Georgia Health Care Partnership is approaching a milestone in the life of a fledgling business.
Having invested five years' worth of financial and sweat equity, the Savannah-based provider-sponsored organization expects to post its first profit next year.
Since entering the commercial risk-bearing business, the PSO, which has generated $3 million in revenues, has spent an estimated $5.5 million to $6 million. That's paid for everything from staffing and computer systems to licensing fees and the development of third-party administration protocols.
"It's not been without a lot of questions along the way about the cost-benefit that this is bringing back," acknowledges Jeff Myers, vice president of managed care at Savannah-based Memorial Health System. Memorial's flagship, Memorial Medical Center, sponsors the PSO.
Executives are determined to make a go of it. Next year they'll apply for federal government approval to enroll Medicare beneficiaries. "We're at the point where we're starting to see there's some value," Myers says.
Be prepared. Enticed by the possibility of capturing Medicare patients, healthcare systems around the country are gunning to get into the PSO business. But before diving in, experts say, they had better be adequately bankrolled.
In Georgia, an organization qualifying as a "provider-sponsored healthcare corporation" must maintain net worth of $1 million, a third of what is required of HMOs.
"But that's only the beginning," says David Whelan, a principal with Hamilton-HMC, the healthcare consulting division of Atlanta-based Kurt Salmon Associates. "Starting one of these things takes a substantial amount of money."
Much of the debate over PSOs entering the Medicare risk-bearing business has centered on fiscal solvency requirements. Insurance regulators want a single cash-based standard for all risk-bearing organizations, whether they are HMOs or PSOs. Providers argue for less stringent standards, which would count bricks-and-mortar assets. An industry panel convened by HCFA is supposed to issue its recommendations next March.
Medicare now requires HMOs to have a net worth of $1 million excluding land, buildings and equipment, or $5 million including those assets. Some people say that's peanuts compared with the cost of launching a PSO.
"The net worth requirements should not even be a market entry consideration," argues Mike Treash, a senior manager with Ernst & Young in Washington. Taking into consideration the money providers will have to invest in network development, marketing and advertising, "the solvency requirements are going to pale in comparison," he says.
Expensive proposition. Florida Hospital Healthcare System, a Medicare PSO demonstration project that got its feet wet in the commercial risk business, financed its initial capitalization through subordinated notes and an equity contribution from its Orlando-based sponsor, Florida Hospital Medical Center. But system President Richard Reiner won't reveal the amount invested, citing industry competition. "I will share that just to get ready to do Medicare . . . we spent in excess of $1.5 million," adds Reiner, whose organization is running on a $100 million budget this year. The $1.5 million covered staff time, consulting expenses, information systems modifications and the development of marketing materials.
All told, PHOs will spend millions of dollars to launch their Medicare networks, with no immediate payoff. "The range that people use is between $2 million and $7 million for PSOs to get started," says Barbara Plager, president and CEO of Health Partners of Philadelphia. "We are on the low end of that because we were building on a plan that already had a lot of capabilities."
Health Partners broke into the risk-bearing business when it began enrolling Medicaid managed-care recipients in the Philadelphia area 12 years ago. Initially, it entered the program through HMO partnerships. Then in 1994 it obtained its own HMO license and purchased its own information systems.
When Health Partners became a Medicare PSO demonstration project this year, the plan incurred a new expense: marketing to beneficiaries. Experts say those costs can range from $600 to $1,500 per enrollee.
To Health Partners and its seven health system owners, the investment is part of a longer-term strategy. Blaming drastic reductions in Medicaid rates in the past two years, Plager says the $238 million plan is operating in the red. She advises PSO-wannabes to be prepared for many challenges along the way. "This is not an effort for the faint of heart," she says.
Hamilton-HMC's Whelan says a PSO easily can spend $3 million to $6 million before breaking even. Costs will vary depending on how many services a provider network buys on a contractual basis. Some plans try to build claims processing systems from scratch, a costly proposition. Others may outsource their claims processing functions, cutting their capitalization costs.
The millions of dollars invested in Georgia Health Care Partnership over the past five years were picked up by Memorial Medical Center. But officials now realize the for-profit venture needs even more capital to add new lives in its market area and expand geographically. In the next two years, the PSO hopes to add another 50,000 enrollees to the 46,000 commercial employees and dependents it now covers.
"We've got to take it to a larger scale to make it work," Myers says. To do that, the PSO is considering bringing in physicians and other hospitals as equity partners.
Friendly government. Assuming that federal law doesn't prevent private investment, Hamilton-HMC's Whelan expects to see venture capitalists and insurance companies involved in PSO financing. And down the road, he sees nothing to prevent PSOs from going public.
HCFA's sanctioning of Medicare PSOs is no ticket to the bank. But with Uncle Sam's blessing, who knows? "They could have a significant role in shaping the healthcare system for the next five years," Whelan says.