American College of Physicians: Internal Medicine — Doctors for Adults ®

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What you should know before joining an IPA or PHO

From the June 1996 ACP Observer, copyright © 1996 by the American College of Physicians.

Editor's Note: This article is part of ACP Observer's occasional column dealing with questions about managed care. This month's respondent is Kevin M. Kennedy, a manager with ECG Management Consultants, a health care consulting firm with offices in Seattle and Boston. His practice specializes in organizational development, managed care strategy and capitated contracting. He can be reached at 206-689-2200.

Q. How should my group decide whether to participate in an independent practice association (IPA) or physician-hospital organization (PHO)?

A. Before making a decision, your group should find out about any required financial and contractual commitment, the likelihood of the organization's success and the organization's strategy and how it fits with the strategy of your group.

The following questions may help you get this information and decide if one of these organizations is a good fit for your practice:

How is the organization structured? Because many IPAs and PHOs avoid delicate political issues, they end up with ineffective structures. These organizations are more likely to succeed if:

  • membership is drawn from the most committed physicians, instead of from the entire medical staff or from any physician willing to pay a membership fee;
  • governance is weighted toward primary care physicians (PCPs), who are more likely to defect from an organization that does not significantly represent their interests; and
  • the board of directors is small and has authority to make decisions quickly.

One IPA recently altered its governance structure to include more PCPs after the existing ones threatened to pull out. The IPA was brought to a standstill while the new structure was negotiated. The resulting bad feelings in the medical community could have been avoided if the IPA had been structured correctly in the beginning.

Who stands to benefit? Will the IPA/PHO actually improve your access to contracts or will the organization gain more from your participation? We recently advised a 13-physician primary care group not to participate in a hospital-sponsored IPA because the organization's composition would have included more than 50 specialists but only 20 PCPs. The primary care physicians would have gained the contracting clout of only seven additional PCPs and would not have increased their leverage to negotiate with managed care organizations, while the specialists would have gained a new source of referrals. The primary care group went on to strike a more favorable deal with another health system.

Does the organization have sufficient resources to manage capitation? Many IPAs and PHOs lack the financial, operational and staff resources to pursue capitation. These organizations often end up with highly discounted fee-for-service contracts because they have no mechanism for evaluating and managing risk. Although reserve requirements will vary depending on size and contracting strategy, the organization should, at a minimum, have several hundred thousand dollars in capital and a full-time management team.

Is the organization serious about managed care? The organization's business plan should be built around the goal of actively pursuing at-risk contracting. We have seen many IPAs and PHOs that formed as knee-jerk reactions to increases in a market's managed care penetration, but then failed to follow through. One hospital, for example, formed a PHO primarily because several other hospitals were doing the same thing. Without a clear strategic direction, and lacking strong support from either the hospital or the physicians, the PHO failed to sign a single capitated contract. Meanwhile, a focused, for-profit IPA in the same market signed up nearly 12,000 lives.

What is the state of your managed care market? Are there already several IPAs in your market? Do you already contract through more than one source? In some markets physicians have joined several IPAs, so payers can access a particular physician through many sources. Since there are so many similar networks, payers can drive prices down by playing one network against another in contract negotiations. If this is happening in your market, joining another IPA may be counterproductive.

Few PHOs are attracting enough covered lives to be a physician's only contracting vehicle. Although there are many well-managed, competitive IPAs, many more have failed. Until the organization has a track record, be prepared to consider an IPA or PHO as an interim strategy, and be aware that you may eventually need to consider more cohesive group structure to access managed care contracts.

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