When you look in your crystal ball, do you see a PSO in your future?

Before you get started, ask yourself some hard questions

[Editor's note: This is the first part of a two-part series on provider-sponsored organizations (PSOs) and what providers should consider before establishing one. The PSO regulations, which were not available at press time, will be discussed in a future issue. Other future topics will include an explanation of PSO solvency standards, tips on marketing a Medicare product, and information about why you need a compliance plan before starting a PSO.]

To hear some experts talk about the rewards of starting a provider sponsored organization for Medicare, you would think they were repeating the old adage about bank loans: You won't get one unless you can prove you really don't need it.

Likewise, if you are in a good position to start a PSO because you already have a Medicare HMO, then why should you bother? But if you don't have HMO experience and a ready infrastructure, it might prove too difficult to succeed with a PSO.

The federal government has been eager in recent years to find ways to manage Medicare, the juggernaut that still is expected to swing out of control sometime early in the 21st century.

As a result, the Balanced Budget Act of 1997 includes measures that reduce the rate of growth in traditional fee-for-service Medicare. The Act also offers an array of new plans to seniors to offer them more choices, including an option that allows providers, through a PSO, to contract directly for Medicare with the Health Care Financing Administration (HCFA) in Washington, DC.

"This was done partly in response to doctors and providers complaining about having their medical judgment being questioned by blue suits and bean counters," says John Gorman, president of Managed Care Compliance Solutions Inc. in Washington, DC. The health care management consulting firm specializes in Medicare risk contracting, development, and compliance issues. Gorman has worked with some PSOs involved in the government's PSO demonstration project.

"So Congress threw down the glove and said, `Great; quit complaining about it and show us you can do better,'" Gorman says.

Unfortunately, providers have no successful models of Medicare-contracting PSOs to emulate. Although the government has a two-year-old demonstration project involving some pilot PSOs, none of these have been operating long enough to make a profit, he says. "Those are the folks who blazed the trail for PSOs under the Balanced Budget Act."

One such trailblazer is the Peoples Health Network in New Orleans. The network has a pilot program called Tenet Choices 65 that was officially announced last July.

The network was formed by a joint venture between the Tenet Louisiana HealthSystem's group of hospitals and six independent practice associations (IPAs) representing about 800 physicians, says Lance Ignon, spokesman for Tenet Healthcare Corp. in Santa Barbara, CA. Tenet Healthcare has 125 acute care hospitals and other health care facilities in 18 states and $10 billion in annual revenues.

The organization spent two years preparing for the PSO's launch, says Roger Burke, vice president of managed care business development for Tenet Healthcare. (See story on pros and cons of forming a PSO, p. 51.)

"The application [to HCFA] looks like a telephone book out of Chicago; it's quite thick," Burke says. "One of the things we learned is you have to become [like] an HMO," Burke adds. "A lot of people don't realize that even though they may have a well-run hospital and integrated delivery system, to take that another step to become a full-blown HMO is quite another leap."

So far, Burke says, the PSO looks promising, having enrolled between 1,200 and 1,400 seniors since the first marketing campaign began in September 1997.

"It's been very well received so far, and the seniors seem to be quite happy with the program," Burke notes. "We hope to take the experience we've learned in New Orleans possibly to rural markets where opportunities exist to do a similar product."

The federal government's motivation in creating the PSO vehicle for Medicare contracting is clear. Providers can take over the risks of Medicare cost increases, and therefore, save the government money, says James Reynolds, president of Reynolds & Co., a managed health care consulting company in New York City.

Eliminating the middleman

Providers may be tempted to start a PSO because it's one way to eliminate the insurance middleman and allow physicians and hospitals to keep more of the Medicare dollar.

It also gives providers more control over how health care is managed for the Medicare population, says Laurie J. Levin, JD, an attorney who specializes in health care at Baker & Hostetler in Orlando, FL. "Providers can make sure they know what type of care for patients makes sense and what doesn't make sense."

Starting a PSO would make the most sense for certain types of providers, Gorman says. These include:

· Providers who have experience in global capitation and in the delegated functions of a health plan, such as claims processing, medical management, quality assurance, and improvement.

· Providers who have experience with Medicare risk and managing that risk both operationally and medically. Integrated delivery systems in Florida and on the West Coast are most likely to have this kind of experience.

· Providers who have a large market share of Medicare beneficiaries in their areas. "If you're the provider of record in your community, then the chances are that Medicare beneficiaries are going to know you and trust you, and you don't have to worry about payer retribution as much because the payers are not going to be able to live without you," Gorman says.

Still, the challenge is daunting. "PSOs are a risky business. They are new, they are inexperienced, and many of them are small," says Jo Ann Lamphere, DrPH, associate director of the Public Policy Institute of the American Association of Retired Persons in Washington, DC. "All of these factors in the HMO industry have been associated with failure."

Also, PSOs likely will have to follow the same sort of stringent regulations that now are applied to HMOs that contract with Medicare, says Colleen Dowd, MHS, vice president of Baptist- St. Thomas Health Associates, a managed care services organization sponsored by two health systems in Nashville, TN.

"Basically, if Medicare HMOs have to have cash reserves to operate, then providers would have to have comparable cash reserves," Dowd says. "They need to expect they'll have to go through the same kind of scrutiny. We're recommending providers go into this not to get away from HMOs, but to look at it as a way to take on some of the traditional responsibilities of a Medicare HMO."

Gorman says newly formed PSOs should expect to lose a great deal of money in their first year of operation and should also expect to not break even for at least two years.

"History says that a large portion of these PSOs are not going to make it because of their inexperience or inability in managing risk," he explains.

In the late 1970s and early 1980s, the federal government had a loan program that capitalized two dozen PSOs to contract with Medicare, and most of them failed by the second year with not a single one surviving beyond the fifth year, Gorman says.

Likewise, a good portion of PSOs also will not survive, he predicts. "They'll jump in for all the right reasons and will have failed for all the predictable reasons."