Don’t let these seven traps sabotage your PSO strategy
Consultant discusses common PSO myths
Intense interest in the newly authorized provider-sponsored organizations (PSOs), combined with a lack of experience and official information about how they will be managed and regulated, has caused the proliferation of a number of myths among physicians regarding how easy or hard it will be to organize and operate a PSO. (See articles on p. 33-38 for more information on PSOs.) Health care consultant Bill DeMarco, president of Rockford, IL-based DeMarco & Associates, recommends you review these myths to make sure your organization isn’t making incorrect assumptions about entering the PSO market.
Myth 1: An organization will be able to quickly apply for and receive a PSO license.
"Just the opposite. The PSO application will actually require a great deal of blood, sweat, and tears," says DeMarco (see sample PSO timetable at right). Overall, it could take anywhere from 18 to 30 months from the start of the application process until the PSO begins enrolling members and generating revenue, he estimates. Before applying for a federal waiver, providers must first complete an application for a state HMO license. Only after this has been formally rejected can you apply for a federal PSO waiver.
Myth 2: PSOs are going to replace HMOs.
"It’s very unlikely PSOs will put HMOs out of business," DeMarco says. PSOs will increase competition in the marketplace, but they won’t eradicate other risk contractors.
Because they will be created and operated by local providers, PSOs will have the advantage of a recognizable, local brand name. However, many HMOs also have the leverage that comes from established affiliations with national associations and organizations. In addition, more established and profitable HMOs can afford to offer such benefits as free eyeglasses and hearing aids while waiving monthly member premiums to attract enrollees. Fledgling PSOs may not be able to match these tactics.
In turn, targeting a specific segment of the local Medicare market rather than trying to corner the entire market may be a more viable strategy for many PSOs, says DeMarco.
Myth 3: Medicare PSOs can only be owned and operated by physicians and hospitals.
While 51% of a PSO must be controlled by providers, the enabling legislation does not say which providers. Besides physicians and hospitals, other possible majority-ownership candidates could include independent practice associations and nursing homes. Minority owners might include any combination of for-profit management companies, private investors, HMOs, insurance companies, and financial institutions.
Myth 4: Medicare PSOs won’t be capitated.
"Some physicians I’ve talked with believe there will be no assumption of financial risk with a Medicare PSO. This is not true," says DeMarco. "PSOs are risk-bearing entities. Learning to think like a payer will be one of the major adjustments providers are going to have to make."
Myth 5: PSOs will automatically be successful.
"Operating a PSO will involve risk like any other business. Since providers can expect federal Medicare rates to drop rather than increase over the near and long term, tight management will be needed to run a successful PSO," says DeMarco.
Myth 6: PSOs will be able to take on risk contracts without approval from their state insurance commission.
State insurance agencies will want a say in establishing what they feel are appropriate financial reserves and risk-management guidelines for Medicare contracts, just as they do with commercial contracts, insists DeMarco.
Myth 7: Medicare PSO rates will be greater than those paid for commercial populations.
Absolutely not, DeMarco says. If a hospital can provide medical services to a commercial population at a lower rate under an alternative reimbursement model, HCFA wouldn’t be willing to pay a much higher fee for seniors, says DeMarco.
"In fact, I expect both Medicare and commercial rates will be about the same in the not very distant future," DeMarco predicts.
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