Shared-Services Model for Small Practices: PHIP Final Report

by Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

Editor’s Note: Primary care practices are under increasing pressure from payers and regulators to move toward a medical home model and participate in value-based payment (VBP) contracts. The changes required—new staff, skills and capacities—increase operating costs in a way that is particularly onerous for small primary care practices. A new report—developed by New York City Population Health Improvement Program (PHIP) in partnership with the United Hospital Fund—outlines a potential solution to this challenge: shared-services arrangements that would enable small primary care practices to adjust successfully to the new VBP world. The report, summarized below, outlines a financial and operational model for small practices to share the cost of services and capacities that they need to thrive in the new realities of healthcare delivery and financing. Click here to download a free copy of the full report.


As healthcare reform progresses, primary care practices are facing two major challenges. First, they are being encouraged to implement a medical home model. Second, they need to adapt to new payment models, using the principles and techniques of VBP. These two forces are challenging for all primary care providers. The magnitude of the challenge, however, is very different for primary care practices of different sizes and organizational relationships.

Large integrated health systems and group practices have the advantage of resources and scale. In contrast, small independent practices (those with four or fewer providers) have limited resources. Therefore, few small practices have received formal recognition as medical homes, and even fewer are participating in VBP arrangements.

The Special Challenges Small Practices Face

With their limited resources, small practices have difficulty putting in place the capacities needed to serve as medical homes. Incorporating and paying for new staff, training existing staff, and expanding patient services add costs that can threaten small practices’ financial viability.

Small practices are also at a disadvantage in VBP contracting. Payers will generally only accept a practice into a VBP arrangement if it serves enough of the health plan’s members to generate cost and quality results that the payer considers statistically valid. VBP contracts also require the capability to report regularly to payers on quality measures and respond to plan-provided information on healthcare utilization and expenses.

Putting these new skills and capacities in place requires a series of investments in health information technology, such as electronic medical records, workflow enhancements, and data and analytic capabilities. To accomplish this evolution, small practices require access to investment capital, as well as the ability to absorb increased operating costs and withstand disruption to practice operations and cash flow.    

The Role of Shared Services

One response to the small-practice dilemma involves the development of shared services across several practices, enabling the practices to share the cost of needed capacities and staff. The PHIP tested the appeal and feasibility of a shared-services model, working with providers in small practices in New York City and consulting with a group of experienced advisers.

The first phase of the project explored the idea of shared services with providers in small practices, as well as with organizations providing shared services (known as hosts). The second phase involved reviewing legal and regulatory issues around shared-services and VBP arrangements and creating a financial model for estimating the cost of shared services from the host and provider perspectives.

What Do Small Practices Need?

In the summer and fall of 2016, PHIP partnered with the American College of Physicians, American Academy of Pediatrics, American Academy of Family Physicians and Medical Society of New York to probe small practices’ needs and interest in the shared-services model. Findings show that there are skills and capacities small practices need to operate as medical homes and participate in VBP contracts but cannot afford. In addition, small practices are willing to consider sharing services, if the services are affordable and provided by a trusted organization with a track record of competence.   

High-Priority and Potentially Shareable Services

Participating practices identified high-priority and potentially shareable services across five areas—health information technologies (HIT), business/administrative services, data analytics and VBP support, quality improvement of staff and services, and shared professional staff who interact with patients. 

In theory, a group of small primary care practices could work together to create and fund a new organization to provide these services in-house. However, the required infrastructure, startup costs and ongoing expenses can be prohibitive. A more viable path would be to contract or partner with an existing organization—an independent practice organization (IPA), a large medical group, a hospital or a health system—to act as a host for a range of shared services,

To understand the prevalence and scope of shared-services arrangements in New York, PHIP interviewed 15 organizations currently offering shared services to their affiliated practices. Four basic models were noted:

  • Some hospitals, health systems, accountable care organizations (ACOs) and Performing Provider Systems (PPSs) have expressed interest in developing services to support their affiliated small practices.
  • Many small primary care practices belong to IPAs that provide a vehicle for contracting with health plans. Some IPAs already have or are developing the capacity to offer additional services to their members.
  • A few health plans are partnering with group practices or IPAs to create management services organizations (MSOs) that offer a range of services to small practices.
  • A few entrepreneurs are partnering with small practices, providing them with a range of needed services to help them participate in ACOs and other VBP contracts with payers.    

Legal and Regulatory Issues of a Shared-Services Program

Host organizations interviewed engage in two broad categories of activities:

  • Shared-services arrangements: A business relationship between a group of practices and a host they engage for organization and delivery of specific services
  • VBP arrangements: A contractual relationship between a group of practices and a payer, covering a cohort of that payer’s members, who are cared for in those practices

1. Establishing Shared-Services Arrangements

If a host organization provides shared services to a cohort of small practices, it is effectively acting as an MSO—an organization providing services to another organization under contract. To receive shared services from the host, each practice in the cohort would sign an independent contract with the host, governing the terms under which the agreed-upon services would be provided. This organizational design is common in healthcare and raises no significant legal or regulatory issues.

