On Physician Hospital Organizations [PHOs]

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Understanding PHOs

[By Dr. David Edward Marcinko; MBA CMP™]


A Physician Hospital Organization, or PHO, is a blend of private doctors and hospitals, maintaining its concentration and control of surgical, rather than medical care.

Ownership may be divided by a governing board, according to a pro-rata basis with the larger partner having most organizational strength and bargaining power in the corporate structure. Typically, this favors the hospital. 

From a strategic standpoint, most MD’s are still not currently aligned with many PHO’s, since surgical care is increasing being delivered in private offices, Surgical Specialty Hospitals (SSHs) or Ambulatory Care Centers (ACCs).  

Additionally, PHOs may become potential MD competitors, and may often lack managed care contracting experience, have inflexible provider networks and may require MD exclusivity in their organization. 

PHO Functions 

Nevertheless, the function of a PHO is to:

  • Negotiate managed care contracts
  • Negotiate on all health insurance contracts
  • Establish insurance product(s)
  • Employ doctors and support staff
  • Consolidate and acquire physician practices
  • Acquire alternative medical practices. 


Many believe the “p” in PHO should be lower-case; while an upper-case “H” is a sign of relative strength [i.e., pHO].  And so, what do you think? 


Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com


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22 Responses

  1. On PHOs?

    According to Physicians News Digest, February 2009 there is a renewed trend toward hospital employment of physicians that is different from the first-wave in 1990s, when physicians approached hospitals about employment opportunities rather than the reverse. Today, physicians are becoming increasingly interested in the employment model. Think: hospitalist.

    Many physicians, even some specialists, are seeking hospital employment to relieve the stress of administrative duties and the general risks and hassles of private practice.

    1. And so, what is the cause behind this trend?
    2. What in the acquisition has changed to avoid the pitfalls of earlier practice employment and acquisitions, in PPMCs and PHOs, etc.



  2. Are Hospitals Luring Physicians Away From Private Practice?

    Last year, half of all new doctors were hired by hospitals. In other words, one out of every six doctors worked for a hospital. And, some of us worry that hiring doctors could give hospitals much more negotiating clout with health insurers – and drive up insurance prices paid by employers and consumers. You decide?


    But, for hospitals, hiring doctors is crucial to their strategies. Having more doctors in the fold guarantees a steady stream of patient referrals that may even bolster care through better coordination of services; as well as revenues. The new health overhaul law also rewards creation of more efficient, integrated models of care.

    However, what does this do to the model of “Accountable Care Organizations”, and to who is the physician ultimately accountable; the patient or the hospital?

    PS: Can you say pHO?



  3. More on Physician Owned Hospitals [POHs]

    The new health care law closes the door on future physician-owned hospitals, requiring new ones to be open and certified by Medicare by Dec. 31. Otherwise, they’ll be barred from taking part in Medicare, the health program for the elderly, as well as other federal health programs.


    That would be a fatal blow to most hospitals because about half of their revenue comes from those programs.



  4. New PHOs Are Being Structured as Stepping Stones to ACOs

    A growing number of hospitals are turning to physician-hospital organizations (PHOs), a model from the 1990s that these hospitals say will prepare them for certification as accountable care organizations (ACOs). Among the structural and operational elements that differentiate these PHOs from their predecessors are full transparency, strong physician leadership, and organizational structures that enable them to operate as independent legal entities in which risks — and rewards — are shared equitably.

    Many of the new pre-ACO PHOs operate as limited liability companies (LLCs) with operating agreements that ensure that the investment risk is equally divided between physicians and hospitals, and that all contracting and payment mechanisms are fully transparent to members. “These PHOs typically are controlled equally by the physicians and the hospital,” says John Harris of DGA Partners, a healthcare management consulting firm, although in some cases physicians hold majority voting power.

    Source: Michael E. Carbine, ACO Business News [12/17/10]


  5. Hospital-physician alignments may wind up costing more money

    Increased alignment between hospitals and physicians, while touted as a means to improving quality and cutting costs, may in some instances have the opposite effect.

    A new issue brief by the Washington, D.C.-based Center for Studying Health System Change has yielded mixed results.

    Source: http://www.hschange.com/CONTENT/1230/#ib5


  6. Why Physician Income May Drop if You Sell to a Hospital

    Recent reports from the MGMA (Medical Group Management Association) show that hospital-owned practices are 25% less productive than those that are privately owned.

    In some cases, previously-profitable practices start to see a decline in their income. In other cases, the practices may have been less profitable to begin with.

    Here are the major roots of the problems and some suggested solutions.


    Dr. Blankenship


  7. Hospital overhauls leadership structure to empowers docs

    Dear Dr. Marcinko

    Did you know that Mercy Medical Center in Des Moines is reorganizing its leadership structure to give physicians more control and responsibility? The nonprofit Catholic hospital aims to improve patient care by integrating clinical and administrative tasks, it said recently in a press release.


    So, I guess what you said about PHOs is true, as I paraphrase:
    “The current structure is very hospital centric and less physician centric

    Keep up the good work!

