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Common PO mistakes

By Howard L. Peterson

To no one’s surprise, physician organizations continue to form under a sponsorship of many, varied organizations. Hospitals, physicians themselves, public corporations, medical societies, insurance companies and private investors have sponsored the creation of physician organizations. The organizations operate under many generic names: IPAs, PHOs, group practices without walls, professional corporations, closed panel employment.

As different as these organizations are, their success or failure will be impacted by the same characteristics and variables of performance.

Sadly, early indications are that most physician organizations will fail for what appear to be predictable reasons: they are unclear about the business they are in and the parameters of performance, the individual physician expectations and goals of the organization are contradictory, the economic plan on which the organization was founded cannot be sustained, and the organization lacks effective governance.

Most physicians are attracted to these new physician organizations for their promise to protect or enhance personal compensation. However, the sponsoring organizations’ goals are often very different. An insurance organization is motivated by maximizing the number of insured lives and retention of premiums for profit. For the insurance company, a physician organization represents the means to control patient care costs associated with a given insured population. It is also a marketing tool to restrict access to quality physicians only for persons who use their insurance products.

The hospital’s motivation to form physician organizations has most often been the preservation or growth of inpatient volumes or the capture of ancillary and treatment services. In this case, the relationship with the providers is a means to an end, not a core of business itself.

Sponsoring organizations often have business objectives contrary to the interests of physicians in the organization. A public company invests to create profits for its stockholders. Unavoidably, this profit motive comes in direct conflict with the levels of compensation to physicians.

A medical society serves as the advocate for all physicians who are its constituents. However, the very competitive nature of the health care marketplace requires that the constituents of the medical society compete with each other for shrinking health care dollars. Further, the society’s advocacy role compromises its ability to be selective regarding physician participation in their network on parameters of cost and quality.

Various economic facts of physician organizations contribute to their poor performance. Frequently, the initial economic arrangements made when a physician practice was acquired are both irrational with respect to the true value of the practice and unsustainable with respect to the future performance of the practice. Usually, the prevailing logic for a hospital in making acquisitions is that profits from inpatient volumes and ancillary services will more than pay for the purchase price and compensation arrangement. However, the speed by which inpatient admissions and lengths of stay have declined, have defeated this logic. There is no realistic opportunity to achieve a rate-of-return on historical purchase prices and, therefore, it is not possible for hospitals to continue their course of acquisition. Often, acquisition is halted by the growing scrutiny of the governance of these organizations.

Often, compensation paid to the physician is not justified by practice performance. As the initial contract period ends (3 to 5 years) there will be great pressure to bring these arrangements into line with actual performance.

Most physician organizations have too little capital to build the infrastructure required to assume patient care risk or to sustain operating losses for the period of time necessary to achieve levels of profitability.

The manner of accounting for physician practice performance also compromises physician organizations’ ability to be profitable. Usually, ancillary revenues were part of the practices when purchased. Following the purchase, they are often accounted for elsewhere. In assuming patient care risk, profits achieved are not typically attributed to the revenue of the practice, though the practice may primarily manage the course of patient care

Another characteristic of physician organizations that undermines their probability of success is ineffective governance. The creation of many physician organizations by their own initiative is most often the product of a collective mentality. Therefore, these structures resist many essential decisions required in a competitive market, notably selection of providers on cost and quality.

Investor sponsored physician organizations are governed by the investors and the business principles which they have established. Investors often minimize the contribution to governance of the physician provider.

Despite these varied reasons why many physician organizations will fail, failure is not a certain end. To improve the chances that your physician organization will not be among those that fail, we offer the following list of characteristics which will typify the successful physician organization in the future.

• An established and effective governance structure allowing for clear focus on a well-conceived business purpose and an ability to be decisive regarding key performance issues.

• A comprehensive set of services in a geography which is directly reflective of how insurers compete in the marketplace.

• A strategy to achieve sufficient size in order to have economies of scale and sufficient leverage in the marketplace to get and retain contracts.

• A plan to be highly selective in the providers who continue to participate in the organization based upon quality, patient experience and the cost of the delivery of care to their patients.

• A financial plan which directly integrates and monitors the complementary nature of individual compensation, incentives and corporate goals.

• A formalized process by which the organization innovates in the delivery of patient care services and the manner in which it manages.

Howard L. Peterson is principal-in-charge of Health Care Services, East Region of Larson, Allen, Weishair & Co., in Philadelphia.

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