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Characteristics of successful POs

By Howard L. Peterson

Most physician organizations have yet to reach a state of stability. Whether hospital-based or independent, IPA or management services model, many face governance issues, poor financial results and unsatisfactory performance of operating systems. Often the economic incentives for physician providers are misaligned with the factors which drive the organization’s finances.

If the prevailing arrangements in today’s physician organizations will not stand, then what will the next generation of these organizations look like? How can one assess the ability of these organizations to transition to a better set of arrangements?

Some of the distinguishing characteristics of future, successful organizations are clear: they’re found in the organizations that perform well today.

In the best performing organizations, compensation to the physician and other providers is closely tied to the organizations’ overall financial performance. Often a material portion of compensation is at risk until financial results are known. At the practice level two features distinguish well-performing organizations:

• Economies of scale are attained by physicians practicing together in groups of four to six. Any additional benefit of staffing and economy of providing routine office technology rapidly declines at about this size; bureaucracy rapidly grows.

• In the best organizations, patient services are structured to delegate the delivery of care to other health care providers (e.g., nurse practitioners, etc.) rather than the physician; protecting the physician’s time for services they are uniquely trained and qualified to provide.

Beyond these replicable conditions the characteristics of the well performing physician organizations are illusive. The following are some predictions of what the best organizations will look like in the second generation.

The governance of the day-to-day issues will be vested with a few physicians and administrative leaders. Performance will be assessed periodically by the physicians as a whole. This “executive” form of governance will unencumber decision making, allowing the organization to act in a more timely fashion, furthering its ability to compete. The members of the “executive” governance will remain accountable to the physicians as a whole, but the need for consensus regarding routine decisions will not be the standard.

Compensation and other economic rewards will be rationalized. The aggregate compensation to all physicians will increasingly be tied to the bottom-line performance of the organization. The irrational compensation arrangements which have arisen from the competitive practice acquisition process will fall away; the late career physician will retire and mid-career physicians will agree to terms more appropriately reflecting their contribution to income.

Primary care physicians will find their compensation tied not only to organization performance and their own productivity, but to the cost of caring for their patients, those costs they reasonably influence. Primary care capitation which fluctuates with downstream patient care costs is one idea currently taking root.

Specialist income will be stabilized at new levels. As networks grow, the incomes of specialists will reflect basic principles of supply and demand. The compensation expectation of new physicians from the nation’s top training programs will set the trend level for income and ultimately reset the standard levels of earnings for each specialty.

The central business purpose of physician organizations will migrate away from practice support services—operating, management, purchasing, etc. The primary focus of these organizations will become information systems. Traditional information services have been of dubious benefit, often adding layers of management and slowing the process of meeting the needs of practices. This does not mean that practice support and economies of purchasing will cease to be done. Rather, it acknowledges that information systems which provide timely and effective information about patient care practices will be far more valuable than traditional services. These services will enable the physicians to knowledgeably manage their own patient care costs and favorably impact their own compensation.

Physician organizations will be increasingly more selective about the physicians who are their members. On one level, minimum criteria for credentialing and scope of practice will be necessary to gain entry into the organizations. In addition to minimum criteria, there will be relative criteria on cost and quality. In order to be a distinguished organization on quality, higher standards will be established for practitioners to remain in the organization. As outcome data becomes public this will be a highly compelling reason for further changes in the physician members of an organization. Cost performance will also be used as a relative criteria for confirmed participation in physician organizations. Physicians of equal quality will be differentiated on patient care costs, excluding those physicians with higher costs.

Size matters. In order to meet the needs of insurers, physician organizations will have to provide networks which cover substantial geographic regions. These regions will need to reflect the employer-base served by the insurance companies.

The complete profile of the second generation of physician organizations is certainly more complex than these few characteristics. However, these thoughts should prove useful for the improved performance and strategic development of your organization.

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

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