Return of the PHO?

This article appears in the March 2012 issue of HealthLeaders magazine.

One common complaint about the transition from fee-for-service reimbursement to value-based schemes is that such groundbreaking changes cannot be done overnight, and must be phased in. That's a problem for healthcare organizations that seek to be forward-thinking yet must continue to exist under current rules. A common refrain is that senior leaders feel as unsettled as a person with one foot on the boat and the other foot on the dock.

But there may be a way to bridge that transition through vehicles such as a the physician hospital organization, which many hospitals and health systems formed under capitation more than a decade ago, and many subsequently discarded as HMOs gave way to preferred provider organizations and as government payers continued to use fee-for-service reimbursement. However, the PHO, or at least something like it, is making a comeback as payers and the government make slow progress toward accountable care.

Commercial negotiation leverage
PHOs were developed in the 1980s as joint ventures between groups of independent physicians and hospitals or health systems as a way to pool risk and, in a key role that would signal their later downfall, offer more negotiating strength with payers. The PHOs were also expected to manage the continuum of care, and payers expressed a willingness to share some of the savings in utilization they were supposed to achieve.

But over time, many PHOs failed, largely because they were either unsuccessful in developing the technology and process infrastructure needed to manage utilization cost-effectively, or they broke down among infighting between the hospital and groups of physicians. They also faced antitrust scrutiny.

"The way they were classically conceived came along when HMO risk contracts were in vogue," says Marty Manning, president of Advocate Physician Partners in Oak Brook, IL, a Chicago suburb. Advocate operates one of the relatively few PHOs remaining from their inception in the 1980s and early '90s. "They would do credentialing, claims processing, some utilization management, contracting, and set fee schedules. Of course, the docs felt the hospital kept too much, and vice versa."

But most stumbled because they were constructed chiefly to gain negotiating might. The Federal Trade Commission subsequently essentially outlawed any PHOs that weren't demonstrating better quality, efficiency, and lower overall cost.

"If they thought of themselves as an HMO risk vehicle, then the product life cycle ran its course because most areas don't have those risk contracts anymore," says Manning.

They also fell out of favor as many physicians found ways to gain bigger pieces of the reimbursement pie by operating their own surgery centers, labs, and imaging centers. But many of those disincentives have withered as reimbursement for ancillary services operated by physician practices has been whittled away, as technology to help focus on care coordination has improved dramatically, and as the antitrust problems have been solved to the FTC's satisfaction. In fact, an FTC challenge to Advocate's PHO may have set the ground rules for a proliferation of future PHOs.

So why are many hospitals and health systems revisiting the structure as a way to better align the concepts of coordinated care with their independent physicians? Some never left, but many others are realizing that in a reimbursement system where hospitals' and doctors' financial fates are tied more closely together than ever, they have to work closely with their physicians, whether they are employed by the system or not. The PHO can serve as a platform to unify the care protocols of both employed and independent physicians. 

Recycling a relic?
It's helpful to get away from the vision of the PHO of the past. Manning says the new vision is a way for hospitals and physicians to begin to work together, with both employed doctors and those not ready to enter into full employment models.

"A PHO is a way to connect with the community-based physician practice model," Manning says. "Organizations dedicated to the employment model might see less value in a PHO than those who want a more pluralistic approach like we have chosen. The key is the value that can be created by truly integrating or engaging with physicians."

This is why the integration factor is so important.

Iowa Health System, which  includes 15 hospitals across Iowa and Illinois and more than 800 employed providers, seeks that pluralistic approach, says Alan Kaplan, MD, the system's vice president and chief medical officer, who has been building a PHO-like organization there for the past two years. The clinically integrated network or CIN, he says, is a nonprofit corporation based upon improving quality, enhancing patient experience, and increasing the overall value of healthcare. It's part of the longer-term strategy of engaging physicians as the system enters into risk- and performance-based contracting.

"When I came here, my boss, Bill Leaver, IHS president and CEO, told me that my main job is to build an ACO."

In developing the ACO, Kaplan set about creating a CIN, which he says is taking place along with plans to integrate all of the owned physician practices at IHS under one structure. Physician alignment with IHS's employed groups began January 1, but Kaplan still needed a way to bring the area's independent physicians into the fold, because forming an ACO, the ultimate goal, can't happen without them.

"It's great that we have employed physicians, but two thirds of our medical staff is independent," he says. "They are our partners, and we cannot deliver care without them. So we have to engage them in our efforts to improve quality and create a better patient experience."

A critical part of that strategy is the CIN, he says, because it provides the platform for independent and employed physicians to work together to develop a care management infrastructure. One potential difficulty is that the CIN is not a joint venture—it's owned entirely by IHS.

To make the organization more physician-driven and welcoming of independents, the board of directors delegates significant authority to an operating committee composed of independent and employed physicians and physician group leaders. Only two IHS executives, Kaplan and Kevin Vermeer, the system's chief financial officer, sit on that committee.

More than physicians
"Today's payment system doesn't support care management, but in the future, it will be demanded," says Kaplan. "We created our integrated care organization—which is more akin to an independent practice association than a PHO—around a platform that focuses on quality improvement, not contracting."

The ICO that IHS is developing will administer value-based contracts throughout the health system's network, but will not operate as a contracting entity for fee-for-service.

"What success looks like is improved quality, enhanced patient experiences, and lower overall healthcare costs," Kaplan says. The ACO that IHS is developing will include physicians in key leadership positions because "the physicians are the heartbeat of the ACO."

But in building an ACO, the infrastructure to create value often spans beyond the direct physician sphere to include IT-enabled clinical analytics, call centers, palliative care, home health, and skilled nursing.

Kaplan and others are busily putting these pieces together, which included hiring additional staff and reshuffling some internal talent.

"We didn't have trained people for care management," he says. "It's a lot of work to  build the right care management teams and develop their skills so we can build a network."

A pathway to employment
As usual, a burning platform is needed to lead change, Kaplan says. In his market, it was healthcare reform leading to likely CMS shared savings and commercial ACO contracts. But he questions whether the CIN will be a permanent fixture in the healthcare landscape. In this climate, even the definition of hospital seems up for debate.

"It's a comeback for the concepts of the original PHOs," he says. "These are bridging strategies, which allow us to work together. If external factors support CIN structures in the future, they may last."

But Kaplan acknowledges that environmental forces encouraging greater levels of coordination to improve quality and lower costs may end up forcing increasing numbers of healthcare organizations to adopt the integrated delivery system model.

"The ICO is a vehicle whereby our independent physician partners can remain independent, but if the market changes and we need tighter alignment, we will be in a better position to migrate there," Kaplan says. "I believe ultimately that's what's going to happen."

Even Advocate's Manning, with his perspective as part of perhaps the oldest and most vetted PHO in the nation, says the PHO role is the transitioning structure that will increasingly serve as a nerve center for dialogue about improving clinical outcomes, efficiency, and patient experience.

"It has its own culture and a sense of citizenship, but what is the meaning of independence in an accountable care world?" he asks rhetorically. "At the same time, most of the physicians who become employed are currently members of our PHO. Almost exclusively here, any physician who becomes employed starts in the PHO. But it doesn't matter if you're employed or private practice. The only thing that matters is performance."

Reprint HLR0312-4

This article appears in the March 2012 issue of HealthLeaders magazine.