Physicians excited about possibilities presented by newly authorized PSOs
Questions remain about these new provider-run managed care entities
[Editor’s Note: Many of our readers tell us they plan to take advantage of the new provider-sponsored organization (PSO) concept included in last summer’s Balanced Budget Act. Most of you are at least intrigued enough to investigate whether the concept can work for your practice. This month’s issue examines the various legal, logistical, and financial requirements that affect practices interested in participating in PSOs.
If your practice decides to participate in a PSO, we’d like to hear about it. Contact editor Larry Reynolds at (202) 347-2147, or via e-mail at Lreyno3720 @aol.com. You can also send e-mail to managing editor Francine Wilson at [email protected].]
Talk to group practice leaders in almost any part of the country, and you’ll hear about the growing interest in provider-sponsored organizations, one of the few pieces of good news for physicians that emerged from last summer’s Balanced Budget Act. If your organization wants to take advantage of this opportunity, you need to begin your strategic planning process now, before your competitors get there first.
A PSO is basically a managed care organization organized and controlled by providers to deliver Medicare risk contracts. According to the rules that HCFA has formulated thus far, providers affiliated with a PSO must own at least 51% of the operation. This 51% rule, however, does not mean potential PSO owners must partner with another group. A single entity like a physician organization or hospital can also own and manage 100% of the PSO.
"What you have here is an HMO-like entity that is designed to accept risk, and is operated by the local provider community rather than a health plan or outside insurer," says Frank Matricardi of Phoenix (AZ) Health Care Consulting. Matricardi is also a member of a three-person team representing the independent practice association (IPA) industry at the HCFA-sanctioned negotiated rule-making proceedings being held to write new PSO solvency standards.
PSOs are reimbursed at the same rate as Medicare HMOs, with a floor of $367 per member per month. Like Medicare HMOs, HCFA varies reimbursement rates by market through the Adjusted Average Per Capita Costs. There is a one-time, three-year federal waiver of state law for any PSO having trouble receiving a state license. These PSOs can apply for a federal license until November 2002. Also, HCFA has tentatively proposed that PSO-participating providers in urban areas will be asked to directly deliver at least 70% to 75% of the Medicare services that member beneficiaries receive from the PSO. PSO-participating providers in rural areas must directly deliver at least 60% of the care provided to their Medicare beneficiaries.
"By requiring that such a large portion of health care services be provided by the sponsoring providers, these regulations would effectively curtail any substantial subcontracting arrangement," points out Fred Abbey, a partner in the Washington, DC, office of national consulting firm Ernst & Young.
HCFA estimates there could be as many as 800 to 1,000 PSOs in operation across the country within the next several years. So far, many provider groups are investigating the feasibility of the concept, but most have made no firm determinations.
"We’re definitely looking into the option of forming a PSO. We see this as a potentially great way to practice good medicine and stay competitive in the market," notes Stephen Rudy, MD, of Monarch Health Care, a Mission Viejo, CA-based IPA. Like most other providers, Monarch is still in the pre-planning, wait-and-see stage of the PSO process.
Monarch is not alone in its cautious attitude. "My impression is most physicians are still gathering information and have not moved into the actual PSO planning and design stage yet," says Robert Redling, a spokesman for the Englewood, CO-based Medical Group Manage ment Association.
St. Joseph’s Physician Association, for instance, a 320-physician association affiliated with Milwaukee’s St. Joseph’s Hospital, is "just seeing if it’s possible for us to do a feasibility study of forming a statewide PSO, but that’s as far along as we’ve gotten," says the IPA’s executive director, Karen Lewinski. "With everyone from HMOs to integrated delivery systems trying to get into Medicare risk contracting, it’s impossible right now for us to tell where we’ll end up in this process," notes Lewinski.
"We’re still trying to get ready to take a hard look at our PSO prospects," says Mike Wilson, president & CEO of Catholic Healthcare West Medical Foundation, a Sacramento, CA-based medical group with 500 physician members spread throughout California.
Given the already strong competition and extent of managed care in the California, "candidly, I’m not sure we can beat the HMOs at their own game, so to speak," observes Wilson. "As such, we’re talking more about finding ways to partner with local HMOs than forming our own separate PSO to compete head-on with them."
For providers, the decision to develop a PSO starts as a strategic decision to enter the buyer side of the Medicare managed care market.
Because providers will be both delivering care and at financial risk for their Medicare managed care contracts, they will have to start thinking and acting like insurers, notes Karen Cook, a partner in the Tampa, FL, office of the Scheur Management Group. Scheur has consulted with several of the 20 PSOs already organized under a HCFA pilot test program.
