PSO solvency standards approved for Medicare Federal agency will accept comments, issue interim final rule April 1
It’s not the Big Chill, but it isn’t the Big Easy either.
Walking the fine line between protecting consumers from insolvencies and yet encouraging provider-sponsored organizations (PSOs) to form, a 14-member negotiated rulemaking committee reached final agreement March 3 on solvency standards for PSOs that will participate in the Medicare+Choice program.
The Health Care Financing Administration (HCFA) will issue an interim final rule on the solvency standards April 1. Comprehensive rules for PSOs will be issued June 1.
"Some organizations, when the topic of PSOs come up, think (the federal requirements) will be a very simple and easy way to get into the Medicare risk business," said Jim Burnosky, a senior consultant for Medimetrix. But, the federal solvency standard, when you "look at it directly in the light of day," recognizes that PSOs are HMO look-alikes.
"The bottom line is that the regs are a little easier to comply with than full HMO regs, but, that’s not saying a lot. PSOs are still strong risk-bearing entities that will need a lot of cash, a lot of infrastructure and a good financial plan. PSOs still have a lot to do to operate," he said, and they will need "parents with deep pockets."
The 14-member committee, composed of representatives from consumer and provider groups as well as government regulators, was charged with reaching a consensus on the solvency standard for PSOs.
"A fallback system"
Jack Ehnes, Colorado’s insurance commissioner and a member of the committee, emphasized that the approval process for Medicare+Choice PSOs is not a "federally regulated" system, it’s a "fallback system." PSOs apply to the federal government for approval only if state regulators take more than 90 days to act on their application or if state requirements far exceed federal requirements. After three years of operating with federal approval, the PSOs would be back in the state regulatory systems.
Among the major gains for providers in the Medicare+Choice solvency standard is that all tangible health care delivery assets (hospitals, medical facilities, equipment, property) will count in determining net worth. Some analysts believe the standards favor hospitals since it would be easier for them to meet the minimum net worth requirement than it is for doctor groups. But major physician associations reacted favorably to the requirements.
Providers would have liked a broader definition of sweat equity, Mr. Ehnes said. However, the committee did agree that "subordinated liabilities" would not count in calculating net worth. "Subordinated liabilities" are claims liabilities otherwise due to providers that are retained by the PSO to meet net worth requirements and are fully subordinated to all creditors," a committee statement said.
The committee decided not to adopt the more "forward-looking" risk-based capital (RBC) approach to solvency matters, one "regret" for insurance regulators, said Mr. Ehnes.
Already used in other lines of insurance such as property/casualty and life/health, a risk-based capital formula establishes minimum capital requirements based on the degree of risk taken by the health organization. RBC also provides for flexibility in regulating rapidly evolving and emerging healthcare organizations. This sliding-scale approach to establishing capital requirements is expected to be adopted by many states in the near future. "The beauty of it is that it sets appropriate capital requirements true to the nature of the risk that is being assumed," said Mr. Ehnes.
Maureen Mudron, Washington counsel for the American Hospital Association (AHA) and another member of the committee, said the feeling was that RBC had not yet been tested with these type of organizations. However, HCFA will continue to evaluate the formula.
The federal solvency requirements for Medicare+Choice are less than, more than or equal to the HMO or PSO requirements used by the individual states. National organizations such as the AHA, the National Association of Insurance Commissioners, and the American Medical Association, are likely to conduct analyses that compare how individual state requirements stack up against the federal requirements, said Mr. Bernosky. In some states, it may be easier to meet HMO requirements than the federal PSO requirements.
"With the backlash against HMOs, there may be a benefit to calling yourself a PSO," he said.
Keith Mueller, director of the Nebraska Center for Rural Health Research, noted that the committee has left the door open to reducing solvency requirements for rural PSOs. HCFA will seek public input on this issue in coming months. In rural areas, where as much as 40% of the population is on Medicare, Medicare+Choice plans could greatly improve the benefit package for consumers, he said. PSOs would also help preserve the health infrastructure in rural areas. When residents join health plans in nearby urban areas, they often stop using local providers.
There’s a perception inside the Washington Beltway that PSOs would prefer to bypass local regulators and deal with with federal regulators, said Mr. Ehnes. Often underestimated is the role state regulators play in helping "solve problems with them (healthcare organizations) when they’re operating." It is difficult to "replicate the value of that relationship" at the federal level, Mr. Ehnes said. Recently, some healthcare executives came into his office to explore whether the PSO concept "can work in our state."
As federal and state regulators prepare to work together on approving PSOs that offer Medicare+Choice coverage, NAIC officials stress the importance of coordination on such issues as when the clock should start ticking on state applications and on when an application should be considered substantially complete. NAIC maintains there is potential for gaming the system if , for example, applicants delay providing information until the the day before the 90-day review period runs out.
NAIC officials also hope that HCFA will not just accept the applicant’s reasons for delays when the 90-day review period is exceeded. The agency should get the regulator’s explanation as well, NAIC believes. There could be a question about compliance with consumer protection standards or other standards that might have a bearing on solvency. For example, the NAIC says a case could be made that network adequacy standards are a solvency issue.
Contact Mr. Bernosky at 216-523-1300, Mr. Ehnes at 303-894-7499, Ms. Mudron at 202-838-1100, or Mr. Mueller at 402-559-5260.
PSO Solvency Standards
(For Medicare+Choice plans upon application with HCFA)
Minimum net worth requirement: $1.5 million
At HCFA’s discretion, if PSO has administrative infrastructure that will reduce start-up costs, net worth can be reduced, but to no lower than $1 million.
Minimum net worth requirement to be met by cash or cash equivalents: $750,000
Calculation of net worth: Tangible assets—Health care delivery assets can be counted at 100% of book value.
Intangible assets: If at least $1 million of net worth requirement is met by cash or cash equivalents, these assets can be counted for up to 20% of net worth requirement; if less than $1 million in cash or cash equivalents, then up to 10% can be counted.
Funding for projected losses: In financial plan, PSO must explain how it will meet projected losses until the break-even period. In the first year, the guarantor must provide the PSO with cash or cash equivalents to fund losses.