    Dr. Billings


  8. How Private Practices Can Survive Hospital Growth

    Are you a physician in private practice struggling to stay afloat as one after another of your colleagues has taken employment in hospital groups?

    If so, you’re not alone. As more and more physicians take positions in hospital groups, independent practitioners face an array of challenges.


    Dr. Phil


  9. More on Fostering Physician-Organization Relationships

    Health care organization leaders need to move well beyond their engagement focus.


    They need to clarify goals for different physician relationships; reflect on the affect, power and salience of different relationships they seek with physicians; and learn to see beyond the immediate interests of the organization.



  10. Challenge to physician-owned hospital ban dismissed

    In a blow to physician-owned hospitals, a Houston federal appeals court threw out a challenge to an Accountable Care Act provision that halts Medicare and Medicaid reimbursements to any such hospitals licensed after December 31, 2010, MedPage Today just reported.




  11. What Docs Should Know Before Selling Out to Hospital

    For a long time, third-party reimbursement allowed most private practice physicians to go it alone and earn a decent living from insurance carriers and government-sponsored health programs; regrettably, that is no longer the case.


    Hope Rachel Hetico RN MHA


  12. Medicare Pay Struggle a Familiar Year-end Cliffhanger

    Physician organizations are working toward a permanent plan to bring payment stability and higher quality to Medicare, but they have run into a familiar roadblock on Capitol Hill — impending deep payment cuts and no immediate relief in sight. Doctors participating in Medicare again found themselves just days away from a large decrease in pay rates, with Congress working against the clock to craft another temporary solution. So far, no deal had been reached to stop a 26.5% cut under the sustainable growth rate formula even as lawmakers pledged to prevent the decrease before it hits on Jan. 1, 2013.

    Congress has enacted stopgap legislation to prevent statutory reductions since the last cut took place in 2002. Some pay patches lasting a matter of weeks or a few months have been enacted — and applied retroactively — days or weeks after the cuts technically had taken effect. Virtually no one believes Congress will allow the SGR to lower pay in 2013, but doctors have sent a strong message to lawmakers that the annual ritual of enacting a last-minute, transitory solution needs to end.

    Source: Charles Fiegel, amednews [12/24/12]


  13. Doctors see consolidation in their future

    Hospitals and physician groups will become more integrated in the next three years, according to a survey by the Deloitte Center for Health Solutions.


    Meanwhile, most physicians are pessimistic about the future of medicine, with 72% saying that the best and brightest of young people might not consider a career in the field.

    What about you?

    Dr. Bertrand



  14. More on PHOs

    Should physicians work for hospitals?

    Dr. Marcinko – I suspect I know your opinion and agree.

    Dr. Cannigglia


  15. Houston hospital announces data breach

    “Memorial Hermann Hospital: Employee accesses 10,000 patient medical records – The case broke wide open last month. A hospital spokesperson tells Local 2 on July 7 the hospital learned a former employee had accessed the electronic medical records of 10,604 patients outside of the employee’s normal job duties. This went on for almost seven years — from December 2007 to July 2014, according to the hospital.” By Andy Cerota, Anchor/Reporter for Click 2 Houston News, August 29, 2014.


    Cerota adds: “The patients’ medical records include everything from health insurance information and in some cases, Social Security numbers. Names, addresses and dates of birth were also on the records. Memorial Hermann insists patients’ financial information, such as credit cards or bank accounts, was not accessed.”

    The thing is, financial information like credit cards and bank accounts can be changed. Medical records, names, dates of birth and social security numbers cannot.

    D. K. Pruitt DDS


  16. Building a Successful Physician-Hospital Organization

    To better position itself for health reform, St. Vincent’s Health Partners formed a physician-hospital organization, which has spurred growth in patient-centered medical homes, a reduction in unnecessary ED utilization, and more.


    But, did it work?



  17. The Threshold of Commercial Reasonableness

    Corresponding with a growing trend toward hospital-physician alignment, there has been increased federal, state, and local regulatory oversight regarding the legal permissibility of these arrangements.

    Most notably, there has been more intense regulatory scrutiny related to the Anti-Kickback Statute and the Stark Law, especially as they relate to potential liability under the False Claims Act. Due to the increase in healthcare transactions, opinions related to the threshold of commercial reasonableness of healthcare transactions are becoming an “increasingly important service offered by healthcare valuation professionals.”


    This three-part Health Capital Topics series will address the components of a defensible commercial reasonableness analysis and the importance of this analysis in today’s increasingly scrutinized healthcare marketplace.

    Robert James Cimasi MHA ASA F CVA CMP™


  18. Hospitals Buying Doc Practices May Reap Tax Savings Under IRS Ruling

    A new Internal Revenue Service ruling could mean significant tax savings for investor-owned hospitals and management companies that operate physician practices in states with laws that bar the corporate practice of medicine. Many states have laws that allow only licensed physicians to employ individual physicians in the practice of medicine. The idea is to keep non-medical practitioners from exercising undue influence over doctors’ clinical judgments. But as hospitals and other entities increasingly have acquired physician practices in recent years, they’ve had to perform some legal gymnastics.

