March 1995

POs and PHOs—A Response to Managed Care (Part 2)

by Corena Peña Andorfer, Consultant for Health Policy

Over the last few years, skyrocketing health care costs have triggered a decline in traditional fee-for-service reimbursement and an increase in health maintenance organizations (HMOs) and managed care plans. This trend means that hospitals’ and physicians’ fees—and services provided for the fees—are undergoing increasing scrutiny; it also means that primary care is favored by reimbursers (government and insurers) over more expensive specialty care.

In response, to maintain a certain amount of financial and clinical control over the practice of medicine, physician organizations (POs) and physician-hospital organizations (PHOs) have evolved. Through such organizations, physicians have improved negotiating power with managed care plans and, as groups, they even may have the wherewithal to accept the financial risk of providing managed care themselves—that is, agreeing to provide necessary care for a given amount of money; hospitals benefit by joining with physicians to offer a full continuum of patient care.

This Bulletin is the second of two on POs and PHOs and focuses on issues of governance, risk, and regulation.

Governance

In the past, physicians have been independent, working alone or in small group practices, with little interaction among specialties. Physician-hospital relationships traditionally were strained, as each vied for control of patient care. The changes in health care in the past few years, however, have made closer working relationships practical, and this development is reflected in PO and PHO organization and governance.

An example is the Jackson (Michigan) Physician Alliance. Andrew Krapohl, M.D., its president, notes that this PO was initiated by specialists, yet it is not structured around specialists but around primary care physicians. In fact, the organization’s bylaws limit specialist membership to 50 percent, and Dr. Krapohl points out that four of the seven board members are in primary care. He reports that the organization’s goal is to have the membership comprise at least 60 percent primary care physicians. This means that as the PO faces such issues as credentialing (establishing standards for organization membership), organization management and direction, and quality of care, the primary care practitioners will have the larger voice. According to Dr. Krapohl, specialists were willing to make this concession because they feel it to be in the best interest of the profession and the organization.

For PHOs, successful governance means working to diminish the differences of the past. Peter Schonfeld, group vice president for the Michigan Hospital and Health Association and former chairman of the board for Allegiance Corporation (an Ann Arbor PHO) and vice president for managed care for Catherine McCauley Hospitals, notes that "initially, there was a sense of mistrust between hospitals and physicians, each trying to protect their piece of the pie. But, over time, we have built trust and confidence in each other . . . physicians see hospitals acting responsibly and working toward the common vision, and hospitals see physicians doing the same." Schonfeld believes that a key factor in Allegiance’s success is a code of ethics provision that guides members to discuss contentious issues prior to a board meeting, so that no one will be publicly embarrassed.

Allegiance Corporation also has community representation on its governing board. The board’s ten seats are allocated as follows: three for physician representatives, three for hospitals, and four for the community. Thomas Summerill, Allegiance president and CEO, states that "we felt that it is important for the community voice to be represented."

Assuming Financial Risk

Although many POs and PHOs in Michigan still are getting off the ground, a few already are dealing with the question of whether or not to assume financial risk for patient care. The rewards can be significant, but so can the losses.

Mr. Schonfeld notes that Allegiance initially lost several million dollars after offering a capitated program through Care Choices, due in part "to the fact that health care professionals did not change the way in which they provided health care. They provided health care as if they were still on a fee-for-service basis, without adjusting utilization to a lower-cost setting." Mr. Schonfeld observes that costs were particularly high for mental health services, chemical dependency treatment, outpatient radiology, and outpatient laboratory and pharmacy services. "These are areas in which the costs traditionally are ignored by physicians, but when you are held at risk for these costs you have to manage it." Allegiance since has developed systems to provide physicians with information on their practice patterns; this apparently has paid off—the organization made more than $4 million in 1993 and $7 million in 1994.

Regulation

As the popularity of POs and PHOs increases, antitrust, taxes, and regulation issues likely will garner attention. Currently, federal and state antitrust laws prohibit "contracts and other agreements that result in an unreasonable impact on competition" and "monopolization and attempts to monopolize." Antitrust violations include agreement to fix prices or divide markets, and, in certain instances, group boycotts and "tying" arrangements (i.e., setting as the condition for a purchase/sale the purchase/sale of other goods or services). As a PO or PHO gains strength in any given community, it is possible that some critics will cry foul.

Another concern is hospital tax-exempt status. To maintain 501(c)(3) status, a hospital must maintain standing as a charitable organization and not inordinately benefit from investment in a PHO. Although a recent federal court case appears to give hospitals some leeway on this issue, it likely will be of concern for some time.

Finally, government regulation of POs and PHOs, particularly as they assume financial risk, is becoming the topic of some discussion. According to Fran Wallace, director of the Health Benefit Plans Division for the Michigan Insurance Bureau, POs and PHOs that meet the criteria outlined under section 333.21042 of the Michigan Code of Laws are regulated by the Insurance Bureau and the Michigan Department of Public Health and, as such, must be licensed and meet all of the standards applied to HMOs.

This means that although the statute does not specifically identify POs and PHOs, if an entity contracts directly with the public (not through an established HMO) in exchange for a fixed payment and is organized so that providers and the organization are, in a manner similar to a HMO, in some part at risk for the cost of services, the entity must be licensed. She adds that a PO or PHO that accepts risk via an HMO does not have to be licensed, but its activities must be monitored by the HMO with which it contracts, and this is a factor in the HMO’s licensing.

Conclusion

To survive in today’s changing health care market, physicians are expected to deliver care more efficiently, and, in addition, deal with hospitals, businesses, and insurers. Hospitals are expected to expand their focus beyond specialty care and be a part of meeting a patient’s total health care needs. POs and PHOs are an increasingly popular way for providers to meet these challenges.