Extracting the ‘H’ from P/H/O: The Anatomy of One Unwinding

Gregg Masters, MPH

Since we now find ourselves at the gateway of resurgent if not soon to be robust exploratory conversations between hospitals, their medical staffs, the broader private medical community and the likely joint venture entities to implement any collaborative vision, this time under the aegis of Accountable Care Organization (ACO)  incentives, I thought it might be useful to recall one unwinding for context and educational purposes.

In the 1990s Presbyterian Healthcare System (PHS) in Dallas, Texas (pre-merger with Harris Methodist Health System and Arlington Memorial Hospital into Texas Health Resources), reading the tea leaves of the wisdom of joint contracting with its medical staff formed ‘System Health Providers’ (SHP) a PHO with it’s primary affiliate IPA (independent practice association) ‘Genesis Physicians Group’ (GPG) and it’s risk contracting derivative, Genesis Physicians Practice Association (GPPA).

PHS had previously formed a first generation PHO doing business as ‘JVE’ which stood for ‘joint venture entity’, a most generic of names which none-the-less represented a culture of commitment by both hospital and medical staff leadership to the idea of collaborating minimally to build provider side leverage in the then fast consolidating managed healthcare industry.

Thus SHP represented a ‘PHO 2.0’ effort – if you will, for at least the PHS side of the JV. All seemed to progress quite nicely, as SHP, a messenger model PPO routinely extracted rather premium pricing when contrasted to other DFW systems including Baylor and the then rapidly consolidating Columbia Healthcare network, and held payor agreements with virtually all major players in DFW.

Yet, somewhere on the road to contracting nirvana, the enterprise stumbled across a ‘trigger event’, initially seen as rather innocuous, but which later began a rather unpleasant and painful unwinding process straining long-standing relationships and testing the goodwill of the partners.

In the fine print of the PHO agreement between the two members (PHS & GPG) was an arcane provision titled ‘mandatory redemption’. Though a rather routine legalese provision, what this language addressed were the conditions under which one member would buy back the share or interest (i.e., redeem) in the JV, and effectively terminate the equity basis for collaboration.

In this case, the ‘offending party’ was PHS, and the trigger event was the merger with Harris Methodist Health System and Arlington Memorial Hospital to form Texas Health Resources (THR).

Following the closing of the merger, the leadership of SHP in consultation with the leadership of GPG and their legal counsel determined that PHS had effectively triggered the mandatory redemption provision, thus forcing the valuation of SHP, and subsequent buy back of PHS’s interest. In other words, the ‘H’ was to be eliminated as this PHO was on the road to becoming a ‘PO’ (physician organization).

One curious little sidebar to the unfolding of events was the CEO of SHP had a financial incentive for the buy back to occur, as the terms of his employment agreement (and perhaps stock ownership) called for a payout under certain circumstances (one of which apparently included mandatory redemption).

Needless to say, hospital and medial staff or affiliate joint ventures even in the best of times, can be a tad tense, but throw into the mix a testy ‘divorce’ and one can definitely challenge even the most skillful managers to maintain the peace.

Much time has passed and the ship apparently has righted itself as both entities continue to work together although I have no direct tie to either.

So what lesson(s) can be extracted from this one experience? One is to choose your partner carefully (do you even need one?), be clear on your intentions, and market upside; then study the fine print of your agreements. Better yet, know your value, understand your goals and make sure you account for likely bumps in the road. While much of the discussion in ACO formation will center around the usual suspects of capital, infrastructure, and core management competencies, a far more important ingredient will be a ‘patients first’ collaborative culture, to endure the rocky road of aligning the partners interests in the JV. Then again, since an ACO does not necessarily need to be a ‘joint venture’ per se, with an institutional partner whether hospital or parent system, do you even want to go down that road? It will no doubt get real interesting, real soon.

Gregg Masters, MPH is an independent heath care consultant in San Diego, California, who served as Vice President for Managed Care and Network Management of System Health Providers, Inc., prior to, during and after the formation of Texas Health Resources.


