Test PSO waters before jumping in

If you're like many Managed Care Strategies readers, you are seriously considering the possibility of direct Medicare contracting.

If so, there are some good reasons for creating a provider's sponsored organization (PSO), as well as some sobering facts that may help you decide to shelve the idea.

Six professionals, representing providers and managed care consulting firms, have given MCS their views on the pros and cons of starting a PSO.

· Pro: It will keep Medicare dollars in the community.

Providers who form a PSO to contract with Medicare could keep the entire Medicare premium, rather than take the spoils of what's left when HMOs or other payers get their cut.

"They could offer more value in the community," says James Reynolds, president of Reynolds & Co. in New York City. "They can keep profits out of the middleman's hands and pass them back to the consumer or use it themselves to improve the quality of care."

· Con: It will cost a lot.

Start-up costs could require investment capital of between $2 million and $8 million.

According to early estimates, PSOs may need at least $2 million to obtain federal approval, and then they may need another $6 million-plus to cover operating expenses and capital, says Colleen Dowd, MHS, vice president of Baptist- St. Thomas Health Associates in Nashville, TN.

"Also [providers] will have to spend a lot of money on developing information systems and telecommunications systems to support them in doing the kind of medical management they would need to do," Reynolds says.

Each state insurance department will require some capital for reserves to handle the cash flow of the business and to protect consumers in the event the PSO fails, says Laurie J. Levin, JD, an attorney with Baker & Hostetler in Orlando, FL.

Then there's the question of who would put up the money. Would it be a joint venture between a hospital and physicians, or would the organization seek an outside investor?

If, for example, a fledgling PSO wants to raise $5 million, the organization would ask a group of 250 physicians to invest $10,000 each and five hospitals to provide $500,000 each toward the investment. Why should the physicians invest their own money to start a PSO when the stock market is so high and they probably could earn a better return on their investment in stocks, asks Jo Ann Lamphere, DrPH, associate director of the Public Policy Institute of the American Association of Retired Persons in Washington, DC.

"And how many hospitals have $500,000 sitting around?" she says. "Many of the hospitals that would be most interested in becoming part of a PSO don't have access to that kind of money, and many physicians wouldn't be interested."

Borrowing money also has its drawbacks, including the cost of paying back interest and the timetable for pay back, regardless of the PSO's cash flow, Lamphere says. Plus loans are harder to secure when Wall Street firms would rather lend money to companies with long track records, rather than to fledgling organizations, she adds.

· Pro: Take advantage of capitation trends.

Most Medicare providers have strategic plans regarding moving into a capitated environment, says John Gorman, president of Managed Care Compliance Solutions Inc. in Washington, DC. Gorman is a national speaker on PSOs, including a recent lecture at the 10th annual National Managed Health Care Congress held in April in Atlanta.

"They recognize that the population is aging and growing substantially," Gorman explains. "For a provider system to make the leap from global capitation to direct contracting is not that long of a jump."

Strategically, it makes sense for a provider who already is involved in global capitation to get into direct contracting as soon as possible, he adds.

· Con: You'll have to struggle through bureaucratic quicksand.

Although the federal government is allowing providers to jump into this new PSO vehicle, the Health Care Financing Administration (HCFA) has not made it easy. PSOs likely will have to follow rules as stringent as HMOs and others do when they apply to sell Medicare.

"The application process for Medicare is brutal. I've seen some Medicare applications delivered in trucks," Gorman says. "Generally, if your application process does not produce four or six 6-inch binders full of narrative or charts and documents, then you've missed something. I've never seen one of these done in under 90 days."

In addition to the application process, a PSO will need to conduct an actuarial study, show an ability to track and collect data for quality improvement, outline marketing strategies, and prepare for a site visit by HCFA, says Roger Burke, vice president of managed care business development for Tenet Healthcare Corp. of Dallas. "They won't let you sign up seniors until they approve all the marketing materials, and then you have site visits and so forth."

Tenet Healthcare was involved with HCFA's PSO demonstration project through its New Orleans-based Tenet Louisiana HealthSystem, which formed Peoples Health Network along with about 800 physicians and created the Medicare product, Tenet Choices 65.

"The reason we selected New Orleans is because they were experienced in managing risk already and had done a good job working with the senior population," Burke adds.

The PSO, which was two years in the planning stage, uses a gatekeeper model in which Medicare beneficiaries are encouraged to see providers within the Peoples Health Network. For a copayment, they also may choose to see a broader range of providers that are part of Tenet Louisiana HealthSystem, Burke says.

· Pro: PSOs could improve clinical quality and outcomes.

PSOs will have complete control over the clinical quality of care and outcomes and may set their own care standards, Reynolds says. "They also have the opportunity to reduce the cost of care, and in doing so, they can have some money left over for themselves."

· Con: There will be marketing and competition challenges.

Marketing to seniors can be tough

Marketing Medicare insurance to seniors is difficult because unlike the commercial insurance population, they have to be approached on an individual basis.

"Enrolling them on an individual basis is very different and more expensive than enrolling employees through an employer," Dowd says. "You may be going to synagogues or churches."

Some PSOs might find that their market is not interested in the type of insurance services they are offering. "They need to make sure there will be a market for their services, and that's much more easily said than done," Reynolds says.

"The other problem is if a hospital and physicians start a PSO they are literally going into competition with HMOs in their marketplace, and the HMOs are likely to retaliate by moving contracts away from them," he adds.

PSOs will need to find creative ways to appease major insurers through product joint ventures or by marketing a product that is not competitive with the insurer's core business, Dowd suggests.