Florida Hospital Healthcare System in Orlando and Morgan Group in Atlanta are two very different healthcare organizations. The first is a multihospital based integrated delivery system; the second is a physician-driven independent practice association specializing in risk contracts with payers.
But the two organizations have one thing in common: Both are contracting directly with Medicare under a HCFA demonstration project called Medicare Choices.
Eight organizations are in the demonstration to date, ranging from a teaching hospital-HMO joint venture to a provider-sponsored HMO. Ten more organizations will be added later this year.
As physicians, hospitals and other provider groups across the nation scramble to put together the necessary capital, medical management systems, administrations and delivery networks to become PSOs, Congress is debating several bills that would give providers the power to accept Medicare risk contracts without the traditional insurance component.
Most experts believe PSO legislation will become part of the federal budget reconciliation package, which is expected to be on the president's desk by the fall. Although President Clinton supports PSO legislation, the administration recently suggested it might support a greater regulatory role for states, a move that would not be welcomed by providers.
The PSO concept is controversial to some. The American Medical Association and other groups such as the American Association of Homes and Services for the Aging are pushing for modifications in the two PSO bills that would give nonacute-care providers the same ability to contract with Medicare that hospitals have.
While the healthcare industry supports the PSO legislation, the insurance industry has lobbied for regulation of PSOs at the state level and for laws that would hold PSOs to the same quality and solvency standards as HMOs. Without those changes, insurers warn that PSOs with insufficient capitalization and management expertise will not be able to offer Medicare beneficiaries high-quality and cost-effective care.
"I liken PSOs to the insurance industry of the 1970s, when HMOs were just getting off the ground," says Christopher Schramm, executive director of Morgan Group. "There were a lot of questions about HMOs back then."
State insurance commissioners learned the hard way about regulating HMOs, Schramm says. "Many (HMOs) failed because of bad management, insufficient regulation and reserve requirements," he says. "When you are in the risk business you need to properly capitalize. We support solvency regulations. We have already demonstrated we have the infrastructure to manage Medicare patients on a capitated, at-risk basis."
In Georgia, the state insurance department created a new health insurance category for PSOs like Morgan. Under the state's Provider Sponsored Healthcare Corporation license, Morgan was required to set aside $1.1 million in reserves and another $500,000 in working capital, Schramm says. "We needed to raise the capital through private investors. It was something we didn't need to do before with our at-risk contracts with insurers," he says.
During the past three years, Morgan has negotiated capitated contracts with five payers for a total of 15,000 enrollees. Soon, the 320-doctor IPA will sign the HCFA contract and begin marketing its PSO to Medicare patients through NYLCare, the health benefits subsidiary of New York Life Insurance Co., Schramm says. First-year enrollment is expected to range from 5,000 to 7,000.
At Florida Hospital Healthcare System, Richard Reiner, president of the nation's first fully operational PSO, predicts enrollment in Florida Hospital Premier Care will reach 10,000 by the end of the year under the demonstration project. Enrollment is now at 5,900, he says. FHHS is owned by Adventist Health System-Sunbelt, a 16-hospital system based in Orlando.
"We made the decision to build (our PSO) internally," Reiner says. "You have to have a good infrastructure in place with expertise and competency in claims and medical management, provider relations and accounting to do Medicare risk contracting."
Reiner says FHHS executives identified nine core competencies necessary for PSO success (See graphic, p. 26). Experience gleaned from risk contracting with payers for 38,000 enrollees gave Reiner confidence that FHHS had already met six of the criteria, including contracting, provider relations and management of medical services, information systems and claims and financial services. Upon examination, Reiner discovered the system needed to work harder on compliance, marketing/sales and member services.
Experts were recruited to help improve services in those three areas (HCFA requires PSOs to have a grievance and appeals process in place for members), Reiner says. "We hired additional staff and spent some money on additional capital equipment."
Among the improvements, the managed-care department increased from 50 to the equivalent of 100 full-time employees. Part of the staffing increase came about because the commercial risk contracts increased last year to 38,000 enrollees from 15,000, Reiner says.
Florida's insurance department approved FHHS Premier Care after it met HCFA's quality and solvency requirements, Reiner says. (Adventist guaranteed $2 million to meet HCFA solvency reserve guidelines.)
