Will a PSO end up serving your Medicare patients without you?

Hybrid form of HMOs could become a force among Medicare risk providers

Last year, federal lawmakers pushed through key provisions in the historic Balanced Budget Act of 1997 that establishes a speedy, less-restrictive process for provider-sponsored organizations (PSOs) to enter the Medicare managed care market. What most lawmakers, including the Clinton administration, did not acknowledge at the time was the checkered fortunes that most PSOs have had just staying financially afloat.

Nevertheless, Medicare-risk PSOs have received federal endorsement, which has renewed a discussion in management circles over whether these health care delivery systems are actually worth the attention they're getting. Yet, for emergency medicine, PSOs could bring solutions to many of the problems managed care generates in the ED, some analysts believe.

For one, PSOs would virtually eliminate the gatekeeper system, mainly because the physicians and the payer entity are both part of the same organization. "The potential is there for communication between provider and payer to become a lot easier, (which is) to the patient's benefit," says Larry Linder, MD, assistant director of emergency medicine at North Arundel Hospital in Glen Burnie, MD.

PSOs could face a growth trend

North Arundel is part of New American Health, a two-hospital Medicaid-risk PSO based in Glen Burnie. Linder's 13-member emergency physician medical group contracts with the PSO on a capitated basis.

PSOs are essentially managed care organizations (MCOs) under which hospitals and physicians come together and develop their own risk-bearing health maintenance organization (HMO). Some PSOs contract with large employers, while others are formed specifically to obtain either a Medicaid-risk or Medicare-risk contract. (For a more detailed definition of PSOs and their recent history, see the box on page 13.)

Though there are currently not many PSOs nationwide, the continuing growth of Medicare managed care may mean these entities will become more common. Providers who can afford the costly price of admission, observers say, can expect a coveted Medicare-risk contract waiting on the other side.

The belief, according to most policy makers, is that providers are more likely to lower the cost of health care to Medicare recipients if they have a direct financial stake in the fortunes of the HMO that pays the bills. "That concept makes absolute sense. It cuts out the middleman," observes Gordon Josephson, MD, an emergency physician who now serves as chief operating officer of Baystate Medical Practices, a division of Baystate Health System, a PSO in Springfield, MA.

How providers can balance cost and care

But, for hospitals and emergency physicians, the question becomes: Can they successfully balance themselves as providers between the PSO's need to hold down costs and their ability to deliver clinically appropriate levels of medical care?

"The answer is yes, and, in most cases, it's even easier to do than when the provider is getting paid by an outside third party," notes David Whelan, MBA, a PSO expert and principal with Hamilton HMC, an Atlanta, GA-based health care strategic and financial management consulting firm. Here's why:

    · In a PSO, payer and provider have the same incentives to keep down costs, Whelan says. In most cases, the HMO and the provider group are capitated for the services to the health plan's enrollees.

    Yet, the biggest incentive is the fact that the provider and the payer in this instance belong to the same company. They have a mutual financial interest, Whelan adds.

    · And because the incentives are aligned, both sides of the organization are expected to work together to keep utilization in check, says Whelan. Neither the HMO nor the provider group profits from over-utilization, he adds.

    · Fewer barriers separate physician and patient, according to Linder. In a PSO, "I'm more likely to know who the patient's primary care physician (PCP) is and can readily contact that person to arrange appropriate follow-up care, which saves money," he adds. With an outside HMO, the patient's PCP could be in another city.

    · Fewer layers of bureaucracy enable physicians to operate more independently despite being part of an entity directly affiliated with an HMO. "There's less red tape," says Linder, "You can get things done in an atmosphere that is more familiar because you pretty much know the administrative territory."

Contracting options are flexible

To protect themselves from downside risk, the parties in the PSO are typically permitted to contract with outside entities. Therefore, the HMO typically contracts with other non-PSO providers and even with other HMOs, says Juanita Singleton, president and chief executive officer of New American Health. The physicians and hospitals do the same.

Yet despite these perceived advantages, PSOs have not flourished, in large part because of the heavy financial risk and initial capital investment required by states and the federal government. Hospitals have had difficulty raising the capital to fund a start-up, much less keep one going, Whelan says. (For a chart outlining these expenses, see page 13.)

In addition, the federal government imposes tough financial reserve requirements and other legal restrictions on PSOs that many find daunting, Whelan says. For example, Georgia imposes a reserve requirement of $1.1 million on PSOs to maintain licensure. PSOs must also follow state consumer protection laws. The federal government can grant a PSO a three-year, non-renewable waiver from federal statutes to receive state licensure.

Physicians can be sheltered from risk

Unless an emergency physician group has a direct-equity stake in a PSO, most won't be affected by these limitations, says Linder. A medical group is free to participate in a PSO either as a contracting entity or as a partner. At New American Health, Linder's organization contracts with the PSO, although the group is owned by the North Arundel Hospital, which has a 50% stake in New American.

"As with any undertaking, if there are no risks there are no rewards," Linder adds.

But rewards may be slow in coming anyway. A government-funded study of integrated hospital alliances recently suggested that these collaborations may actually end up increasing health care costs instead of reducing them.1

Researchers at Virginia Commonwealth University (VCU) in Richmond found no evidence that forming strategic alliances among hospitals led to lower operating expenses or patient-care costs. The findings raises questions about the benefits of strategic partnerships such as integrated systems and possibly even PSOs, according to Jan P. Clement, PhD, associate professor of VCU's department of health administration and one of the study's authors.

"Many times, its that the goals of the [integrated] organization is to maximize revenues when it should also be to create efficiencies. But these situations aren't inevitable," Clement says. "Everyone is trying to control the environment in one way or another," she adds.


    1. Clement JP, McCue MJ, et al. Strategic hospital alliances: Impact on financial performance. Health Affairs 1997;16:193-203.