Medicare+Choice has its attractions, but it's not all sweetness and light

Not so fast on the PSO bandwagon

If your practice is interested in new business development, you definitely want to investigate the new provider-sponsored organization (PSO) concept that became effective with last year's Balanced Budget Act.

36 million potential new patients

There are some 36 million potential customers out there for practices that handle Medicare patients. And come November, they are going to be looking at some new choices for their care. Along with the Medicare HMOs now available to them, there will be Medicare savings accounts, preferred provider organizations (PPOs), and PSOs available to take their business. For practices interested in PSOs, it could be a boon to business.

Although the Health Care Financing Administration (HCFA) won't divulge numbers of applications received, a spokesman says applications for waivers - the first step in the process - are starting to roll in. And HCFA isn't making it too hard for practices to get involved.

(See story on HCFA's PSO requirements, above.)

The requirements aren't very strenuous. But before you go rushing into any PSO deal, understand what you're getting into, says Phyllis Costanza, senior manager at The Lewin Group, a Fairfax, VA, consulting firm.

HCFA defines PSOs as public or private entities that are established and operated by a health care provider or group of affiliated providers that provide a substantial proportion of health care services under a Medicare+Choice contract directly through the providers or affiliated group. The PSOs share, directly or indirectly, financial risk for the provision of care under the Medicare+Choice contract.

"To get involved, you will have to have at least 7,000 members in the first three years," Costanza says. "Ten thousand would be better. You have to have a vast provider network, and you will have to be able to provide 70% of the services needed by members."

That means pairing with hospitals in virtually every case, she notes.

And the physicians will have to take on risk, says Eugene Samuels, JD, MBA, a lawyer and consultant with Healthworks in Miami. Seventy percent of what is spent on medical care has to be at risk, he says.

"That's a lot. And we aren't just talking about capitation, but an arrangement where physicians can benefit, where they are incentivized not by just how they manage care, but how the entire organization manages it. Capitating primary care won't be enough," he says.

The PSO contract, Samuels adds, will likely include language that makes your office responsible for the total care of the patient, for other Medicare Part B services, and for hospital services. If utilization goes too high, then compensation will go down.

Take time to learn about PSOs

If you are still interested, says Costanza, talk to the hospitals in your area. Find out if there is any movement on PSOs. And educate yourself. Among the places she suggests looking are the American Medical Association and the American Hospital Association, both in Chicago, and HCFA itself, which has its PSO regulations on its Web site (

Another place for information is the book, Capitation: Tools, Trends & Techniques, edited by R. Steven Venable, MD, the chairman of the Tampa, FL-based American Association of Provider Sponsored Organizations. Among the chapters in this PSO textbook is one on legal implications written by Samuels. The book is available for $44.95 by calling (800) 633-7467.

Even if you don't want to get involved with a PSO now, you still need to take time to learn about Medicare+Choice. "Come November, when every beneficiary in the country gets information on this, you are going to get a lot of questions," says Samuels. "You will have to understand traditional Medicare, PSOs, PPOs, and savings accounts. If you say, 'I don't know,' or 'I don't understand,' you won't instill confidence. Then those patients will go somewhere else for that information."

The good news about the PSO potential is that you will have more say in the medical decision making, says Samuels. "Unlike an investor-owned HMO, you will have more involvement in setting protocols, more participation in utilization committees, and will be more active in creating coordinated care."

Costanza agrees. "The benefit is that you can direct care management. And for practices that are losing patients to Medicare HMOs, there is an opportunity to stem the flow."

But there are costs to consider, she warns. Buying or building systems - member services, marketing, claims services - could cost as much as $10 million. "You are basically becoming an insurer."

They won't work everywhere

And not every market is ripe for this, she warns. If you are in an area Medicare HMOs are abandoning, look carefully at the reasons why. If it is because they couldn't bring costs down, you could have a problem based on the demographics of the area. If itbecause they didn't market adequately, you might have a chance to succeed.

Samuels says smaller communities will offer the best chance for success. "It will bring organized, regulated health care programs to communities that don't have it yet."

He says that for those who choose to participate, a PSO experience will be like an HMO experience, "but harder. Harder, but better. Docs will be able to provide a better product under the managed care umbrella than under an investor-owned corporate HMO."

· Phyllis Costanza, Senior Manager, The Lewin Group, Fairfax, VA. Telephone: (703) 218-5500.

· Eugene Samuels, JD, MBA, Attorney and Consultant, Healthworks, Miami. Telephone: (305) 388-7559.