Not everyone needs to become an Value-Based Care Organization (ACO) today. Some hospitals should consider developing a risk-friendly entity such as a Physician/Hospital Organization to address cost reduction targets for commercial insurers and large employers as a first step.

These models typically pay for services at a discounted rate (e.g., Medicare levels) and provide bonuses if costs are reduced and clinical targets are achieved. This is a shared saving approach.

While the concept is simple, getting there is not. Unless a sound foundation is in place, there will be no bonuses to share. Participants, especially physicians, will become frustrated, potentially damaging their relationships with the partner hospital. What needs to happen before embarking on the shared savings journey?

Compensation issues need to be resolved before approaching physicians for participation, since it’s among their top concerns. There are two elements to consider: compensation of employed physicians and distribution of savings incentives.

Most hospital-employed physician networks currently use some form of wRVU-based compensation model that encourages productivity. This is not a model that rewards appropriate behavior in a value environment. The model must be revised to include factors such as meeting quality measures, prescriptive patterns, patient satisfaction and more.

If there are savings to be shared, a formula showing how the savings will be distributed should be in place. This will be one of the first questions physicians ask during promotional meetings. The formula should define: (1) the split between primary and specialty physicians; (2) physician-specific distributions vs. IPA-wide incentives; and (3) the metrics that will drive distributions. Many IPAs use measures such as chronic disease management, generic utilization, site of service care, meaningful use compliance and ER utilization, but other factors can certainly be considered.

Data Systems
What percentage of your target physicians already use an EMR? If they are on an EMR, are they meeting meaningful use standards? Which systems are in use? Can they electronically share data? Will any physicians need to convert to a new system? What are their plans to move paper-based offices to digital? Creation of a community health record that can move with the patient from physician to physician and from there to the hospital is critical to the success of a PHO. If you are considering using a public Health Information Exchange (HIE), is it robust enough to permit disease/patient management? If not, which system will you use?

Patient Data
You can’t measure savings without benchmarks. How comfortable are you that your benchmarks are sound? What detail is available on cost-drivers? Can you identify patients who need to be early targets? Five percent of the patients drive 50 percent of the cost. By placing these individuals in patient registries, the collective skills of the physicians and ancillary providers can focus on managing their care.

Do you have data related to cost targets? If evidenced-based care is adopted, what is the potential for cost reduction and is it significant enough to warrant the development of the program?

PHOs should be based on measurable clinical improvement and not on sharing money. The savings are secondary. Physician participants must be monitored and outliers brought in line or discharged from the program. There are clear federal guidelines in place to avoid issues with Stark, CMP rules and the FTC. Legal advice is critical.

What investment will be needed to develop and manage the program? Most expenditures will be tied to data needs, but key management and analytical staff is also important. As the program grows, care managers must either be hired or contracted. Will the potential savings offset the projected investment? How will operating costs be recaptured — through physician dues or a portion of the savings?

How will the PHO be structured? Will it be a subsidiary of the hospital or free-standing? How will decisions be made and who will make them? What’s the process for bringing physicians into the program and discharging those who don’t comply with the clinical requirements? What role will physician members play in governance and operations? To whom will the staff answer? These are some of the issues that must be worked out before the program becomes operational.

Marketing is the final element in developing a PHO. Compensation, data systems, legal and financial issues and governance should be addressed and resolved before seeking out “customers.” Starting small is advisable, since few members of the network will have experience in the type of patient management required to be successful. Many organizations start by enrolling captive populations such as hospital employees or the local school district. Some insurance companies will partner with the PHO and bring technical advice along with their covered lives. Some will even want to take an equity position.

Performance data collected from the first enrolled group can be a strong tool in attracting additional business.

Halo Effect
As practice patterns change, patients are better managed, care becomes more efficient and costs go down, value-driven care will become the new norm and all patients – even those outside the contracted population – will benefit. Non-participating payers will also benefit even though they’re not sharing any savings with the network.

Once you’ve demonstrated success, decisions such as dropping uncooperative plans become important. Remember that physician members cannot be forced to drop plans. The PHO can sign new contracts on behalf of members, but cannot influence relationships beyond those carriers.

The fastest growth in shared-savings arrangements will be in commercial and large employer sectors. The federal (ACO) model is still evolving and the risks are greater, so ACOs will lag the private market. Commercial plans can use benefit design to move patients to preferred settings, while the Medicare ACO model contains no such incentives.

Don’t underestimate the difficulty of transitioning from volume to value. Creating the collaborative culture necessary for success cannot and will not happen overnight and certainly not without some degree of conflict. The very training of physicians is based on individual decisions based on data they have collected. We are now suggesting that a community of physicians, sharing data from many sources, is the answer to better patient management and better care. Not everyone will reach this goal.


Travis Ansel

Chief Executive Officer and Managing Director, Strategy