HCFA pays FHHS a monthly amount for each enrollee. FHHS divides the money between the hospital and physicians based on predetermined costs. HCFA pays PSOs 95% of their region's "adjusted average per-capita cost."
"PSOs must align incentives with physicians and be able to work with them to manage costs," says Bill Wing, FHHS' director of operations. Wing says PSOs have one inherent advantage over Medicare HMOs. "Most payers only have claims information, the financial piece. The key thing about PSOs is the integration of financial and clinical information. Those two pieces of information give PSOs a powerful tool to manage costs."
While FHHS and Morgan continue to develop their PSOs, many group practices and hospital organizations are in the process of evaluating whether creating a PSO makes sense for them, say executives with the American Hospital Association, the AMA and the Medical Group Management Association.
"PSOs are not for everyone," says Carmela Coyle, vice president for policy and development at the AHA. "To be an effective PSO, an organization must have a high level of integration between physicians and hospitals. They must understand financial risk management, and they must meet substantial net worth and reserve requirements."
Edward Hirshfeld, assistant general counsel for the AMA, agrees. "Most IPAs are interested in the (PSO) legislation and what it means," he says. "Some are too small or are not ready to accept risk, and others don't want to take on the insurance aspect of marketing and enrollment."
Thomas Adams, executive director of the MGMA, says most large group practices, such as Mayo Clinic and Cleveland Clinic, are already structurally prepared to bid for Medicare contracts as PSOs. A 1995 MGMA study indicated about 15% of the nation's large multispecialty groups are considered tightly integrated.
"Where large multis (physician groups) don't exist, there will be more partnerships between hospitals and physicians to put together PSOs," Adams says. "The strength of the (PSO) legislation is that (Congress) wants to create more competition, not less, and you don't need HMOs for marketing or reinsurance."
But the country's largest physician practice management company, MedPartners, has taken a cool view of the federal government's plans for PSOs. Birmingham, Ala.-based MedPartners manages more than 10,000 physicians in 18 states.
"We are concerned about the federal government regulating PSO development," says Larry House, MedPartners' chairman, president and chief executive officer.
"We believe it will be a disaster if there is any lessening of insurance standards for providers. We believe HMOs and PSOs should be regulated the same. We don't want to create any more risk for the public."
If House sounds like a representative of the insurance industry, he freely admits MedPartners and dozens of insurers across the nation are inextricably linked.
In March, MedPartners signed a strategic alliance with Aetna U.S. Healthcare to provide physician services for Aetna's health plans. It also has signed global capitated contracts with HMOs in California, Florida, Ohio and Oregon.
"We don't think physicians should be put at any disadvantage under the PSO legislation, but payers are giving us more and more risk," House says. "When I am at the table and bidding for groups of lives, I am relying on (insurers and HMOs) for marketing, administration and analysis of opportunities."
PhyCor, a Nashville-based PPM company, has a different perspective on PSOs.
Ronald Loeppke, PhyCor's vice president of medical affairs, says the company wants to keep its options open to develop its own PSOs or partner with hospitals and payers.
"Our preference is to contract with HMOs," Loeppke says. "But if we are in markets where HMOs have not established themselves or aren't interested, we are mobilized to become PSOs."
PhyCor manages 47 multispecialty groups and 3,300 physicians with equity relationships and manages the practices of another 16,000 physicians in IPAs.
Some HMOs might be interested in forming partnerships with PSOs, Loeppke says. "They might delegate medical management to provider-driven organizations. There are incentives to building in the quality of care as it is delivered rather than after the fact in utilization review."
As part of PhyCor's preparation for accepting Medicare risk contracts, Loeppke says PhyCor is working on improving its medical risk assessments of seniors.
Typical risk factors of Medicare beneficiaries include injuries from falls and medication interactions.
"The Medicare-age population requires more preventive care, health screenings and immunizations based on age and sex than the commercial market," he says.
"These must be done on a proactive basis rather than waiting for them to come into the hospital when the costs are going to be high."
Jay Greene is a St. Paul, Minn.-based freelance writer who specializes in healthcare business issues.