Physician-Hospital Organizations As Vehicles for Accountable Care Organizations

One of the most common ownership vehicles for Accountable Care Organizations (“ACO’s”) is a physician-hospital joint venture (“PHO”), where the hospital takes the leadership role in setting up and administering the ACO and supplies the initial capitalization.

The PHO is formed for the purpose of advancing the business goals of the sponsoring hospital. As such, the hospital will usually retain a majority share of the PHO and ultimate decision-making authority over major business decisions, as set forth in the organizational documents such as the Member Subscription Agreement and the Operating Agreement.

Initial capitalization of such organizations is often in the $1,000,000 to $2,000,000 range, depending on the size of the medical staff necessary to serve the target population. Roughly 50% of this comes from physician members who purchase ownership interests.

The cost of such ownership interests will vary with the size of the PHO, but amounts between $3,000 and $5,000 are common.

• Initial Capitalization Interest (not refundable)
• Medical Staff membership at the sponsoring hospital
• Agreement to contract with certain health plans
• Agreement to enter into a sponsored ACO
• Attendance at certain PHO functions and medical staff meetings
• Participation in a “clinical integration program,” sharing of clinical data for patients cared for by the PHO, and furnishing PQRS-related data
• Signing the associated legal documents, including the Operating Agreement
• Minimum malpractice insurance coverage

While participation in an ACO is the primary reason for setting up PHOs, they may also contract directly with health plans, presenting an attractive option for a small, start-up medical group that has difficulty breaking into large health plan networks.

PHOs may or may not require their physician members to drop a health plan contract that may be in conflict with one negotiated by the PHO. Careful analysis of the wording of the organizational documents is necessary to determine what happens in such cases.

Individual membership in an ACO contracted with the PHO is often set forth as “voluntary” for the physician members. However, bear in mind that “voluntary” is a relative term, and if all other members, particularly referring physicians, enter into such arrangements, members who do not will be cut off from referrals.

For established medical practices, the benefit of being part of a PHO is primarily in preserving the referral relationships with PCPs who are part of the PHO, as well as preserving market share with health plans that enter into an exclusive, or a “narrow network” relationship with the PHO.

In PHO arrangements, members carry significant risk, as PHOs have a history of failing without prior warning. When this happens, the member loses all invested capital, and may not be paid on any contracts secured by the PHO to which he is a participating provider.

While PHOs have a goal of making profit through “shared savings,” and “effective patient management,” the reality is that only one-third financially break even, and of those that show a profit, this is more a factor of luck or accounting adjustments than true medical savings resulting from better care.

Most PHOs are set up such that any medical cost savings will be shared first with the payor (50%), and the remainder will then be shared between the physician members and the sponsoring hospital in proportion to ownership. Distribution to individual physician members is determined by the Management Committee after assessments are taken out for operating or future cash needs.

Unless there is a very large annual savings, the amounts coming back to individual investors will probably be minimal.

PHO members may be at risk to contribute additional capital beyond the original buy-in amount, as determined by the PHO management committee. Such requirements are set forth in the organizational documents.

Some PHOs make compliance with additional capital calls voluntary. However, provisions often stipulate that if a capital call is made, and the member fails to respond, his capital account will be debited for the amount of the call, and he may eventually be voted out.

Members can generally resign their PHO membership at any time, effective when released by a vote of the management committee. However, in such cases they will still remain as a “Participating Provider,” for any PHO-contracted health plan patients currently under their care. This means they may still be obligated to care for these patients until such time as care can be transferred.

Organizational documents tend to put all financial risk on the member/investor, and to not explicitly promise financial rewards.

While the PHO will have its own management structure (usually a committee) composed of member physicians, power resides with the sponsoring hospital partner, who has the authority to veto any Member action or decision, as set forth somewhere in the Operating Agreement.

Individual physician members should understand that business decisions will effectively be out of their hands, and controlled by a management committee or sponsoring hospital partner that may make decisions they find objectionable. In such cases, the only options are to comply or resign membership and lose all invested capital. This is standard in the industry.

Organizations such as ACOs should be viewed as business ventures that are speculative in nature, and may be short-lived. Will their ACO achieve the stated goals of profit and shared savings? Possibly, but even if successful, the profit distributed through a PHO-vehicle to individual members may be disappointingly low. It may take years before the initial PHO capital contribution is recovered from distributions alone.

Written statements regarding the lofty purpose of improving patient care should be viewed in the context that such a “purpose” is required to get around anti-trust laws relating to collective bargaining.

The primary consideration in joining a PHO / ACO should be related to the maintenance of referral relationships and market share. This alone may be worth more than the initial investment.

Caution is urged when joining a Medicare ACO. Federal regulations permit specialists to join multiple Medicare ACOs (PCPs can be a member of only one). However, if he specialist bills a “primary care CPT code (such as an E & M code),” then the specialist is treated like a PCP and forced to limit his participation to only that ACO for which he billed the E & M code.

Specialists may participate in multiple Medicare ACOs as “Other Entity Providers,” but there is no guarantee they can participate in shared savings or distribution of profits in the same manner as other providers. Reimbursement for Other Entity providers is at the discretion of the ACO management.

The risk of being involuntarily assigned to a small Medicare ACO and forced to forego participation in a large Medicare ACO (with its benefits of market share and referral relationships) is significant. Physicians are urged to evaluate competing Medicare ACO organizations in their area and join the one that best shields their referral relationships.