Physician-hospital organizations are suffering from a laundry list of problems, yet doctors in places like Odessa, Texas, and Billings, Mont., are putting their faith and money into the rapid formation of small, rural PHO networks.
Rural providers, many of whom are encountering managed care for the first time, say there is no inherent flaw in the PHO concept. Instead, they believe PHOs that have failed did so because of poor design and management.
While the newer rural PHOs face many of the same struggles as the first generation of PHOs, they also enjoy the luxury of developing without a managed-care gun to their heads.
The advantages of time and history will allow rural providers to create more successful PHOs, and more importantly, perhaps call the shots, says Mark Burzynski, the executive director of the Billings (Mont.) Physician Hospital Association, a PHO made up of 150-area physicians and St. Vincent's hospital.
"In rural areas where (managed care) is not predefined for you, you can define it for the community and set the standard," Burzynski says. "Physicians have an opportunity to define it for their marketplace, take advantage of that before somebody imposes their definition on them."
Taking the lead, however, also means being the first to encounter obstacles. The BPHA is just one of several rural PHOs recently investigated by the Federal Trade Commission for possible antitrust violations. With so few hospitals and physicians in smaller markets, it doesn't take long for PHOs to flirt with antitrust problems, says executive director Burzynski. There is just one other hospital in Billings.
After a five-year investigation, the FTC issued a consent decree in January 1997 limiting the organization to a "messenger-model PHO." According to Burzynski, the FTC has clearly defined two types of contracting initiatives for PHOs. One is risk contracting, in which physicians assume a substantial risk by accepting at least 20% of capitated revenues. Everything else, including discounted fee-for-service, is no-risk.
The FTC claimed that the BPHA had assumed the role of negotiating terms and conditions for otherwise competing physicians in no-risk contracts. Instead, the BPHA, and most other rural PHOs, now act as messengers that carry contractual proposals back and forth between participating providers and healthcare purchasers. Providers can choose independently to accept or reject any contract.
Such antitrust concerns and low managed-care penetration (in this case, only 13% of St. Vincent's $180 million in revenues) have made some rural providers hesitant to jump on the PHO bandwagon. Perhaps the biggest challenge facing PHO cheerleaders is convincing traditionally independent practitioners they need to partner period.
"On first blush, it's not immediately obvious that a rural hospital and its physicians need to develop a PHO. So in many cases, they don't," says Doug Hough, a partner in the Northbrook, Ill.-based consulting firm Argus Arista.
Yet, according to a survey by the accounting and consulting firm Deloitte and Touche, rural areas experienced a 69% increase in HMO contracts in 1996. In addition, approximately 8% of the rural population under 65 is enrolled in HMOs, according to the University of Minnesota Rural Health Research Center. As HMOs continue to penetrate rural areas, and more of the Medicare population moves into managed-care plans, physicians will find themselves increasingly dealing with such contracts, Hough says.
More immediate motivation will come from the many large employers that dominate second-tier cities. A small city may be dependent on a single employer, and many of those large companies are increasingly negotiating risk contracts.
"Physicians and hospitals often misunderstand the level of risk at their door already," says Kim Byas, president of the Evanston, Ill.-based consulting firm Kailo Alliance.
Portland, Maine, for example, is home to several large naval shipyards. The Maine Medical Center Physician Hospital Organization, the collaboration of more than 480 physicians and the Maine Medical Center, was formed to contract directly with these large employers and also to deal with the growing managed-care presence.
"It made more sense to participate in the change to managed care as part of a collective organization, such as a PHO, rather than having the physicians and hospitals deal with it individually," says Peter Wood, the PHO's executive director. "When managed care hits that critical mass, some say when it's 25% of a physicians' practice, it's too late, because you've already lost control of the environment."
Once rural providers are philosophically on board, they face the more concrete challenge of capitalization. According to Randy Killian, executive director of the American Association of Integrated Health Delivery Systems in Glenn Allen, Va., it takes a minimum of $150,000 to $300,000, and as much as a $1 million, to launch a rural PHO. "If you have a small number of physicians and a freestanding hospital, there's not a lot of extra money floating around in the system.," he says.
At the Permian Basin Healthcare Network in Odessa, Texas, the 150 participating physicians each paid an initial $5,000 assessment, but Executive Director Scott Taylor says that may not be enough. "We have virtually no source of income other than new physicians joining." The PHO's hospital partner, Medical Center Hospital, provided a $25,000 start-up grant, but it has no other financial investment. The hospital does, however, pay the salaries of Taylor and his staff.
At the Billings Physician Hospital Alliance, the 150 participating physicians pay an initiation fee of $100 and annual dues of $100. St. Vincent's matches all physician contributions. In Portland, primary care physicians pay $500 and specialists pay $1,000 in membership fees. "There are fewer people to spread the costs over, but the good news is the costs are also going down. They are going down because we've all done this before -- the attorneys and consultants, that is," says Argus Arista's Hough.
While it previously took months to develop a PHO, Hough says he recently put one together in just six weeks. Rural PHOs have paid close attention to the struggles of their predecessors and can avoid repeating mistakes, he says.
"In more mature markets, they're going from no integration whatsoever into high degrees of integration," Taylor says. "They haven't had the luxury of being able to watch what other areas in the nation have done or how the market has developed in other areas."
Perhaps the most important lesson Taylor learned is the issue of governance. The Permian Basin Healthcare Network has a nine-member all-physician board of directors that has authority to make day-to-day management decisions. Although there is no hospital representation on the board, the hospital administration does have veto power on major contract decisions, Taylor says.
According to Killian, hospitals controlled early PHOs, but physician participation in today's PHOs is growing.
"There are a lot of physician organizations that were formed when this mad rush came across the country saying, 'You've got to form, you've got to have an entity, you've got to circle the wagons and protect yourselves,' " says Randy Garner, a consultant with Millennium Health, a Spartanburg, S.C., consulting firm. Garner recently helped about 350 physicians and nine hospitals in rural South Carolina form a super PHO.
"In a lot of the rural areas there's not a lot of managed care penetration, but it's coming," Garner says. "Instead of being behind the eight-ball, (providers) should begin to look at the opportunities that lie ahead."