A large multi-specialty physician group (wholly owned and operated by a four-hospital health system) took a 25-percent upside/downside risk as a percent of premium on 6,000 Medicare Advantage (MA) patients. After realizing losses of over $1 million the first year, they determined tighter alignment with key independent specialist groups was necessary to better manage the total cost of care. Further exacerbating the need for a strategy to align the economic incentives of employed and independent physicians was the fact that they were in year one of a three-year contract. The contract called for increased levels of risk and lives at risk, with 100 percent upside/downside risk sharing on over 11,000 lives at the start of year three. At the same time, two other commercial payers covering additional MA patients had expressed an interest in entering into similar downside risk arrangements.


A profile of the employed physician group:

  • Over 350 providers: approximately 170 PCPs, 180 specialists and 50 advanced practice providers
  • Specialty services available within the group included cardiology, gastroenterology, general surgery, nephrology, pulmonology, women’s health and others
  • Key specialties essential for managing population health that were not part of the employed group included oncology, orthopedics and urology
  • Nearly 100 practice locations in a suburban setting outside a major city in the Midwest
  • The group’s management had spent the past four years aggressively expanding specialty services and developing capabilities in population health management



After a lengthy evaluation process, it was decided to create a clinically integrated PHO (Physician Hospital Organization) capable of accepting and managing an array of value-based contracts. The PHO was predicated on the following fundamental principles:

  • Leverage the resources and existing infrastructure of the hospital (e.g. IT, contracting, budgeting/ financial management and access to capital) and the employed physician group (e.g. informatics, quality tracking and reporting, care management, physician leadership; and its Patient Centered Medical Home (PCMH) Level 3 designation of 28 primary care practices);
  • Create a consensus-driven organization that put employed and independent physicians and the hospitals on an equal playing field;
  • All participating physicians would share in the financial gains and/ or losses incurred from risk contracts; and
  • All participating physicians would be required to participate in all contracts negotiated by the PHO.



The health system created a PHO that was well on its way to becoming clinically and financially integrated. It was set up as a separate legal entity, with a unique governance structure that required unanimous approval across the three stakeholder groups (hospital, employed physicians and independent physicians).


Actual improvements in the total cost of care have yet to be determined, however, early projections indicate an estimated two to three percent savings (this particular population was considered “loosely managed”) in total spend for the targeted population over the previous year.


Targeted independent physician groups were highly supportive of this model, resulting in 100 percent participation of the large groups (more than five providers) in the PHO within six months. This was due to the deliberate effort to solicit their input from the beginning, provide them with an opportunity to get in at the ground level, and shape the core components of the clinical integration program.





David W. Miller

Founder and Chairman

Terrence R. McWilliams, MD, FAAFP

Chief Clinical Officer and Managing Director, Employed Provider Networks