A ground-floor perspective on organizing a PSO

Tips from someone who's been there

Among the few providers that have a realistic idea of what it really takes to form a provider-sponsored organization (PSO) from scratch are the 25 health care organizations selected to participate in HCFA's pilot Medicare Choice project, which will build and operate a Medicare-risk managed care plan from the ground up.

Included in this pilot group are Mount Carmel Health Plan (MCHP) of Columbus, OH, a three-hospital, 600-physician organization, and the seven-hospital Orlando-based Florida Hospital Health Care System (FHHCS). Invited by HCFA to join the Medicare Choice pilot in 1996, these two systems officially began operating and accepting risk contracts in early 1997. Here are some words of advice from executives of both systems:

1. Understanding the market is key to success.

"A provider-sponsored network can thrive if the market is right," notes MCHP's president Joe Cavaruso, "but you have to do the market research and thoroughly understand what it says or you can easily end up losing your shirt. " An early competitive analysis done by FHHCS, for instance, found 42,000 of the 160,000 (26%) eligible Medicare patients in its market were already enrolled in one of six existing local Medicare HMOs, with two more senior plans in development.

"This apparent oversaturation of the market turned us off the idea for awhile, " admits FHHCS president Richard Ryan. However, further research showed that FHHCS hospitals actually controlled 50% of the current market for Medicare patients. "We found an advantage we hadn't realized we had, which made the prospect of going ahead with a new Medicare plan in an already active market less daunting," recalls Ryan.

2. Physician involvement is essential.

From the start, participating physicians need to be included and consulted about all aspects of the planning process. "One of the first things you must do is find out what will be needed to gain physician support for the project. That could turn out to be one of your biggest assets, " advises Cavaruso.

3. Develop a solid business plan.

"Make sure your business plan contains all your start-up and development costs, including how you will fund the operation until it is in the black," stresses Cavaruso. Between April 1996, when it was selected to join the HCFA pilot, and the end of 1997, MCHP invested some $13 million into developing its Medicare contracting capabilities. "We expected to lose money for the first several years, and we have," notes Cavaruso, "but we're not concerned because these losses were realistically covered in the budget. Now the program is also starting to grow quicker than projected, so we also anticipate breaking even sooner than planned."

4. A strong sales and marketing plan is essential.

"You have to remember that this is a medical product that will require lots of market research and a properly structured and staffed sales staff - concepts which most providers are still not very comfortable with," notes Cavaruso.

Market research done by both systems, for instance, found that both Medicare and Medicaid participants preferred joining a plan sponsored by a hospital or physician network to joining one owned by an insurance company. "Information like this, along with active physician involvement in the marketing process, will become part of the foundations of your marketing strategy," stresses Cavaruso.

5. Medical management/utilization review must be done.

"After getting the lives, the question becomes how are you going to manage them," says Cavaruso. As such, a PSO is probably going to look more like a typical HMO than expected when it comes to such things as utilization/quality management, financial controls, and other administrative functions, say these experts.

6. Hire people with HMO experience.

Especially when designing and launching the PSO, focus on hiring staff and managers with previous health plan experience. "Operating a Medicare plan, as opposed to a hospital or hospital network, requires a staff with a different area of expertise and mindset to succeed," notes Ryan.