It was just four years ago that the physician-hospital organization affiliated with 120-bed Chandler (Ariz.) Regional Hospital was being cited by healthcare consultants as an archetype to be copied by other hospitals across the country that wanted to cozy up to their physicians.
Now those consultants are pushing other hospital cure-alls; the Chandler PHO, known as Spectra Health Systems, went out of business in January; and the parent hospital, East Valley Regional Medical Center, is seeking a capital partner.
The situation should warn other hospitals that may be tempted by the latest industry fad.
"Many PHOs are tenuous propositions. Clearly, the hospitals were providing much of the money and the management expertise," said Thomas Gorey, president of Policy Planning Associates, a Crystal Lake, Ill.-based medical consulting firm.
Gorey's firm decided in the past couple of years to change its name from PHO Services and to refocus its core business. "We weren't getting all that much PHO business to begin with," he said.
While operating as PHO Services, Gorey authored a report- commissioned by the American Medical Association and three state medical societies-profiling eight PHOs. It was released in 1994.
Gorey said he thinks all the PHOs profiled except Chandler remain in operation.
Formed in 1985 as Chandler Joint Enterprise, the Chandler PHO was one of the first in the nation, created to address a changing managed-care market. The partial risk-bearing PHO was financed by the hospital, with the physicians repaying half the estimated $200,000 start-up costs over the first several years of operation. It was replaced in 1992 by Spectra, a full risk-bearing PHO, officials said.
Kaylor Shemberger, chief executive officer of Chandler Regional's parent company, East Valley Regional Health System, said Spectra had lost money for the past three years. He would not disclose figures but said they were "sufficient to make a change."
"What was lacking was sufficient expertise on the physician side to manage business activities. We were at risk with the doctors on a 50-50 basis, but without sufficient systems in place and the leadership to manage in a capitated environment," added Shemberger.
About half its physicians agreed to form an independent practice association called Integrated Physicians of Chandler, which now is being managed by Birmingham, Ala.-based MedPartners. The remainder broke off and formed another IPA called Integra Physicians Network. Its president, Clifford Goodman Jr., did not return phone calls seeking comment.
In the deal with MedPartners, Integrated Physicians of Chandler assumed 40% of the risk-sharing arrangement, while MedPartners and the hospital each took on 30%. The previous 50-50 split was out of line, Shemberger said.
Spectra is the second PHO in Arizona to cease operations this year. St. Joseph's PHO, an affiliate of St. Joseph's Medical Center in Phoenix, went out of business in May (March 16, p. 42).
However, the failure of the two PHOs does not necessarily mean all of them fail, said John Rivers, president of the Arizona Hospital and Healthcare Association. He observed that two other PHOs in the Phoenix area-Lutheran PHO, an affiliate of Mesa, Ariz.-based Lutheran Healthcare Network, and Lincoln Primary Physician Group, an affiliate of the John C. Lincoln Health Network in Phoenix-are doing well.
But Rivers added that PHOs were never considered a long-term solution to counteract the growing clout of HMOs.
"No one's ever worshiped at the PHO altar here. Many of our members have predicted they would evolve into another contracting vehicle and go away," he said.
The system itself is profitable; East Valley posted net income of $2.1 million on revenues of $77.6 million last year. But Shemberger said its $80 million debt and continuing need for capital improvements to serve the rapidly growing community mean it must find a partner.
Among the systems expressing interest are San Francisco-based Catholic Healthcare West; Phoenix-based Samaritan Health System; Lutheran Healthcare Network; Brentwood, Tenn.-based Vanguard Health Systems; and Santa Barbara, Calif.-based Tenet Healthcare Corp, he said.
Shemberger said the search process, initiated about 18 months ago, is too preliminary to make guesses.
"We're going to be looking at all the players, and the various options for a relationship, such as an affiliation," he said.
Shemberger said he believes requests for proposals could be issued by East Valley's board by midsummer.