A group of prominent physicians in Massachusetts is trying to launch a contracting alternative that acts like a provider-sponsored organization but avoids the financial risk and government regulation imposed on PSOs.
The group's brainstorm: Target self-insured employers. They pay half the state's healthcare claims, assume their own insurance risk, elude regulatory mandates and work mainly through third-party administrators, which supply networks of local providers.
Pinnacle Health of Massachusetts aims to compete with third-party administrators by making physicians and other providers exclusive shareholders of the start-up company, said Paul Brough, its president and chief executive officer. That ownership, he said, will create incentives for physicians to quote lower prices than a middleman would and add more-extensive medical management to the services a third-party administrator would usually provide.
The company's prime movers aim to sidestep HMO strictures and return medical control to physicians. Interim board members include two past presidents and a former executive vice president of the Massachusetts Medical Society (See chart).
With managed-care penetration of more than 40%, Massachusetts is one of the most highly penetrated markets in the nation. Many physicians chafe un-der parameters imposed by large managed-care organizations, said Leonard Morse, M.D., a Worcester internist and interim board member.
"As healthcare delivery becomes more complex and Wall Street merger mania is the current trend, physicians and other provider services have been relegated to a subordinate role," Morse said.
That opinion has fueled the provider-sponsored movement nationwide. But many providers that have formed contracting organizations have been impeded by insurance regulation and the risk that costs will outstrip revenues and reserves.
Such obstacles have reduced the appeal of federally regulated Medi-care PSOs (June 15, 1998, p. 58).
Another obstacle for some was the hotly debated requirement that Medicare PSOs meet minimum net worth requirements to address solvency concerns. HCFA last year settled on a $1.5 million minimum, half of which must be in cash, to cushion the risk of underwriting medical costs.
Other provider-sponsored managed-care businesses face insurance regulations related to their state laws.
But in Massachusetts, Pinnacle's founders say their business is providing a service for risk-taking employers, not an insurance product. Thus Pinnacle did not require clearance from the state department of insurance, Brough said. "Those employers are their own little insurance company," he said.
The new venture requires minimum start-up capitalization of less than half the level required of Medicare PSOs. The venture will progress only if it raises at least $65,000 in proceeds from shares sold, though Brough said he expects to raise much more than that.
The only regulatory agency involved in the start-up was the securities division of the secretary of state's office, which cleared the prospectus and stock offering, Brough said.
Physicians will be offered one share of voting stock at $2,000 per share, while hospitals and other medical facilities will be offered a unit of one voting share and 14 nonvoting shares at $30,000 per unit. Any owner of a voting share can buy more nonvoting shares at $2,000 apiece.
Because Pinnacle is not "caught up in the insurance game" as other provider-sponsored ventures are, the new company won't be under undue pressure to deny care or selectively underwrite insured groups, Brough said.
Under the federal Employee Retirement Income Security Act of 1974, the company also benefits from self-insured employers' exemption from government mandates regarding coverage of certain procedures and costs of medicines and devices.
Customers, rather than legislators or regulators, will decide the value in a health plan, Brough said.
Using provider ownership as an incentive, the company aims to attract employers by offering the best price of shareholder physicians and a commitment to guarantee prices in a multiple-year fee schedule. Participating physicians can still bargain for inclusion in other managed-care plans, he added.
To curb temptations to rack up volume to offset lower prices, Pinnacle will offer surplus sharing. For example, if an employer's medical costs totaled $1 million last year, physicians would collaborate on regional committees to manage medical cases more effectively and reduce the employer's costs. The physicians would share any cost savings that reduced the total below $1 million, Brough said.