Forming a PSO doesn't have to be risky
The greater the risks you take in the stock market, the greater your potential returns. The same holds true for provider-sponsored organizations (PSOs) that contract directly with Medicare beneficiaries, when physician groups can expect to spend $2 million to $7 million just to get the entity operational.
But a large investment doesn't have to be a foolhardy gamble. Like most small business enterprises, a good strategic plan can see you over the hump of your first three years of losses, which experts estimate can range from $8 million to $15 million.
"A PSO should plan to lose its financial shirt during its first few years in business until it learns how to effectively manage its Medicare population," advises Roger Friend, executive director of the People's Health Network (PHN) in Kenner, LA. PHN is one of 25 HCFA-approved organizations chosen to participate in a three-year-old national PSO pilot program.
A good starting place is determining which functions to outsource and which to perform in-house, Friend says.
"Building these functions in-house increases your control. But contracting them out to a vendor will probably save much-needed capital over the short run," notes Friend.
Based on Friend's experience, critical start-up considerations include:
1. Benefit design. Many PSOs will feel pressured to match the benefit packages offered by local HMOs. However, this can be a troublesome strategy, observes Friend. Before deciding to match the competition's benefit package item for item, "ask beneficiaries what they want in terms of benefits and get a gauge of what kind of name recognition and confidence factor the various providers involved in your PSO have with your target Medicare population. If it turns out the physicians and hospitals involved in the PSO give you a distinct local competitive advantage, instead of having to match the HMO's $1,000 drug benefit, you may be able to do just fine with a $500 package," says Friend.
He also recommends using focus groups of Medicare beneficiaries when making basic decisions on such things as service areas and benefit packages. "I also find it useful to compare what physicians participating in the PSO think beneficiaries want and need with what actual beneficiaries say they want and need," notes Friend.
2. Provider network. Aligning your incentives so every provider in the network - hospitals, physicians, home health, specialists, etc. - is working in sync toward the goal of excellent care in the appropriate setting will be one of your first concerns when organizing the provider network.
3. Make or buy. Should the PSO lease or buy such core operational functions as its information systems and sales force? "This is a critical decision, not just because of the money involved, but the ripple effect on such vital factors as information control and ability to manage growth," notes Washington, DC, health care consultant John Gorman of Managed Care Compliance Solutions.
4. Organizational structure. Do you need - or want - to partner with other outside groups? Under HCFA's guidelines, 70% of an urban PSO's medical services, and 60% of a rural provider's medical services, must come from affiliated providers. "Effectively, this means physicians cannot create a PSO without a hospital partner," says Friend. "This does not mean the hospital must be the majority partner, but it must share risk with the physicians."
Similarly, because a hospital cannot provide 70% of PSO-related medical services by itself, it will need to partner with both primary care physicians and specialists. Consequently, the PSO needs to take a good inventory of its capabilities and what kind of additional provider capacity - if any - it may require.
5. Non-provider partners. Because affiliated providers only have to own at least 51% of the PSO's stock, as much as 49% of the equity theoretically could be used to partner with a variety of outside investors.
"The range of possible partners is almost infinite, ranging from a venture capital firm to a drug company or a disease management company," notes Patrick O'Hare, a partner in the Washington, DC, offices of McDermott, Will & Emery.
Again, the major question is, do you want or need a nonprovider partner, and why? If so, what unique organizational or strategic need do you want this partner to fulfill? Does the potential partner share your treatment philosophy and long-term strategic goals?
6. Synergy. When making individual operational decisions, it is vital to keep in mind what effect each one will have on other aspects of the organization.
For example, the range and kind of benefits you offer, particularly supplemental benefits like prescription drugs or eyeglasses, will have a dramatic impact on your overall marketing and financial plans - especially the PSO's adjusted community rate (ACR) submission. The ACR is a detailed actuarial explanation of how your benefit package will work and what it will cost that must be submitted to HCFA annually.
The ACR, in turn, is a major driver in determining the composition of your physician network because the benefit package reflects what kinds of providers need to be included in the network. Because each physician in the network can only see so many patients, composition of the physician network will influence your member enrollment projections and vice versa.
The final benefit package also will affect the PSO's utilization management plan. "If the benefit plan includes such things as unlimited generic drugs, or even a very generous drug benefit, a sicker population is more likely to enroll," predicts Gorman.
Likewise, when designing your marketing plan, it is important to remember that the PSO's most loyal members will probably be the ones who see and like their doctor the most. "And these are usually the sickest people in the system," says Friend.
As such, "you also have to factor in what impact this loyalty factor might have on your utilization management, operations, and staffing models when developing the basic blueprint of what your PSO will look like," advises Friend.
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