The solvency standards for Medicare provider-sponsored organizations have turned out to be stiffer than provider organizations had wished.
Medicare PSOs are organizations that can contract directly with the federal health plan.
HCFA's rule-making committee on March 5 set a minimum net worth of $1.5 million for any PSO, although HCFA retains the option of approving PSOs with a minimum of $1 million if they contract out services such as claims repayment. Either way, $750,000 of a PSO's net worth must be in cash. In addition, HCFA can collect a $100,000 cash deposit for prospective PSOs, money that can be counted toward net worth.
Under the 1997 balanced-budget agreement, HCFA had until April 1 to approve the solvency standards. They don't overrule state insurance licenses that PSOs need; however, a PSO can apply to be regulated under HCFA standards if its state's regulations are tougher or if the state fails to act on the PSO's application within 90 days. At least 12 states have solvency standards more rigorous than those of HCFA.
Provider groups on the rule-making committee, which consisted of associations representing providers and payers, wanted a lesser solvency standard to encourage more doctors to form PSOs. But the committee decided it was more politically palatable to ensure that the initial crop of PSOs were financially sound.
"The tone of Congress was that it didn't want to see this program have a lot of failures," says rule-making committee member Edward Hirshfeld, vice president of health law at the American Medical Association.
Under the solvency standards, Medicare PSOs also must file a financial plan covering the first 12 months of operations. If the plan projects losses during that period, the financial plan must be extended to the date where it is expected to break even.
Plus, the plan must demonstrate it can cover losses through such means as lines of credit, cash reserves or capital contribution agreements. HCFA regulations due by June 1 on the definition of a PSO are expected to require that providers must be the majority owner. However, Hirshfeld says, that would not necessarily bar investors from contributing the lion's share of dollars and still remaining minority owners.
Seattle attorney Peter Grant, who represented the IPA Association of America on the rule-making committee, says the solvency standards probably won't change until Congress is convinced that Medicare PSOs are "more beneficial to the public" than HMOs.
One exception HCFA might make: The agency currently is accepting comments on whether solvency standards should be reduced for rural PSOs. There is no announced date on when that question will be settled.
Though provider groups weren't happy with the Medicare PSO solvency standards, some observers say any PSO meeting the bare minimum is going to have a tough time staying in business.
Donna Fraiche, an attorney at Locke Purnell Rain Harrell in New Orleans, on March 14 told an audience at the IPA Association of America's annual conference in Orlando that a Medicare PSO would need at least $5 million on hand to get started, well above the HCFA minimum. That's because a PSO will need money to pay lawyers, accountants, auditors and others to help with HCFA licensing and certification, she says.
Of course, others are a bit more gloomy about PSOs.
"How many of you would like to spend $15 million on an unnecessary venture?" Boulder, Colo.-based healthcare consultant Rick Levine, who doesn't believe PSOs are a good business venture for physicians, told the crowd at TIPAAA's conference.
He looked at one audience member who raised her hand and said, "You do? You must be from a hospital."