Because it can be very costly to develop a PSO (see chart on p. 34 for a summary of these costs), defining the final solvency standards for these PSOs is a major issue before HCFA. The amount of cash required can vary widely according to your market, but can run as low as $750,000.
Insurers, who will potentially be competing with PSOs, have argued that PSOs should be required to have the same amount of cash reserves in the bank $1.5 million that HMOs are generally required to hold. Providers claim that it makes sense for them to be held to a less demanding reserve solvency standard. They say their potential for loss will be less because they are the ones providing the medical services.
Many insiders predict HCFA’s final rules will permit providers to include such factors as capital equipment, facilities, letters of credit, guarantees from sponsoring organizations, and "sweat equity" in their solvency calculations. If this proves to be the case, it would significantly lower the amount of cash a PSO would have to obtain to open up shop.
Assessing your potential for PSO success
Because the financial and competitive risks of forming a PSO can be formidable, experts recommend that potential PSO candidates go through an organized decision-making process before committing to the venture. Ernst & Young has developed a "decision tree" to help guide possible PSO applicants along the decision-making process (see chart above). Some of the key steps in this process include:
1. Identify your goals. There are several different reasons for wanting to create a PSO, the most obvious one being to compete directly against established health plans for Medicare-covered lives. Starting a PSO also might help you establish a competitive position in your marketplace.
(For more information on this strategy, see step No. 2.)
Finally, consider using your PSO as a stepping stone to other ways of increasing your practice’s effectiveness in the marketplace. For example, "the PSO could be used as a ploy to gain more leverage with health plans, while the threat of forward integration might gain you access to more capitated contracts," advises Washington, DC-based Ernst & Young partner Jim Roberts.
2. Analyze your competition. Once you define your goals, take a close look at your local competitors. Your competitive analysis should examine barriers to market entry posed by existing managed care players, competition from other providers, and start-up costs. Other topics this competitive analysis should address are:
How does the geographic coverage of your potential PSO’s provider network compare against that of your competitors? Are your participating physicians, hospitals, and ancillary service providers located near where your target members live?
Can the PSO afford to provide supplemental benefits such as prescription drugs and eye care?
What kind and size of sales and marketing staff and budget will you need to be competitive?
How can the PSO penetrate the employer-sponsored plan market? Remember, more and more employers are purchasing Medicare risk products for their retiree benefit programs.
What can the PSO do to differentiate itself and still remain price competitive?
3. Develop a competitive pricing strategy. From the start, PSO fees must equal or, ideally, be lower than those charged by local managed care competitors. While underpricing the competition would be preferable, most experts feel this goal is impractical, especially in markets where zero-premium high-benefit packages are already the norm.
Some things a PSO must do on the medical side to ensure it will be price-competitive include aligning provider incentives and protocols to ensure that your practice meets its cost and utilization goals. On the administrative side, there must be efficient processes for functions traditionally handled by insurers, such as claims and appeals processing , information management, network contracting, and regulatory procedures.
4. Consider potential partnerships with other providers. If your initial estimates indicate it will cost more than you can afford to launch the PSO on your own, or will force you to set prices uncompetitively high, then you might consider finding one or more partners to work with.
"Providers who complain about the administrative costs of health plans will quickly learn to appreciate the scope of the infrastructure required to support a Medicare PSO," notes Ernst & Young senior partner Doug Lee.
Striking a partnership with a hospital or hospital system will likely be one of the most popular options. Other possible partners could include nursing homes, HMOs, IPAs, insurance or drug companies, venture capital firms, and individual investors.
5. Develop a business plan. If your competitive analysis determines that it makes sense for you to form a PSO, your next step is to create a formal business plan. "In the business plan, you want to specify what the organization is going to do, how, and for whom, along with the financials for getting there," notes Roberts.
6. Prepare your Medicare application. It typically takes insurers 12 to 18 months to complete a Medicare application, Abbey says, so the time frame for PSOs should be similar.
7. Develop an implementation strategy. The last stage in the development process is preparing to implement the PSO product. This includes such activities as developing and modifying information systems, preparing the marketing plan, hiring and training staff, actually rolling out the product, and continuous care management monitoring to ensure that appropriate cost and quality standards are being followed. Allow three months for this stage.
One way to maximize your strategy is to take advantage of your most important marketing benefit: the physicians in your group. Other provider-owned organizations have found having their physicians send a short letter informing their patients that they are affiliated with a particular organization is a very effective member recruiting tool.
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