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By Elizabeth Gallup, MD, JD, MBA
Physician organizations (POs), whether in the formative stages or up and running, all have a universal problem: lack of capital. To access capital, POs typically turn to three sources: hospitals, physician practice management firms, and payers. In a previous column, I addressed the issue of PPMs. (See Physician’s Managed Care Report, August 1997, p. 95.) This column will focus on potential partnerships with hospitals and payers.
Crafting mutually beneficial relationships with hospitals can be tricky. Often the difficult part of the relationship can be in defining what the term partnership means. Does it mean that to access the hospital’s capital, the PO has to give up governance and control? If so, how much governance and control is appropriate to give up in return for how much capital? Desperate POs often enter into relationships that may appear fair on their face until the fine print is read and understood. Unfortunately, the fine print is usually read and understood after the check has been cashed and the money used and the hospital exercising the control it negotiated.
A PO in the Midwest recently found itself in that all-too-familiar setting, when they were just about to sign for many capitated contracts but needed only a relatively small amount of money to see them through until the contract revenue stared flowing. The local hospital system offered the organization the money it needed. However, the terms were that the physician organization would have to exclusively contract with the hospital for the hospital’s services and agree to enter into the hospital’s physician-hospital organization. The fair market value for such an arrangement was well over 24 times the amount of money that the hospital was offering (yes, 24 times). Yet the hospital thought the physicians would sign and accept the money because they were desperate. Fortunately for their organization, the physicians declined.
Columbia/HCA, even before its recent difficulties with its physician syndication deals, sought to take an arm’s-length strategy to assist physician organizations. Columbia’s strategy was to assist POs in maintaining their independence though loans. Columbia feels that by creating something that allows doctors to stay independent, then Columbia can compete for their business business that Columbia might not have access to if the physician lose their independence and become employed by competing hospital systems.
At the same time physicians and physician organizations are gaining clout with hospitals, payers are courting them. Foreseeing the potential of PSO competition, some payers are calling on POs with partnership proposals.
One of the most powerful synergies that can be created in partnerships between physician groups and payers comes through information sharing. Physicians must own or be able to access sophisticated management information systems to track referral patterns, determine patient eligibility, and mange the capitated dollar. Because most POs, especially those just starting, do not have the resources to purchase information systems, they may see partnership with information–rich payers as attractive options.
Partnering with payers also could mean access to members of the payer’s staff. The option of utilizing professionals who are high on the learning curve in case management, utilization management, and quality control enables POs to perform more services without incurring the costs of their own full-time personnel. In return, payers increasingly want POs to submit proposals that define how they will cut costs and deliver continually improving, superior quality of care.
When faced with the urgent need to come up with capital and management services, POs can be tempted to cut a deal quickly before checking out other options. But options for developing a management infrastructure are increasing, and sometimes partners come from surprising sources. Competing hospitals are offering start-up capital and loans. Companies with sophisticated management information systems are tailoring programs for POs.
The pendulum is starting to swing back toward greater physician influence over revenue streams and clinical protocols. The practice of medicine is moving away from the hospital setting, and POs are growing in sophistication and membership. Payers and employers are staring to like what they see in POs and are rewarding them with shared risk contracts.