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Curriculum Center Browse Bibliography Build EPacket Pricing Structure Distribution Process Management Control in Nonprofit Organizations
Percy Memorial Hospital
Young, David W.
Functional Area(s):
   General Management
   Healthcare Management
Difficulty Level: Intermediate
Pages: 11
Teaching Note: Available. 
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First Page and the Assignment Questions:

Tom Walters, Vice President of Managed Care at Percy Memorial Hospital (PMH), was preparing for the first Physician/Hospital Organization (PHO) Steering Committee meeting with the hospital’s independent physicians and the PHO’s legal counsel. Mr. Walters knew that development of the PHO’s charter and other legal documents was critical to the organization’s ability to attract a critical mass of physician members and to operate effectively. He was reviewing the key decision points that would be discussed at the meeting. His goal was to guide the development of the PHO in a direction that would assure physician commitment and give the hospital some control.

A few days earlier, Mr. Walters had received a phone call from a local physician, who had told him that St. Mary’s Hospital, PMH’s main competitor, had just mailed applications for its PHO (First Choice) to all of the area’s physicians. The news caught Mr. Walters by surprise. He had received no indication from any of the local physicians that St. Mary’s was creating a PHO.

The physician caller had told Mr. Walters that St. Mary’s had created First Choice without significant input from the area’s physicians. Mr. Walters believed that, by involving Percy’s physicians, he could gain their commitment, thereby developing a PHO that was preferable to First Choice. Doing so while simultaneously making sure the hospital maintained control in certain key areas would be difficult, however. He knew he would need to be careful about several matters of both process and substance.


Percy Hospital was a 296 bed community hospital, located in Percy, Tennessee. For over 100 years, the hospital had provided high quality, cost-effective health care to the citizens of the greater Percy area. PMH also was known as a leader in the managed care arena, with over 20 years of experience delivering health care to patients of managed care plans. The hospital currently was undergoing a $20 million renovation to refurbish an old physical plant, and to expand its outpatient areas to address the increases it was experiencing in ambulatory care.

The Percy health care environment was becoming increasingly competitive. St. Mary’s, the only other hospital located in Percy, was increasing its managed care presence through the success of a managed care plan that had signed an exclusive contract with it some four years ago. PMH’s plan to develop a PHO was part of a strategy to improve the hospital’s ability to address the needs of the managed care market by integrating the area’s independent physicians with the hospital. . . .


  1. Given that First Choice PHO already is established, is PMH too late to develop its PHO? If not, how should Mr. Walters address the fact that First Choice is already developed and ready to accept members? If so, what should PMH do? For example, should PMH wait to see how the market develops, and consider forming a more integrated model? What might a more integrated model look like?
  2. Assuming that PMH decides to develop a PHO, how should the governing board be designed? That is, which physician specialties should be included on the board? What rationale did you use for including or excluding different specialties? Would you anticipate a power struggle among the physician members on the board and if so, which ones? For what kind of power?
  3. For each of the remaining decisions, how should Mr. Walters try to position the hospital? What kinds of difficulties do you think he will encounter at the Steering Committee meeting? How should he prepare for these?