HCFA, provider groups reach agreement on proposed PSO solvency rules
April 1, 1998 2 minutes read
HCFA, provider groups reach agreement on proposed PSO solvency rules
Decision expected this month
In a major compromise, the Health Care Financing Administration (HCFA) and the various provider and health plan groups represented on an official rule-making committee agreed in early March that up to 20% of the $1.5 million minimum in net assets that will be required to start future provider-sponsored organizations (PSOs) can be in the form of intangible assets.
The intangible assets rule is a major victory for physician groups. HCFA had wanted to limit this intangible asset criterion to 10%, and many HMOs had argued that provider groups should be subject to the same capital standards that insurers face. As HCFA Center for Health Plans and Providers acting director Kathleen Buto said at a working session of the negotiated rule-making committee, "We feel most strongly about keeping a limit on intangibles." Intangible assets can include such things as physician contracts, practice management agreements, and health care delivery networks.
Exactly how much funding prospective PSOs would need to meet minimum federal solvency standards has been a major question facing provider groups interested in organizing a PSO. The March 5 negotiated rule-making agreement will serve as the basis for an interim solvency rule that HCFA is legally required to publish by April 1. A 60-day public comment period is required once the proposal is published.
Under the expected solvency standard, prospective PSOs must have a total minimum net worth of $1.5 million, at least $750,000 of which has to be in cash or cash equivalents, plus a $100,000 insolvency deposit. However, at its discretion, HCFA can lower the $1.5 million net worth threshold to $1 million if it feels the PSO's business plan proves start-up costs will be low enough to justify reducing the net worth requirement.
As part of the proposed solvency standard, prospective PSO applicants must be able to demonstrate that they have the available resources to fund all projected losses until they hit a projected break-even point. And that's not all: They also must provide evidence of financing to cover operations for another year after reaching break-even before HCFA will issue them a license.
However, in another significant compromise sought by physician groups, HCFA agreed that an "irrevocable, clean, unconditional letter of credit" can be used instead of cash reserves to fund estimated loses.
While most provider groups came away generally pleased with the proposals, rural health organizations say the minimum cash start-up standards and reserve requirements to fund projected losses may be too high for many rural health care organizations. As such, another push for a separate set of solvency rules for rural PSOs is expected during the public comment period.
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