With profits shrinking, medical costs rising and legislators turning up the heat on managed-care plans, it's no wonder HMOs view competition from provider-sponsored organizations as a serious threat.
Last year's balanced-budget law allows these new provider networks to enter risk contracts directly with Medicare beginning in 1999. But HMOs aren't taking the threat lying down. So far, two plans with Medicare experience -- Louisville, Ky.-based Humana and Santa Ana, Calif.-based PacifiCare Health Systems -- have made bold moves to partner with the new PSOs by offering administrative services in exchange for fees and a percentage of premiums (Jan. 19, p. 6).
The strategy allows the HMOs to enter new Medicare markets without shelling out the millions of dollars it takes to do so.
PacifiCare is the largest Medicare-risk HMO, with 1 million enrollees. Humana is the second-largest, with about 490,000 enrollees.
One large HMO expected to follow suit is Woodland Hills, Calif.-based Foundation Health Systems, which may announce a program to partner with PSOs in a couple of months, says Meg O'Toole, its senior vice president for Medicare operations.
"Rather than being a consulting group, we're trying to change that model and look at a joint provider partnership," O'Toole says. "We're analyzing whether we should have a subsidiary and, if we did, what would differentiate us from PacifiCare and Humana."
Even Kaiser Permanente is testing the PSO-business waters. The Permanente Co., or PermCo, the business-venture arm of the Permanente medical groups, has offered to assist Oakbrook, Ill.-based Advocate Medical Group, which is set up as a PSO. Humana is bidding for that same business, but so far Advocate says it isn't interested in direct contracting for Medicare beneficiaries (March 9, p. 6).
This partnership trend represents a smart move by HMOs, which fought easy access to the Medicare market by PSOs.
"It's interesting that these large HMOs are positioning themselves to be successful no matter how the managed-care market evolves," says Bruce Fried, former head of HCFA's Office of Managed Care. Fried is now a partner with Shaw Pittman Potts & Trowbridge in Washington.
"The law was passed; they lost the legislative war. Why not put yourself in the position to maximize your opportunities" in the marketplace, says Gary Davis, an attorney and co-chair of the healthcare group at Steel, Hector & Davis in Miami.
For HMOs, partnering with PSOs "follows the Machiavellian rule that you keep your friends close and your enemies closer," he says.
So far, two models have emerged for HMOs that want to partner with PSOs to serve Medicare beneficiaries. The first model, introduced by Humana in January, uses a new subsidiary called MedStep.
MedStep will provide computer, marketing and customer services to help PSOs build an operating infrastructure for a private-label health plan. It also will help with state and federal filings. In return, MedStep will receive a percentage of the PSO's per-enrollee reimbursement.
The arrangement with PacifiCare is similar except that a PSO would receive a franchise of PacifiCare's Medicare HMO, called Secure Horizons.
Humana was the first HMO to announce it would partner with PSOs, and MedStep is the first to get a contract with a provider-sponsored plan. In February, MedStep signed a multiyear arrangement with United Health of Wisconsin Insurance Co., a managed-care plan owned by Appleton-based United Health Group and Milwaukee-based Aurora Healthcare.
United Health Group is a community-owned not-for-profit health system that operates two acute-care hospitals: 146-bed Appleton (Wis.) Medical Center and 216-bed Theda Clark Medical Center in Neenah, Wis. The system employs about 100 physicians and affiliates with about 800, says Gregory Devine, United's executive vice president. Aurora, which operates 13 hospitals, is Wisconsin's largest system.
Along with United and Aurora, a third provider system built around 167-bed Bellin Hospital and a group of 50 physicians in Green Bay is expected to invest in the managed-care plan in about 60 days, Devine says.
United's managed-care plan has 100,000 HMO enrollees, 130,000 PPO enrollees and 10,000 Medicaid enrollees but no Medicare business. "We were really looking for an opportunity to develop a partnership to get into Medicare risk that would allow us to tap into an organization that had substantial experience in managing a Medicare HMO," Devine says.
But United also wanted an arrangement "that would allow us to take advantage of what we worked very hard to develop in our local communities through our own system. And even if we felt we could ultimately accomplish some of the same things on our own, we thought we would be more successful more quickly by working with an experienced partner," he says.
United hopes to receive contract approval from HCFA in the fall and start enrollment in early 1999, Devine says.
The first franchise of PacifiCare's Secure Horizons went to Tufts Associated Health Plan of Massachusetts in 1993, and the second was created last year with Presbyterian Healthcare Systems of New Mexico through PacifiCare's sale of FHP of New Mexico to Presbyterian. PacifiCare acquired FHP International in February 1997 and since then has sold several of FHP's state operations.
Craig Schub, president of Secure Horizons, says PacifiCare "leans toward an empowered delivery system," paying providers on a capitated basis. "We delegate responsibilities where appropriate, and that's consistent with what PSOs are looking for," he says.
Secure Horizons is looking for providers in the Midwest and the East Coast "that have the wherewithal" to accept capitation and that work in areas with a sizable Medicare population but relatively low Medicare-risk penetration, he says.
"We're looking to couple Secure Horizons with leading delivery systems," he says.
The arrangement would benefit providers because of Secure Horizons' expertise and the HMO, which could enter new markets at a fraction of the cost of setting up a new network, he says.