Physician-Hospital Organizations (PHOs) are legal (or perhaps informal) organizations that bond hospitals and their attending medical staff. PHOs are frequently developed for the purpose of contracting with managed care plans. A PHO may be open to any member of the staff who applies, or it may be closed to staff members who fail to qualify (or who are part of an already overrepresented specialty). Gillian I. Russell, Terminology, in FUNDAMENTALS OF HEALTH LAW 1, 32 (American Health Lawyers Association 5th ed., 2011).
PHOs were created in the early 1990s by hospitals that were interested in establishing a bond with physicians in order to offer an attractive full-service provider product to managed-care payors and employers. A PHO can be structured in various ways, but it is typically structured by creating a new entity that is jointly owned by physicians and a hospital. Customarily a PHO is established either as a for-profit corporation, a partnership, or a limited liability company.
Typically, the specialty physicians (e.g., cardiologists, surgeons, radiologists) would not be offered ownership in the PHO; rather, the PHO would contract with such physicians to provide those types of specialty medical services to the PHO’s patients. Specialty physicians are typically not offered ownership opportunities in the PHO because, unlike primary care physicians, a specialist usually does not manage care in the same way a primary care physician does.
Once formed, the PHO would then contract directly with managed-care plans, which would now have a “one-stop-shopping” type of arrangement with the PHO: IN one contract, the managed care plan simultaneously arranges for the PHO provision of hospital tertiary-care services, primary-care services, and specialty-physician services. The managed care organization (MCO) would no longer need to enter into several agreements with individual physicians and specialists; instead, the MCO would have an agreement for the entire scope of services from the PHO.
As with all healthcare transactions, a wide variety of legal issues influence the formation of a PHO. One of the most fundamental legal issues to review is tax concerns for hospitals deemed tax-exempt under federal law. In addition to the necessary tax analysis, the structure of a PHO has to be reviewed to ensure compliance with the Stark laws and the Anti-Kickback Statutes.
Excerpt from Anthea R. Daniels, Healthcare Transactions and Contracting, in FUNDAMENTALS OF HEALTH LAW 449, 462-63 (American Health Lawyers Association 5th ed., 2011).