    Essentially, they’ve been acting like owners without actually being able to include the practices as subsidiaries on their tax returns. That means they couldn’t use any of a practice’s losses to offset taxes on other income, said Kelvin Ault, a partner at PricewaterhouseCoopers in Nashville who represents the organization that sought the ruling, which he declined to identify. But the IRS private-letter ruling, which was published in the Federal Register on December 19 allows Ault’s client organization to consolidate its operations when filing federal taxes despite a state corporate practice of medicine law. The IRS private-letter ruling did not name the organization.

    Source: Lisa Schencker
    Modern Healthcare [12/23/14]


  19. 68.2% of Physician Owned Hospital Admissions Come from Referrals

    The BMJ recently published a comparative analysis on physician owned hospitals. Here are some key findings from the report:

    • More than 250 hospitals in the United States are partly or completely owned by physicians (POH).
    • 6.3% of Medicare admissions in each region are at POHs.
    • POHs are more likely than non-POH’s to have less than 100 beds.
    • Patients admitted to POHs were 1 year younger than those admitted to non-POHs (77.4 vs 78.4).
    • POHs had more admissions through physician or clinic referral (68.2%) than non-POHs (62.3%).
    • 1.8% of POH patients are discharged to hospice care, versus 2.8% of patients at non-POHs.

    Source: BMJ, September 2, 2015


  20. Hospital Market Power

    Recent NBER publications by Laurence Baker, M. Kate Bundorf, and Daniel Kessler:

    1) “The Effect of Hospital/Physician Integration on Hospital Choice“:

    We find that a hospital’s ownership of an admitting physician dramatically increases the probability that the physician’s patients will choose the owning hospital. We also find that ownership of an admitting physician has large effects on how the hospital’s cost and quality affect patients’ hospital choice. Patients whose admitting physician is not owned by a hospital are more likely to choose facilities that are low cost and high quality. For these patients, the marginal effect on choice of a hospital’s costliness is negative, as is the marginal effect of a hospital’s rate of adverse health outcomes. By contrast, patients are more likely to choose a high-cost, low-quality hospital when their admitting physician’s practice is owned by that hospital. The sum of the marginal effects on choice of cost and the interactions between ownership and cost are positive, as is the sum of the marginal effects of a hospital’s adverse outcome rate and the interactions between ownership and adverse outcomes. We conclude that hospital/physician integration affects patients’ hospital choices in a way that is inconsistent with their best interests.

    2) “Does Health Plan Generosity Enhance Hospital Market Power?”

    To what extent does the generosity of health insurance coverage facilitate the exercise of market power by producers of health services? […]

    We find a statistically significant and economically important effect of plan generosity on hospital prices in uncompetitive markets. Defining a county as “high generosity” when the weighted average actuarial value of plans in it is above the median, counties with generous plans and uncompetitive hospital markets have approximately 8.6 percent higher prices than counties with low generosity and competitive markets, holding constant county- and time-fixed effects and other time-varying characteristics of counties, including their hospital market characteristics. Defining a county as high generosity when the weighted average value of plans in it is above the 75th percentile leads the estimated interaction between generosity and competitiveness to rise to 10.6 percent. These findings suggest that most of the aggregate effect of hospital market structure on prices found in previous work may be coming from areas with generous plans.

    We also find substantial effects of plan generosity on the hospital admissions rate. Using the median as the cutoff for high plan generosity, counties with high generosity have approximately 18.9 percent more hospital admissions than counties with low generosity. We find no significant interaction between generosity and hospital market competitiveness on the admissions rate.

    @afrakt via Ann Miller RN MHA


  21. Hospital Ownership of Medical Practices Grows by 86% in Three Years

    Hospital ownership of physician practices has increased by 86% in the last three years, according to a new report. The analysis, conducted by healthcare consulting firm Avalere Health and the not-for-profit Physicians Advocacy Institute, found that from 2012 to 2015, hospitals acquired 31,000 physician practices in the U.S.

    In 2012, about one in seven physician practices were owned by a hospital. In mid-2015, one in four medical practices, or 67,000 practices, were owned by hospitals. The report also found that in the same three-year period, physicians employed by hospitals increased by 50%.

    In 2015, about 140,000 physicians were employed by hospitals or systems, a rise from the 95,000 physicians who were employed by hospitals in 2012. Overall, about 38% of physicians in the U.S. are employed by a hospital or system, according to the report.

    Source: Maria Castellucci, Modern Healthcare [9/7/16]


  22. 5,000 Physician Practices Were Acquired by Hospitals in 2016

    The Physicians Advocacy Institute recently released an analysis on physician practice acquisitions from 2012-2016. Here are some key findings from the report:

    • The number of physicians employed by hospitals grew by 14,000 from 2015 to 2016.
    • From July 2015 to July 2016, 5,000 physician practices were acquired by hospitals.
    • The percentage of hospital-employed physicians grew by nearly 11% 2015-2016.
    • From 2012 to 2016, the percentage of hospital-employed physicians increased by 63%.
    • More than half (53%) of physicians in the Midwest were employed by hospitals.
    • 33% of physicians were employed by hospitals in Alaska and Hawaii in 2016.


    Liked by 1 person

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