For many doctors, having to contract through HMOs is like living under the control of a cheap, crotchety landlord, the kind who won't allow a single nail to be pounded into the wall without prior approval.
The advent of provider-sponsored organizations, or PSOs, would seem finally to give physicians the chance to own their own houses. The PSO legislation, which takes effect Jan. 1, 1999, frees physicians to contract directly with Medicare, rather than having to use an HMO to participate in a Medicare managed-care plan.
But the decision to establish a PSO is not one to make casually. Like renters who will never become homeowners without a lot of money and advance planning, physicians will never reap the benefits of direct contracting without the commitment and funding necessary to make a PSO viable.
"We're doing the same thing everybody else is -- deciding if it's the way we want to go," says Yvonne Sonnenberg, executive director of ProMed Health Care, an 1,100-member IPA in Pomona, Calif. "Everyone's sitting on the fence about it."
Depending on the source, experts estimate PSO start-up costs will be anywhere between $750,000 and $20 million for the managerial, administrative and technical expertise required to manage risk. The cost will be less for groups that have risk-management expertise already in hand, though experts say most groups don't.
Make a list, check it twice. There's no doubt that starting up a PSO isn't cheap, but how expensive it will be depends on whether a physician group has the staff, equipment and other skills on hand to easily slide into the world of managing risk.
Just filling out a PSO application with HCFA costs a substantial chunk of change. R. Stephen Venable, M.D., chairman and founder of the Tampa, Fla.-based American Association of PSOs (AAPSO), says, at the minimum, an applicant will have to spend $50,000 -- $150,000 for the application, $50,000 for feasibility studies and actuarial work, and $50,000 for legal costs.
Add another $100,000 for a solvency deposit and the $750,000 in cash on hand that is required for HCFA approval. So before HCFA has even taken the application out of the envelope, $1 million has been committed. (The application also must be submitted to the PSO's state insurance department; HCFA will offer a temporary waiver from state requirements if necessary.)
"The capital reserve regulations are pretty high hurdles," says Steve McDermott, chief executive officer of Hill Physicians Medical Group, a 2,500-doctor IPA based in San Ramon, Calif. "We're just breaking even."
One solution to the need for a large infusion of money is taking on a financial partner. Despite some disastrous forays into purchasing physician groups, hospitals have expressed interest in investing in PSOs. Plus, HCFA is allowing minority investments in PSOs by nonproviders, including physician practice management companies and venture-capital funds.
And, ironically, there is another entity with years of risk-management experience that is more than willing to advise doctors and to invest in their PSOs -- HMOs (proof that politics isn't the only impetus for strange bedfellows).
Among the tasks that will claim the PSO's dollar:
And, of course, the hiring of new employees will be necessary to handle these tasks. The number will vary.
So how much money do you really need? It's tricky to pin down an exact amount. When some people talk PSO start-up numbers, they don't include the HCFA solvency requirements, which physician advocates consider strict. Even Venable doesn't always count those numbers.
In fact, some of the so-called essentials that various sources recommended for PSOs, such as marketing, aren't always counted as start-up costs because they'll be spread over months, or even years. Venable argues that revenue from the PSO can pay for many expenses "All those expenses become recoverable," he says.
Plus, there may be costs that no one has discovered yet. For example, a physician group-run PSO could end up getting less-than-favorable terms from other Medicare HMO contracts. They even could be frozen out of some contracts because, as a PSO, they would be competitors.
The conflict that comes with competition is why Dreyer Medical Clinic, a 110-physician multispecialty clinic in Aurora, Ill., is not immediately forming a PSO. Dreyer, an affiliate of Oak Brook, Ill.-based hospital group Advocate Health Care, sold its own HMO to Blue Cross & Blue Shield of Illinois in 1996.
"We found that the strategy that was optimal for the clinic was not the strategy optimal for our own HMO" because of the strained relationship operating an HMO caused in other contract negotiations, says Dreyer Medical Director Mark Shields, M.D. "Our strategy is not to compete with the insurance companies."
But others are looking at these costs and wondering if even large physician groups and IPAs can go it alone. Hospitals, because of their cash on hand and ability to raise capital through bond issues, probably will drive the development of PSOs, says Joseph Chiarelli, a senior investment analyst covering healthcare for J.P. Morgan in New York.
"A hospital is a very expensive hotel room, and if you're on a per-diem basis -- because you have an aged population -- you're either going to deny care to have your financial model work, or you're going to be squeezed on pay rates," Chiarelli says.
But Venable -- whose AAPSO claims 7,500 members, half of them physicians -- says some of this talk may just be scare tactics.
Large consulting companies will dissuade physicians from starting PSOs, he says, because they benefit by ensuring that hospitals get the lion's share of the business. Venable figures first-year costs for physician groups would run about $350,000 to $500,000, with the rest of the money recouped as revenue from operating the PSO. (He doesn't count the $750,000 liquidity requirement.) Venable's figures would require a 50-physician group to kick in, at most, $10,000 apiece.
