Though several troubled physician-hospital organizations have called it quits in the past two years, financially stable PHOs are continuing to expand, new industry data show.
The number of PHOs operating nationwide slipped to 908 this year from 922 in 1998, according to data released last week by the Managed Care Information Center of Allenwood, N.J. However, the number of hospitals and hospital systems taking part in PHOs more than doubled during the same period, to 2,300 from 1,100.
Hospitals and physician practices typically band together to form PHOs so that they can save on administrative costs and wield greater clout when negotiating managed-care or discounted fee-for-service contracts.
But, PHOs in many regions have fallen far short of their mission, said Bruce Johnson, a consultant with the Denver-based Medical Group Management Association.
"PHOs have been failing quite regularly because, for the most part, they've had incredible problems in providing value for their two (constituencies)," Johnson said. "Many have been largely unsuccessful in winning contracts" and holding down costs, Johnson said.
A group of physicians and a health insurer are challenging that notion in North Dakota, where they've built and opened a co-owned hospital (See story, p. 22).
Almost two-thirds of PHOs are found in only 15 states, none of which are in the Pacific or Mountain regions, said Gwen Lareau, special projects director at the Managed Care Information Center.
The five states with the most PHOs are Texas, with 86; Illinois, with 63; Pennsylvania, with 54; Ohio, with 48; and Georgia, with 44.
PHOs tend to be most viable in towns with two or three hospitals and 20,000 to 150,000 residents, Johnson said. Larger states, such as Texas and Illinois, have several communities of this size.
The East North Central and South Atlantic markets account for the most PHOs, or 21.4% and 17.6%, respectively. The Pacific region has the smallest percentage, or just 4.7%.
It's no surprise that the West, particularly California, isn't embracing PHOs as much as other areas are, said Richard Sinaiko, president and chief executive officer of the Los Angeles-based Healthcare Practice Enhancement Network.
As managed care evolved in California, capitation became much more dominant there than in other parts of the country.
"And with capitation came large multispecialty groups and (independent practice associations), where physicians grouped together without hospitals," Sinaiko said. "The dynamics were completely different."
A number of PHOs were launched in California during the early 1990s, but several have since thrown in the towel because of rapidly rising medical costs and low reimbursements.