PSO notice to providers: Uncle Sam wants you

Mild solvency requirements open the PSO door, but should you walk in?

[Editor's note: This is the second of a two-part series on provider-sponsored organizations (PSOs). In this issue are articles on setting up a PSO compliance plan and how to decide if your PHO should form a PSO.]

After the Baltimore-based Health Care Financing Administration (HCFA) released in mid-April its solvency requirements for PSOs to contract with Medicare, it became clear to providers across the country that the federal government had extended them a gold-embossed invitation.

Granted, it wouldn't be a free ride to the Medicare gala, but the intent was clear: HCFA is trying to attract providers to waltz with Medicare risk contracting.

Many national managed care and PSO experts say PSOs will thrive in coming years and quickly surpass HMOs in their success in attracting Medicare consumers.

These new PSO plans will be similar to Medicare HMO risk contract plans except that the new plans were established by the Balanced Budget Act of 1997. In the legislation, HCFA established a Medicare+Choice or Medicare Part C "shopping mall" plan, which provides a variety of new options for Medicare consumers, including PSO Medicare plans.

10 million Medicare recipients up for grabs

"There are going to be 10 million Medicare folks who will move over to PSOs in the next four years. We've had HMOs with Medicare risk for 10 years, and only four million people have enrolled," explains R. Steven Venable, MD, FAAFP, FACEP, chairman of the American Association of Provider Sponsored Organizations in Tampa, FL.

Most of these new PSOs will be in communities with populations of less than 250,000, he asserts. "We think it's a great opportunity for providers and hospitals to start a PSO."

One new PSO, St. Joseph's Care Management Corp. in Atlanta, had a good idea of how popular a PSO Medicare plan would be with seniors months before its May kick-off program.

The PSO had a backlog of nearly 500 calls from people who were interested in finding out more about the PSO's Medicare product - Medicare SMART - says Tom Flora, vice president of the PSO. The PSO was formed by the 350-bed St. Joseph's Hospital and has an affiliation of 21 hospitals, including Emory University Health Care in Atlanta.

"We have a 31-county service area, and a lot of it is rural," Flora says. "We're the original hospital in Atlanta, founded in the mid-1800s, and we have a wonderful reputation here."

Flora says the PSO has no contracted physician panel but is contracting with ancillary services and hospitals to share some of the risk.

"We've built into the current plan some cost incentives for beneficiaries and financial penalties if they don't get pre-authorization for certain things," he adds.

The PSO's start-up costs have been in the range of $2 million to $3 million, Flora says. "We have a joint venture with Momentum Health Services in Birmingham, AL, to be our third-party administrator and to do medical adjudication, claims payment, collections of the $20 monthly premium, prior authorization, and chart review."

For other providers looking to start a PSO, the proposed federal solvency standards, which are undergoing a 60-day public comment period, might give them some incentive. Although some of the details are complicated and may require interpretation by an accountant, here's a thumbnail sketch:

o PSOs must have a minimum net worth of $1.5 million.

HCFA may lower that to $1 million if a PSO can show that it has an established infrastructure to operate the PSO and if it has experience in global risk contracting or if the PSO has a long-term contract with a third party that captures administrative expenses, says Peter N. Grant, JD, PhD. Grant is a partner with Davis Wright Tremaine law firm in San Francisco and a health law specialist who helped write a recommendation for the solvency standards as a member of the HCFA negotiated rule-making process formed for this purpose. He spoke in April about the standards during a seminar at the National Managed Health Care Congress (NMHCC) in Atlanta.

o Liquidity is important.

At least $750,000 of that $1.5 million must be in cash or cash equivalents, and the PSO's business plan needs to show it has sufficient cash flow to meet its obligations.

o Providers can use both tangible and intangible assets to meet the solvency requirements.

The federal solvency standard is more lenient than those used by many states as to what types of assets PSOs can use to show how they will meet the cash equivalent requirement - and this is where an accountant will come in handy.

"This is a big victory for health care providers because most state health insurance regulation is very stingy in counting assets in a beneficial way," Grant told providers at the NMHCC seminar. HCFA's proposed regulation allows providers to use intangible assets such as physician contracts or practice management agreements for up to 20% of the required $1.5 million in start-up capital.

o Providers must comply with the solvency standards until their PSO breaks even.

The above standards will only allow a PSO to open for business. After meeting these initial requirements, PSOs will have to show compliance with solvency standards until they reach a break-even point in three years or longer.

The prospect of starting a PSO still is daunting, but the solvency news from Washington was welcomed by some providers.

"These actually are not stringent," says Robert Minkin, chief executive officer of Desert Hospital in Palm Springs, CA. Desert Hospital has 388 beds and is part of the Tenet Healthcare Corp. in Dallas. Tenet launched a PSO in New Orleans as part of the Medicare+Choice demonstration project.

"I was very surprised that the financial reserves were limited to $1.5 million, with $750,000 in cash and half in other assets," Minkin says. "It has become clear the federal government is trying to foster these PSOs."

Desert Hospital, which has some capitation experience, is considering forming a PSO to contract with Medicare, he says. "We're going to look for a physician organization to fund at least 50% of the exposure; the start-up costs will have to be funded equally by both parties."

Some experts caution providers to not become too enthusiastic about the favorable federal solvency requirements because other costs can be substantial.

"My feeling is the regulatory requirements are not the big hurdle," says Phyllis Costanza, senior manager with The Lewin Group in Fairfax, VA. The Lewin Group is a health care consulting firm that works with providers, managed care organizations, and others. "If a provider doesn't have $10 million to sink into the PSO - that's the issue."

Costanza lists these potential costs of forming a PSO:

· establishing a new infrastructure, including computers and equipment;

· establishing a provider network;

· hiring a consulting firm to assist with the PSO application process;

· hiring a consulting firm to assist with state licensing requirements;

· developing a claims processing system;

· setting up all administrative services;

· setting up member services and sales teams or paying a third party to handle this.

Other expenses might include hiring a chief executive officer to run the PSO and hiring a compliance officer specifically for the PSO's operations. (See story on forming a PSO compliance plan, at right.)

"Make sure you do a thorough feasibility study and don't jump into this blindly because there are so many start-up factors and so many administrative requirements," Costanza advises.