2. Establishing Value-Based Payment Arrangements

Practices participating in shared-services arrangements may also want their host organizations to facilitate and manage VBP contracting. To support the negotiation and management of VBP contracts, the host would need:

  • The ability to aggregate the patient panels of participating practices to negotiate VBP contracts as a group and to be granted the authority to do so by the practices;
  • The technical capability to perform sophisticated data analytics using clinical and claims data, and to combine and report practice-specific quality and utilization data; and
  • The financial expertise and contractual authority to receive and distribute incentive payments to individual practices, based on the group’s aggregate performance.

Practices seeking to participate in a VBP arrangement facilitated by a host can select from two main models:

  • Intermediation by an IPA. Most providers use an IPA structure to contract with payers, with the IPA serving as an intermediary between the health plan and the physicians. Where an IPA provides VBP contracting services, the IPA will commonly provide shared services to providers as part of their contracted relationship, often through an affiliated MSO. Should a cohort of practices working with a shared-services host decide to enter into a VBP arrangement by means of an IPA, the host organization could fill that MSO role under contract with the providers’ IPA.
  • Direct-to-payer contracting. Some health plans prefer to contract directly with the participating physicians, with no intermediary entity involved. Should a cohort of practices wish to enter into a VBP arrangement with a payer without the use of an IPA intermediary, the cohort could do so by entering into parallel VBP contract amendments that would be added to their existing health plan participation agreements.     

Modeling the Economics of a Shared-Services Program

PHIP’s financial consultants designed a financial model under which an existing organization could host a shared-services program serving small practices. Their methodology involved three sequential steps:

  • Key services matrix—a complete set of services to be included in the shared-services offering. Interviews showed that the services provided by health organizations aligned well with the needs identified by small practices.
  • Cost drivers—a set of assumptions for estimating the required staffing levels and costs of providing the key services to a cohort of small practices. Staffing and cost assumptions used for the financial modeling spanned nine areas: Electronic medical record (EMR) and Regional Health Information Organizations (RHIO), VBP claims data contractor, ongoing practice management support, medical home and VBP data analytics staff, quality improvement staff, shared professional staff, overhead/central services, management costs and startup costs. As a final step in developing the model, a “client” was defined—a host serving a small practice cohort of 20 practices.
  • Cost estimation—the financial model distributing costs across three distinct phases. In Year 0, the host and participating practices would develop and execute a project plan for implementing the shared-services program and make a series of one-time startup investments to prepare for the practice transformation. In Year 1, the participating practices would need to put core medical home capacities in place. In Year 2, the shared-services host organization would need to take on two additional responsibilities related to VBP contracting. First, the host would need to negotiate VBP contracts with payers and help participating practices manage services under those contracts. Second, the host would need to analyze information derived as claims data.

What Will It Really Cost? It Depends…

The financial model is a starting point rather than an endpoint. It assumes a “maximum cost” scenario—in other words, the cohort would start from essentially zero capabilities and would need to develop or acquire every single key service.

As applied to a real cohort, many of these costs would be lower or even zero, as a cohort of practices would not need to acquire every single service. To be useful, the model must be tailored to reflect local circumstances and the practices’ current capabilities and priorities. The actual cost of a shared-services program depends on several factors, including the baseline capabilities of the practice, the nature of the patient population being served, and the host’s administrative costs.

Timing and Cash Flow

VBP arrangements can offer primary care practices an opportunity to generate additional revenue to help offset the cost of building the capacities necessary to enter into these arrangements. If practices improve their patient panels’ health outcomes and reduce potentially preventable utilization and costs, they can share in the resulting savings. There is a substantial lag time, however, from when the practice sets up these new capacities until the practice’s payers will calculate and pay out shared savings to the practice.

Under shared-savings and shared-risk VBP arrangements, provider incentives are generally calculated after the end of the performance year. Then an additional six months are needed for late claims to be adjudicated. Therefore, to ensure financial feasibility, small practices will likely need to consider phasing in shared services incrementally and/or pursuing other sources of income.

The Need for Investment and Payment System Reform

The shared-services model requires two different types of financing:

  • Capitalization of the startup of such ventures, a one-time investment; and
  • Payment change to support the ongoing operating costs.

Neither of these is in place in any kind of systematic or broad-based way

There are some potential sources of investment capital to help cover the startup costs required to establish a shared-services program. For example, one source of investment capital could be to allocate any unspent funds from a state’s State Innovation Model (SIM) grant or Delivery System Reform Incentive Payment (DSRIP) program, both of which stress the importance of a transformed primary care system. Shared services, however, also require the second form of financing—augmented payments to compensate the involved practices or host organizations for their increased operating expenses.

Shared services could be part of the solution to ensure the survivability of small, independent primary care practices on which the most vulnerable populations often rely for care. Without investment capital and a reliable payment system, however, shared-services models are unlikely to succeed.

Conclusion and Next Steps

The PHIP report quantifies and evaluates the concept that small practices—which are at a disadvantage in terms of becoming medical homes and participating in VBP—can better position themselves by banding together and partnering with a host organization to share services and the costs of those services. It also provides a framework for practices and potential hosts to use when thinking about initiating such an effort.

One immediate next step would be to test the viability of the concept with primary care providers and host organizations. Creating and funding a series of pilot projects could test the proposition that together, small practices and host organizations can develop high-quality and affordable shared services that effectively transform practices and ready them for VBP arrangements.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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