PSO maze getting easier for providers
June 1, 1998 5 minutes read
PSO maze getting easier for providers
HCFA's PSO definition offers key piece of puzzle
Proposed regulations defining what a provider-sponsored organization (PSO) is, and who can form one, have finally been published by the Health Care Financing Administration (HCFA). The preliminary rule was published in the April 14 edition of the Federal Register. HCFA will accept public comments on the proposed regulations until June 15.
Combined with HCFA rules governing federal PSO solvency standards and criteria for waivers from state licensing requirements, "this proposed PSO definition is a key piece in the puzzle of how provider-sponsored entities can quality for contracts under the new Medicare + Choice program," notes Wendy Krasner, partner in the Washington, DC, law offices of McDermott, Will & Emery.
Basically, HCFA defines a PSO as a public or private entity that:
· is established and operated by a health care provider or a group of affiliated health care providers;
· provides a substantial proportion of the health care items and services under a Medicare + Choice contract directly through the provider or affiliated group of providers;
· in the case of a group of affiliated provi ders, the providers share direct or indirect substantial financial risk for the provision of items and services under their Medicare + Choice contract and have a majority financial interest in the PSO.
These three broad criteria give rise to a number of related issues, including:
1. Control. HCFA says control exists if an individual, group of individuals, or organization has direct or indirect power "to direct or influence significantly" the actions or policies of the PSO.
As such, "it seems HCFA intends to ensure provider control not only of clinical decision making but also of the administration and management of the PSO," says Krasner. This also means HCFA will have to do a case-by-case review to determine if an applicant meets the definition of a PSO.
2. Provider leadership. One thing that makes PSOs different from other health care delivery organizations is they are intended to be controlled by providers. As such, who or what constitutes a provider for PSO purposes is a key consideration.
"HCFA's definition of a health care provider is much broader than the one Medicare traditionally uses," points out McDermott, Will & Emery partner Patrick O'Hare. Specifically, not only licensed individuals such as physicians are included, but institutional entities are included as well.
For example, under the proposed PSO definition, an integrated health care delivery system (IHDS) is considered a provider even through it is not a traditional licensed medical provider.
3. Health care delivery. To be a provider, the entity or individual must be "engaged in the delivery of health care services." Again, HCFA intends to define this phrase broadly because of the many new kinds health care organizations being formed daily, notes Krasner.
However, "because HCFA believes PSOs are intended to be established and operated by providers actively furnishing patient care, the interim rule only says the entity applying for a license be organized and operated 'primarily' for the provision of health care," notes O'Hare.
In turn, HCFA will look at the applicant's entire organizational structure, including lines of business, mission, bylaws, and governance before determining if it is a qualified provider for PSO purposes.
4. The "substantial proportion" definition. PSOs must deliver a substantial proportion of health care services through the provider, or through the affiliated group of providers responsible for its operation.
Rural, non-rural definitions differ
For non-rural PSOs, HCFA defines "substantial proportion" as not less than 70% of Medicare items and services covered under the PSO's contract.
"Substantial proportion" for rural PSOs is defined as 60% of Medicare items and services covered under the contract. Qualifying rural PSOs must be able to show they can at least provide primary care, routine specialty care, and emergency services. They also need to demonstrate that their referral patterns to non-rural providers are consistent and that a majority of the PSO's Medicare enrollees reside within the rural area it is licensed to serve.
5. Defining the "affiliated providers" standard. A provider is "affiliated" with another provider if through contract, ownership, or another method, any of the following criteria are met:
- One provider, directly or indirectly, owns at least 51% of the PSO or has voting rights representing at least 51% of the voters.
- Providers are part of a lawful combination where they share financial risk in the PSO's operations. This means, besides passing muster with HCFA, PSO applicants must structure their financial risk-sharing in a way that also meets federal antitrust and tax guidelines.
- Providers are part of a controlled group of corporations under sec. 1563 of the Internal Revenue Code.
- Providers are part of an affiliated service group under sec. 414 of the Internal Revenue Code.
"HCFA does not want these rules to limit the structuring or payment arrangements of PSOs," says Krasner. "The purpose of these tests is to ensure the PSO not only meets HCFA regulations, but those of other agencies like the IRS and the Federal Trade Commission."
6. Determining substantial financial risk. Besides these organizational tests, a PSO also must demonstrate that each affiliated provider shares, directly or indirectly, "substantial financial risk" for the provision of items and services under the Medicare+Choice contract.
Under HCFA's PSO definition, each participating provider must be at financial risk for more than their services. "This means each affiliated provider must have a stake and be at risk for the PSO's entire economic operation," notes O'Hare.
HCFA has outlined several sample models of what it considers satisfactory risk-sharing arrangements, whether used alone or in some combination. These include:
· Acceptance of fixed capitation or percentage-of-premium payments for providing services to Medicare PSO enrollees.
· Financial incentives that encourage affiliated providers to achieve utilization management and cost-containment goals, including:
- withholding a significant amount of the compensation due them to cover possible future PSO losses as long as it is returned when the PSO meets its cost-containment or fiscal year utilization goals;
- establishing cost or utilization targets with corresponding provider financial rewards and penalties based on whether the PSO meets these goals.
Other methods of establishing significant financial risk HCFA says it will consider include:
- significant ownership position in a for-profit PSO;
- significant investments by affiliated providers in the PSO;
- affiliated providers' personal guarantee to cover the PSO's future operating expenses or debt.
7. Defining "majority financial interest." Affiliated PSO providers must have a "majority financial interest" in the organization. HCFA defines "majority financial interest" to mean effective control of the PSO. To have effective control, the affiliated providers must own at least 51% and maintain a majority governance position in the PSO.
This gives rise to larger control issues as well. "Physician groups looking to hospitals to put up the bulk of the capital needed to launch the PSO need to consider this provision closely since it basically says he who puts up the bulk of the money should get the bulk of the votes on the board," says O'Hare.
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