Problems at some physician-hospital organizations in Arizona show that PHOs may not be the prescription to cure managed-care woes.
Ninety-two percent of the hospitals in the country have a relationship with a PHO, says Randy Killian, executive director of the American Association of Integrated Healthcare Delivery Systems in Glenn Allen, Va.
"You would assume something increasing is therefore successful." Killian says. "It's the only entity I know where physicians and hospitals could come together as equal partners. We believe the PHO is a transitional model creating integrated delivery systems of the future, providing a continuum of care."
The formation of PHOs began in Arizona in the early 1990s as a way for doctors and hospitals to team up to create stronger negotiating power with managed-care organizations. A few had rocky start-ups, but overall things went pretty smoothly.
However, three of the Phoenix area's 12 PHOs -- St. Joseph's Physician Hospital Organization in Phoenix, Spectra Health Systems in Chandler and Arrowhead Physician Alliance in Glendale -- recently began having problems.
Late last year, St. Joseph's PHO notified its 662 physicians of a 15% reduction in reimbursement, representing $3.5 million per year. In response, two physician groups -- Cactus Children's Clinic PC and Central Phoenix OB/GYN -- walked away from their contracts with the PHO.
About 225 enrollees in the two groups -- 205 from Cactus Children's and 20 from Central Phoenix -- were notified by letter that the medical groups were ending their relationships with the PHO because of a "breach of contract" on the part of St. Joseph's. (Ironically, 155 of the Cactus Children's enrollees were employees of St. Joseph's.)
Michelle Gianopoulos, administrator at Central Phoenix OB/GYN, says that for the past year St. Joseph's PHO has violated the terms of its contract with the physician group by failing to pay claims in a timely manner.
"The contract says they should pay clean claims (those that include all information) in 60 days," she says, but St. Joseph's PHO has been taking longer, leaving the physician groups to carry the balance. That, coupled with the announced cut in reimbursements, gave weight to the groups' decision to break away. Don Anderson, director of St. Joseph's PHO, says the reimbursement reductions were necessary to improve the PHO's overall financial performance.
"In the Valley, PHOs have reduced their reimbursement to their providers by anywhere from 10% to 50%," he says.
The 171 physicians involved with Spectra Health Systems in Chandler also are frustrated with their PHO's decision to turn to MedPartners for risk contracting, a process that is now under way.
Kaylor Shemberger, president and chief executive officer of East Valley Regional Medical Center, the hospital component of Spectra, says the physicians didn't manage the care effectively.
"We said we can no longer face the potential of significant losses because of poor medical management," he says. "I think the fact is that the physicians -- the independent physician organizations -- just don't have the wherewithal to effectively manage in a managed-care environment. So that's why you're going to see the PHO relationship dissolve, and that's why you see the increase in professional practice-management companies like MedPartners."
Killian says physician practice management companies aren't the only answer to improving the PHO picture.
"You can get a good administrator to come in and do the same thing at much less cost," he says. "The way these physician practice management companies come in and make money is by simply managing accounts receivable. You can get a good administrator of a PHO to help you and not have to give it to somebody else."
Many doctors involved with the Spectra PHO have refused to sign the new MedPartners contract. The physician component of the PHO joint venture is called Integra Physicians Network.
Clifford Goodman Jr., M.D., president of Integra, has admitted his patients to East Valley Regional's Chandler Regional Hospital for 15 years. He does not want to sign on with MedPartners.
"I'm being put in a situation of having to go to other hospitals in my community because I won't sign a contract with a publicly traded company -- a for-profit company," he says. "I think a lot of physicians feel that way."
Another PHO in the Phoenix area, Arrowhead Physicians Alliance, is in the midst of dissolving its corporation, says Michael Alper, president of Meridian Health Care Management of Woodland Hills, Calif., which has had a management contract with the PHO.
Comprised of 375 physicians, Arrowhead had first considered seeking additional capital, restructuring debt and selling its assets.
Now many of the primary-care physicians from Arrowhead are joining Phoenix Baptist Primary Physicians Group, a related PHO run by Baptist Hospitals and Health Systems.
Alper says a successful PHO has strong physician leadership, effective governance, good capitalization, a competent and efficient administration infrastructure, reasonable reimbursement from payers and reasonable and appropriate compensation to providers.
"We had pretty much every one of those things not performing at maximum," he says.
David Coombes, president and chief executive officer of the National Association of Integrated Health Organizations, says PHOs that have been around a while are doing well, but notes that many of the younger PHOs quickly evolve into other kinds of things.
"Our estimation is on an annual basis, whether it's a PHO or an MSO or what have you, that we're seeing 30% to 40% just go out of business after a couple of years," he says, noting the estimate is not based on a quantifiable study but represents "a feel" for the situation.
Killian says physicians and hospitals need to stay on the same team for a PHO to be successful. The board should be made up equally of physician and hospital representation, with equal representation among specialists and primary-care physicians.
Reginald M. Ballantyne III, president of PMH Health Resources in Phoenix and speaker of the American Hospital Association House of Delegates, says it's important for physicians and hospitals to join forces to regain some degree of economic power.
"It can't be at all surprising that some PHOs have enjoyed success while others have failed," he says. "Scrutiny of these arrangements makes it evident that some were developed with much thoughtfulness and with parity among the participants, while others were slammed together with haste by those who feared being left out of the newest thing to hit the streets in healthcare."
Gerald Marshall, M.D., president and CEO of Premier Healthcare of Arizona, an HMO comprising nine hospitals and their affiliated physicians, says many problems with PHOs begin when they don't have full physician support.
"In general, anyone working in managed care would agree that PHOs as a generalization are not the most desirable structure (under which) to run a health plan," he says. Many physicians joining a PHO do so because they don't want to lose access to potential patients.
"As a consequence, they become a participant, and they can either hurt you by some passive-aggressive type of behavior or they can be blatantly anti-managed care and torpedo the system," Marshall says. "In order for any organization to be successful, you have to have all the parts pulling together with common goals and objectives."
Executives involved with other PHOs in the market cited some key ingredients they've found essential to a successful operation.
Chuck Lehn, director of Lutheran PhysicianHospital Organization in Mesa, attributes much of the PHO's success in the past nine years to the fact that the 650 physicians in the PHO make all the medical decisions.
"The trust relationship between the hospital and the medical staff has to be present when the PHO is formed and has to exist during the course of the business," he says.
Dan Coleman, president and CEO of the John C. Lincoln Health Network in Lincoln, says the Lincoln Primary Physician Group is successful because the 637-doctor PHO manages the administrative functions, rather than farming them out to practice management companies like MedPartners.
"We have physicians leading our medical management, and they're doing it successfully," he says.
Meanwhile, Jeff Terrill, president and CEO of 500-physician Scottsdale Physician Hospital Organization, says a PHO needs to have an ability to offer an integrated and broad access healthcare-delivery network. It also must have the ability to assume the risk and the management of the risk, he says, "which means they must have global capitation from the health plan and end up with a division of responsibility If you're taking the risk for it, the last thing you want is someone to manage it for you.
A successful PHO also must be able to continually grow its membership, Terrill says, pointing out that 50% of the enrollment in St. Joseph's PHO is its own hospital employees. In addition, he says, hospital employees are the worst kind of risk for an insurance company because they tend to overutilize healthcare services.
Ballantyne says he can't imagine an integrated delivery system that has not discovered a way to bring the principals together.
"It makes little difference what they're called -- PHOs or some other designation -- but it will continue to matter that the parties are successful in entering bona fide economic partnerships," he says.