After months of anticipation and buildup, provider-sponsored organizations are becoming a reality.
HCFA last month issued financial requirements for the provider-owned health plans, and now the race to launch PSOs by the official January 1, 1999, start date is on -- applications must be made to HCFA by summer to meet the 1999 deadline. Because few physician groups will be able to finance a PSO on their own, they must now begin the arduous task of securing a PSO partner.
"A lot of people in healthcare don't know how to partner very well," says Stephen Bennett, partner in the PSO Development, Corp., in Los Angeles. "But PSOs aren't going to work unless physicians learn to choose partners wisely.
"They're clearly going to have to partner with hospitals, vendors or others that have the administration and infrastructure required to make this work," he says.
PSOs are provider-owned health plans that can contract directly with Medicare. There are currently 38 million Medicare beneficiaries, and, as baby boomers age, that number is expected to double. As much as 50% of the Medicare population is expected to leave traditional fee-for-service plans for the lower premiums of managed care or PSO plans.
Last month, HCFA set PSO solvency standards at a minimum net worth of $1.5 million (see related story, page 6). The high solvency standards, plus the anticipated start-up costs (estimated to range between $1 million and $4 million), will put PSOs beyond the reach of most physician groups. Many groups had hoped for lower solvency standards because they viewed the advent of PSOs as an opportunity to eliminate the traditional insurance middleman. Instead, to obtain the necessary license, fund and managerial experience for a PSO, they will need to ally with hospitals or insurance companies.
Already, Louisville, Ken.-based insurance giant Humana, and Santa Barbara, Calif.-based hospital giant Tenet Healthcare Corporation are planning to launch PSOs in markets across the country. Other large companies are sure to follow.
Because PSOs must provide firsthand at least 75% of the healthcare services they offer, physician involvement is essential; companies like Humana and Tenet are actively courting physicians.
Humana's new MedStep unit will offer one-stop shopping for those who want to develop PSOs, and then take 14% to 17% of profits, according to vice president and general manager Greg Rotherham. He says the company has been overwhelmed by interest in MedStep, but most of the interest so far has come from hospitals.
Tenet is studying about 18 markets and will soon launch its own PSOs, or it may partner with insurance companies or other hospitals in markets where it can't provide all the services itself, says spokesman Lance Inyon. Tenet already runs a PSO in New Orleans under a HCFA pilot project, which was built around six area IPAs with 800 physicians. In New Orleans, the physicians paid the $2 million start-up costs. Inyon says Tenet's future PSOs will be designed around similar physician relationships.
Though Tenet and Humana may be the first suiters to knock on physicians' doors, others are likely to follow, and physicians should be prepared to evaluate them as well.
"In terms of partnering, the thing I think physicians need to look for is proven medical management capabilities and the partner's ability to demonstrate that (he or she) knows how to play under managed care," says Bruce Johnson, a consultant with Englewood, Colo.-based Medical Group Management Association.
One advantage to working with a Humana, Johnson says, is "the insurance companies know how to play the game better than the hospitals. Although there are some pretty savvy hospitals and health systems out there, the insurance companies are already in that business and they know all the games."
At the same time, however, PSO consultant Bennett warns that insurance companies like Humana could pose a conflict of interest. "One of the things that worries me about Humana in particular is how Humana is going to deal with this in markets where they're already in business. Is it going to put the physicians at risk if they develop a PSO in a market where Humana already has a big Medicare risk product?"
James Robinson, a professor of public health at the University of California-Berkeley, questions how PSOs will differ from traditional HMOs, with insurance companies playing such a large role in them. "A PSO will not be qualitatively different than a provider-owned HMO," he says.
Donald Fisher, chief executive officer of the American Medical Group Association in Glenn Allen, Va., is more optimistic. "These are clearly different organizations than the traditional HMO out there. This third party, the insurance arm, will not be in the examining room with the patient. That entity is retained by the providers to provide the services they want and need."
Some consultants say partnering with a hospital could be an easier route to PSO success. Physicians and hospitals will first need to overcome past conflicts, and avoiding the mistakes of their provider hospital organization predecessors.
When HCFA mandated that PSOs be able to provide 70% of healthcare services, it effectively mandated a hospital-physician partnership. And that, Fisher says, was the government's way of telling providers to "get over it, move on and figure out how to make this successful for the patients."
MGMA's Johnson says: "Physicians will have to play a much bigger role than they played in PHOs. There are physician communities and physician groups that have said we're not going to keep business as usual in terms of physician and hospital relationships, meaning they're going to invest some more of their own money. And that may enhance the long term prospects of the organization."