What lies ahead for the PHO?

THE ROLE OF THE PHYSICIAN-HOSPITAL ORGANIZATION (PHO) in the world of health care is an ever-changing one. The American Association of Physician-Hospital Organizations/Integrated Delivery Systems (AAPHO/IDS) and Tyler & Company jointly conducted the Profile of Physician-Hospital Organizations and PHO Executives for the third consecutive year and outlined trends within the PHO system, including executives' compensation and projected salary increase.

The survey also examined for the first time the bonuses and compensation packages of executives. The survey focused on the growth of the PHO, contracting, enrollees, staff size and experience, and what the PHOs themselves see in their future. These trends, overall, paint a picture of the PHO's transition into an integrated delivery system. The survey was mailed to hospitals with more than 100 beds, along with existing PHOs; of the 287 responses received, 90 percent revealed that their hospital either owned or sponsored a PHO.

The 1996/97 Profile of Physician-Hospital Organizations and PHO Executives reaffirmed that the PHO is, in essence, a transitional stage to developing an integrated delivery system. Both physicians and hospitals are using the PHO to form a more efficient and effective health care delivery team: "PHOs are bringing physicians, nurses, medical directors, and administrators together to define a continuum of care that will become the integrated delivery system of tomorrow," says Randall W. Killian, Executive Director of the AAPHO/IDS. "You have to visualize the PHO as the starting point from which the integrated delivery system will grow."

The PHO, in and of itself, is proving to be more and more successful, which is vital as it lays the groundwork for the health care system of the 21st Century. The survey shows that the most popular model is the PHO-MSO combination, a contracting entity that reduces overhead and administrative costs by avoiding the bureaucracies that add little value to direct patient care. Functions, such as contract management, billing, financial management, physician relations, and information systems are being combined and provided more efficiently through a network.

Where will PHOs be in three years?

Survey participants were asked, "Where do you see your PHO three years in the future?" More than half responded that their PHO would be operating as a PHO-MSO combination. While the PHO is still young, it is developing at a rapid pace. As they mature, PHOs will increase their capability of handling additional services, such as centralized billing, provider credentialing, clinical guidelines, home health care, and other services managing the continuum of care, rather than focusing on acute episodes of care. Successful PHOs offer management expertise and market value to both hospitals and physicians, bringing them together to build a shared mission and vision. As this process is perfected, the PHO will be the central building block of the integrated delivery system.

Another noteworthy statistic is the increased percentage of physicians serving as PHO Chairman of the Board, along with a high rate of equal board representation among hospital and physician board members. These numbers indicate that, for the first time, hospitals and physicians are creating a team in which they share equally the risks and benefits of forming a PHO.

Other projected trends include an increasing enrollment as PHOs mature, assume more risk contracts, and initiate more direct contracting with employers. The number of members/enrollees in the PHO is generally less than 25,000 (see Figure 1), but memberships and enrollments are steadily increasing. "As they grow in enrollment, PHOs should also begin to position themselves to play a role with Medicare and Medicaid managed care, because as the Health Care Financing Administration and the states begin to capitate Medicare and Medicaid, the PHO will need to have its utilization controls, disease management guidelines, and health care cost management program in place," comments Killian.

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In addition, there was a 2 percent increase in the number of PHOs contracting directly with employers. While the majority (61.7 percent) contract both directly with employers and through an insurance company or managed care organization, the direct contracting number is expected to increase as ERISA (self-funded) employers find PHOs to be a proven way to reduce corporate health care expenditures.

Profile of PHO staff and compensation

The survey found that, while more than half of PHOs responding still have less than five staff members, the percentage of PHOs with six to 10 staff members significantly increased from the previous survey (see Figure 2). This proves that, as the PHOs gradually take on more responsibility and increase their services, they are finding it necessary to increase staff size. Specialties for these staff members were fairly evenly split among such disciplines as marketing, finance, and medical management.

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The survey identifies staff salary ranges broken down according to specialty. More than half of the respondents also said that they had a compensated medical director, a new question this year. Health care professionals are realizing that physicians are likely to listen more closely to other physicians and that they are better able to balance administrative decisions with the clinical side of medicine. In addition, the medical director is also perceived by network physicians as an advocate in the PHO staff.

Among the most useful statistical analyses in the survey are those regarding the experience and compensation of the Chief Executive Officer. The survey ranks types of industry experience and prior disciplines. This year's statistics were found to be consistent with last year's rankings, with one change: Operations became ranked as the most critical prior discipline. "A PHO Chief Executive Officer, like the CEO of a hospital, must be able to manage a complex organization," states Bob Cunningham, Managing Principal of the Integrated Healthcare Advisory Group, the consulting affiliate of the AAPHO/IDS. "PHOs are rapidly maturing beyond the developmental stages to the operational stages with their emphasis on setting contracting and other performance targets, and managing extended networks of physicians and medical care facilities. PHO Chief Executive Officers must constantly assess the changing requirements and demands of key employers and other payers in their local market, and capture this in an evolving business plan and annual corporate operating plan and budget."

The number of years of experience the CEO has in health care administration has decreased since the last survey. As for compensation statistics, the profile lists information on the base salary of the CEO as of May 1, 1996, breaking the information down to increments ranging from less than $70,000 to greater than $200,000 per annum. Several new questions on the survey this year address incentives and compensation packages, including medical insurance, life insurance, profit sharing, and 401k plans. In examining projected percentages for raise in base salary, it was found that PHO executives' salaries will continue to increase as the "power base" shifts from the acute care setting to the integrated health care delivery system.

Conclusion

If an entity is a PHO in name only and does not offer management expertise and market value to both hospitals and physicians, it will not remain in existence. Successful PHOs have asked themselves the most important question of all: "What are we trying to accomplish?" They have answered that question by bringing the hospitals and providers together and building a shared vision and mission. The PHO that sets proactive goals to reach that vision will pave the way to becoming an even more successful integrated delivery system.

W.C. Williams, III, MD, FAAFP, is President of the American Association of Physician-Hospital Organizations/Integrated Delivery Systems in Glen Allen, Virginia. He can be reached at 804/747-5823.

Kelley F. Cuneo, is the Director of New Development for the American Association of Physician-Hospital Organizations/lntegrated Delivery Systems in Glen Allen, Virginia. She can be reached at 804/747-5823. The 1996/97 Profile of Physician-Hospital Organizations and PHO Executives can be purchased for $75 by calling 804/747-5823.