Gary Davis, a Miami healthcare attorney, wonders if doctors who would have to pay at most $1,000 to join a hospital-based network would be willing to pay significantly more to be part of a PSO. But Venable emphasizes the $10,000 is a small investment for a potentially lucrative business.
Doctor needs assistance. Though some of these costs appear to be staggering, there are two ways to reduce them. One, find a big-money partner; two, outsource some of the tasks.
Hospitals are the providers with the most money, but groups can look elsewhere for a partner. According to HCFA regulations, providers must have 51% of the management control, meaning nonproviders could have 49%. Healthcare attorneys say it's an open question whether that means physicians have to contribute 51% of the equity capital.
Others have been creative in addressing this problem. One example is the way financial arrangements were conducted for a 1996 government auction of the digital cellular telephone spectrum. In that case, a company could invest most of the capital but have the deal structured in a way in which it was a minority partner.
The two national IPA associations -- the IPA Association of America (TIPAAA) and the National IPA (NIPAC) Coaltion -- say potential investors are calling their respective Oakland, Calif., offices trying to link with IPAs interested in forming PSOs. The major interest is coming from physician practice management companies and venture capital funds, the organizations say.
PhyCor Chief Executive Officer Joseph Hutts says his company, the second-largest PPM, is examining local markets with its physician groups to see if a PSO is viable, but the company has not committed to any PSO investment program. Paul Keckley, PhyCor's chief strategist, is more blunt, "We don't plan to be a bank," he says.
However, both TIPAAA and NIPAC say PhyCor has joined MedPartners, PhyMatrix and smaller PPMs in inquiring about IPAs' interest in PSOs.
Venture capital funds also are checking out whether PSOs might be a good investment. NIPAC has set up a program that places member IPAs with a San Francisco-area investment bank that either provides financing or forwards the IPA to another possible financing source.
However, venture investors tend to want great influence in determining the direction of a company, influence they could not legally have under HCFA regulations. Also, it remains to be seen whether venture investors, who make their money by cashing out when a company goes public, are interested in a venture that may not ever go to the stock market because a public offering of any importance would likely put nonprovider ownership at greater than 49%.
Despite the possible pitfalls, bringing in a financial partner may be essential for an IPA or physician group, says ProMed's Yvonne Sonnenberg, who also is a NIPAC board member.
But Hill Physicians Group's McDermott is mindful that even well-financed, provider-run HMOs have bitten the dust over the years. "There's an awful lot of information that says the key issue of PSOs isn't financial," he says. "What (failed organizations) seem to lack is organizational discipline. We're one of the more disciplined organizations and we think we don't have (enough discipline to form a PSO)."
Hire a professional. Money alone can't unite an IPA that's loosely affiliated, negotiate contracts, guarantee a balance of power between hospitals and physician groups, and manage risk. That's why some product vendors and consultants are selling services to doctors that they claim ease the costs of putting together a PSO or provide some operating expertise.
For example, Lutherville, Md.-based computer company Innovative Solutions sells a software system that is paid for through a monthly cost of 3% to 5% of premiums, rather than a large cash outlay upfront. Other software companies are offering similar deals.
There's another group of companies that have done contracting with Medicare for a decade or so that also would like to offer help, if for no other reason than to protect revenue they might be losing in competition with PSOs.
HMOs, the organizations PSOs presumably want to compete with, are signing up clients for their PSO advisory services. The movement is being led by the No. 1 and No. 2 Medicare HMOs: PacifiCare, through its Secure Horizons subsidiary, and Humana, through its MedStep subsidiary. In either case, the HMOs will be in the odd position of working for physicians.
MedStep offers a plan that includes a payment of up to $100,000 for a feasibility study, followed by another $1 to $3 million in payments to MedStep for startup costs and consulting fees. Once the PSO is running, the group would pay MedStep 14% to 18% of premiums.
"We had a choice -- to treat (PSOs) as a threat or an opportunity," says MedStep President Greg Rotherham. "We obviously elected the latter."
To keep from repelling potential clients, Humana is soft-pedaling its involvement in MedStep. Though Humana is mentioned by name on MedStep press releases, on its web site, MedStep is referred to as a "wholly owned subsidiary of one the nation's largest and more experienced health care organizations."
"We've had to be a little bit schizophrenic," says Rotherham, whose company has signed up two clients and has letters of intent signed by four others. The biggest concern with linking with MedStep is making sure that the PSO's information doesn't end up in Humana's hands, Rotherham says. He says he tells potential clients that MedStep and Humana act as separate companies and don't have access to each other's files.
However, Humana and other managed-care companies aren't just acting as advisers. They're also looking at whether they can be the nonprovider investors in PSOs. Humana in a few cases is looking at investing or arranging financing for PSOs in what it considers to be high-growth markets.
But the HMOs emphasize they are not interested in controlling PSOs. And that's just fine with the PSOs. After all, they are the ones buying the house; they fully expect it will be their job to keep it solid.