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  1. “…routinely extracted rather premium pricing when contrasted to other DFW systems”

    Here is problem #1 with consolidation. It will not reduce or even contain costs, quite the opposite I believe.

    Problem #2 is that I have yet to observe the “‘patients first’ collaborative culture” ingredient make an appearance in these M&As.

    I wonder why people think that this time around it will be different…. Perhaps we need more stories like this to remind us all that we have taken this road before.

  2. Hi Margalit and thank you for taking the time to comment!

    I so agree with your learned skepticism, but stipulate the following ‘macro’ or paradigm shift considerations, which might merit an ‘it can be different this time’ outcome (?):

    1. It must be consolidation into entities of the ‘right kind’, i.e., those prudently managing both clinical risk and resource utilization vs. a maximization of profit via leveraging volumes or unit pricing; and

    2. Embedded in a broader market context incentivizing collaboration whereby all entities play by the same rules, with the same set of incentives.

    May be a tad naive, but I am an optimist…

    Had the Kaiser’s and Mayo’s of the world not ‘shadow priced’ their premium structure (to less mature and therefore effective managed healthcare delivery systems), I dare say that alone would have shaved a couple of points off the MCI over time. Since they had no incentive to be materially below the prevailing market premiums, they simple priced accordingly (a slight price point competitive advantage), and redirected the surplus of revenue over expense into innovation and other enhance benefits.

    On the ‘patients first’ culture, lets keep the pressure on! The health 2.0, empowered or e-patient phenomenon is a granular tsunami gaining increased momentum each day.

    Thanks again for your thoughts!

  3. I agree with Margalit that there is no guarantee that the new structure will automatically bring about cost savings, but there are certainly added incentives now to make that happen (gainsharing without risksharing built into the ACO statute, and generally falling reimbursement rates). On the patient-centered issue: the ACO statute names patient engagement and patient-centeredness as the last two of the criteria needed to be met in order to qualify as an ACO. That’s huge. If the regs put appropriate meat on the bones here, this proviision could have a significant impact on broadening the appeal of a patients-first culture.

    Some hospital-centric organizations are going into the ACO fray with the “no margin, no mission” mantra in mind. I suppose others are headed in simply in search of margin (or profit). Physicians, leery of the last go-round (which ended up in unwinding of some relationships that were either more or less messy than the one you describe, Greg) would be well-advised to consider a well-designed escape hatch, or nuclear option, so that they can opt out (or blow up the relationship, depending on which metaphor you prefer). Even more important to physicians this time around is the need to work on the front end of the relationship to ensure that the clinical decisions that they will be called upon to make in order to save hospitals money will result in significant sharing of savings with the physicians. The AKS/Stark/Antitrust safe harbors and exceptions necessary to do that will be put in place by the feds, and the physicians could benefit by leading this time around, rather than letting the hospitals lead.

  4. Great report about the real ins and outs of healthcare integration. The article illustrates that (1) healthcare systems are extremely competitive, and (2) strategic arrangements are very sensitive to competition. It illustrates perhaps the greatest challenge to ACO development and integration altogether—trust. Any system development, be it a PHO, PO, IPA, ACO, multi specialty group practice requires collaboration, cooperation and transparency. And the element of trust is the glue that binds. The funny thing about ACOs, for instance, is that it assumes physicians, hospitals and insurers can cooperate and trust eachother, even though most wouldn’t even have lunch together. Gregg’s story shows that a simple or not so simple realignment of a party can change the dynamics so quickly and thoroughly that the system falls apart. As healthcare reform proceeds and healthcare businesses integrate further, they will have to ensure trust is preserved in order to thrive as an integrated business comprised of previously distrusting players. Moreover, business structures that evolve out of this time will have to have “thick skin” when it comes to perceived competitive threats; otherwise, they will not be able to withstand the needs of the thousands of patients they are designed to serve.

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