accelerating because of hospitals' desire to corral as many physicians as possible under the same corporate umbrella in preparation for reform.
In addition to a telephone survey of about 40 PHOs, the project researchers conducted case studies of eight PHOs in cities across the country (See map).
Physician component.The case studies found that the PHO sponsors felt that the existence of a formal physician component, or subgroup, of the PHO was essential to the PHO's success. The subgroups often are referred to as physician organizations, or POs for short. Six of the eight PHOs examined had PO components.
"Repeatedly, in discussions with physician and hospital representatives of PHOs that had a PO, the point was made as to the essential role played by the PO in all phases of PHO planning, development, operations and policymaking," the researchers said.
Many of the PHO executives interviewed by the researchers said POs served an important role specifically in the following areas:
Unifying the physicians.
Providing a structure and process for information sharing and policymaking.
Fostering physician consensus-building and decisionmaking.
Presenting a unified front in discussions with hospital representatives.
Enhancing the ability of the PHO to negotiate with payers.
All that's great as long as hospital sponsors get the right physicians, and the report suggests that hospitals are more than willing to open up their wallets to make sure that happens.
The researchers found that all of the eight PHOs examined were structured as 50-50 joint ventures between the hospital and the physicians. However, in none of the cases did the physicians initially contribute 50% of the PHO's start-up costs and capital needs.
"Although the specific details varied from PHO to PHO, in each there was some loan, letter of credit or other arrangement by which physicians could pay back their share of the initial capitalization over time," they said.
Expenses. The initial expenses associated with creating a PHO primarily were spent on consulting and legal fees, and those costs ranged from $50,000 to $150,000, the report said.
The two major expenses facing the PHOs were the development of an information/claims processing system and the ongoing expense of maintaining a PHO administrative staff. Those expenses varied widely by the PHOs in the report. One PHO, for example, invested nearly $1.8 million in an information/claims processing system.
Also noted in the report was hospitals' continued generosity in paying PHO physicians.
The researchers found that most of the PHOs paid their physicians on a fee-for-service basis no matter what type of payment arrangement the PHO had with a payer.
Fee-for-service payments typically were based on a fee schedule, and payments had portions withheld for PHO expenses.
"Currently, if physicians are `at risk' in PHO arrangements, it is typically through the use of withholds," the researchers said. "However, most PHO representatives were not completely satisfied with withholds and agreed that, over time, mechanisms will be implemented to provide individual-based physician incentives."
Hospitals, meanwhile, were paid in a variety of ways by their PHOs. The methods included per-diem payments, payments based on DRGs and capitated payments.
"Although per-diems were the most frequently used hospital payment mechanism, most of the PHO representatives indicated that, as with physicians, hospitals would be accepting more and more risk over time, first through case-payment rates and eventually through fixed, per-member, per-month payment," the report said.