Heralded last year as a promising way to compete with managed-care companies for Medicare enrollees, provider-sponsored organizations have failed to take hold. Instead, some providers are choosing to become state-regulated HMOs.
"The PSO business right now is quiet," says Sandy Wolff, practice leader for health plans and provider consulting at Buck Consultants in Los Angeles. "A year ago it was a hot business area for people in healthcare consulting. It cooled off because details of the Balanced Budget Act were delayed and because of financial problems with some medical groups and IPAs."
Wolff, who has consulted with providers forming PSOs, is currently working with a provider organization that has decided to become an HMO.
The Balanced Budget Act of 1997 requires risk-bearing organizations to hold state licenses in order to participate in Medicare+Choice, a program that aims to provide new managed-care options to Medicare beneficiaries.
Originally, providers perceived PSOs as less troublesome because such organizations can seek waivers from the federal government if they are denied state licensure. But when state regulators sensed that providers were going to pursue this route, they became more responsive to approving HMO licenses, says Jacque Sokolov, M.D., chairman of Sokolov, Schwab, Bennett, a healthcare consulting firm in Los Angeles.
As a result, most organizations decided to become HMOs rather than PSOs. As of November 1998, there were more than 40 provider-sponsored HMO applications in the pipeline across the country.
By comparison, HCFA has not received any PSO waiver requests this year, says Philip Doerr, director of the agency's division of premium and financial evaluation.
In the second half of last year, HCFA received just six applications, four of which it rejected and one it approved. Doerr declined to name the organization that filed the sixth application; he says it is awaiting approval. St. Joseph Healthcare in Albuquerque, N.M., got the OK from HCFA and started doing business March 1; so far it has 1,100 enrollees.
Janice Torrez, president of St. Joseph's MedicarePlus, says the PSO distinguishes itself from its competitors with a heavy emphasis on its partnership with doctors, which means easier access to specialists for patients.
"It's clear that doctors are back in control (at the PSO and) . . . people are really attuned to that," Torrez says.
Providers that wanted their PSOs to be operational by Jan. 1 had to submit federal waiver requests by Aug. 1, 1998.
Early last year, consultants predicted a glut of PSO applications.
Doerr says most organizations are holding back because of new payment methodology, high risk and potentially low profits. HCFA is moving to a complicated and difficult-to-administer risk-adjusted payment methodology that will take into account disease states of enrollees, says Simon Jones, a consultant at Sokolov, Schwab, Bennett.
"The Medicare program is not for the faint of heart," Doerr admits. "The profit margin can be fairly low, given all the regulations." After studying the issue closely, some organizations may conclude that it's "just not worth the risk," he says.
Indeed, the first Medicare PSO, Florida Hospital Premier Care, which began operation in 1997 under the "Medicare Choices" PSO demonstration project, last year called it quits, blaming low reimbursement and the high cost of caring for sicker seniors. Florida Hospital Healthcare System, Orlando, continues to operate a commercial PSO, but most of the enrollees are health system employees.
As hospitals, doctors and other providers strategize about which type of organization to form, they see little difference between PSOs and HMOs, particularly in terms of risk, Sokolov says.
"If you look only at PSOs, you say, 'Gee, this is a disaster,' " Sokolov says.
"People are missing this story" because they're not looking at the alternative ways providers are organizing themselves. He says there are about 200 provider-sponsored health plans across the country, many of which have been around for decades.
Such organizations are generally state-regulated and are majority-owned by hospitals and physicians providing care to the health plan. These include HMOs, PPOs and PSOs.
Sokolov adds that the dismal year large HMOs experienced in 1998 may help smaller, provider-based HMOs. He points out that commercial HMOs have pulled out of dozens of Medicare managed-care markets across the country.
Provider HMOs have networks in place and are paying more attention to controlling pharmaceutical and other costs than they were just a year ago, so they may do well in markets where commercial HMOs have failed.
"There's a natural void" for local, provider-based HMOs, Sokolov says.
But, he adds, providers shouldn't jump into the HMO game just because large, commercial competitors have dropped out. One key test: The income from a provider-sponsored health plan has to be equal to costs and must be as good as the provider's least lucrative external payer, Sokolov says. Better yet, the provider-sponsored health plan should capture the most lucrative segment of the provider's market.
While provider-sponsored health plans are gaining favor, Doerr says it's too early to conclude that PSOs have failed.
He points out that it can take an organization two to three years to decide whether to become a PSO. And, he says, an interim regulation on Medicare+Choice that came out in February may have kept some parties from going forward.
The interim regulation assures that Medicare beneficiaries have the opportunity to enroll in other Medicare managed-care plans in their community if they are enrolled in a plan that withdraws or is eliminated from the Medicare program.
"We're still expecting to get more" applications, Doerr says.
St. Joseph's Torrez agrees that interest is high. "There were 1,500 inquiries made at HCFA to see our application," Torrez says. "There are obviously people who are wondering why and how we did this."