PSOs hunger for Medicare risk plans; the race is on

Congress may pave the way for direct contracting

The winds of change may finally be gusting in the direction of provider-sponsored organizations (PSOs). Proponents of direct Medicare risk contracting, among them numerous physicians and hospital executives, have long insisted that private insurers should not be allowed sole boasting rights to the lucrative $3 billion-a-year managed care program.

Soon they may get their way. Two separate bills in Congress — one in the Senate (SB 146), the other in the House (HR 475) — are gaining strong bipartisan support and could win passage this year.

The legislation essentially would enable pro vider groups to pursue Medicare risk contracts without necessarily meeting state licensure requirements that normally apply to bona fide health maintenance organizations (HMOs). The U.S. Department of Health and Human Services (HHS) would create oversight standards that would conform with state licensing criteria.

Under current federal requirements, only state-licensed HMOs are permitted to participate in Medicare risk plans. But even the Health Care Financing Administration (HCFA), which oversees the program, has weighed the possibility of allowing PSOs direct-contracting rights. The agency is currently testing the possibility with a program called Medicare Choice at 12 demonstration sites nationwide.

Meanwhile, the White House has proposed its own measure. The Clinton administration’s budget, which was unveiled in February, carries a provision that gives HHS the authority to grant waivers to PSOs that wish to operate in a state under a full- or partial-risk contract.

If lawmakers approve any of these measures, some health care organizations say the number of PSOs that will rush into the market to win risk contracts will mushroom. "Yes, we would not hesitate to seek a HCFA contract immediately," says Sally A. Arnaud, RN, vice president of administration with Paramount Physician Network, a 900-member independent practice association (IPA) in Denver.

But while hospitals and medical groups are cheering the prospects of direct contracting, some are taking a closer look at the situation. "[Providers] are going to develop a healthy respect for the competencies of insurers," says Frederick B. Abbey, MPA, a partner with Ernst & Young in Washington, DC.

"They’ll have to replicate those competencies, which will be very difficult and expensive," says Abbey.

In all likelihood, HHS isn’t going to depart radically from applying standards it currently uses on insurers, in the opinion of one HCFA official. If so, providers are in for a tough screening process.

HMOs typically are put through a maze of qualifying prerequisites, such as proof of financial solvency, including cash and non-liquid asset reserves. They also have to demonstrate proper levels of patient access, efficient billing and claims processing capabilities, and sufficient commercial risk experience.

The agency sets a minimum 5,000-member commercial enrollment criterion for HMOs before a plan qualifies for Medicare risk (1,500 in rural areas), and prohibits insurers from having more than 50% of their entire membership enrolled in Medicare managed care.

The pending legislation sets even tougher standards on PSOs, including a complex formula for determining net worth (beginning at more than $1.5 million), and implementation of a rigorous internal quality assurance program.

Knowing these facts, providers don’t seem daunted. In the areas of quality and service, large integrated systems are likely to pass muster, says Alan Yordy, CHE, MBA, chief executive officer of Mid-Valley Healthcare, a system of three hospitals and 100 physicians based in Lebanon, OR.

In Yordy’s opinion, the ability of PSOs to directly control quality and utilization automatically raises the organization’s net worth, which should lead HCFA to loosen its solvency requirements.

But even Yordy admits that direct contracting is fraught with danger. "It’s a very difficult business. Unless you can accept full risk for at least 80% of the care that’s delivered, I wouldn’t touch Medicare managed care," Yordy cautions. And there are other perils, such as the following:

• The enormous amount of working capital required will certainly hamper providers, especially in the initial stages of the contract, Abbey says. Estimates vary, but some providers put the figure at $1.5 million at least. To raise the capital, many will have to affiliate with deep-pocketed partners such as an insurer or regional network, says Abbey.

• The lack of any long-term actuarial experience with Medicare risk patients and the time it takes to grow enrollment to a sufficient size to diffuse risk will test a provider’s resolve, Yordy says.

Enrollment alone isn’t enough

Some estimates recommend establishing minimum enrollment volume at between 3,500 to 10,000. But volume alone isn’t an indicator of future success, says Abbey. The more lives you cover, the higher the potential for practice variance — and, therefore, the greater your exposure to risk.

• Cuts are likely to widen in the 95% portion of the Annual Adjusted Per Capita Cost (AAPCC) index, HCFA’s key measure for Medicare HMO reimbursement rates to providers, which is based on geographic averages. The removal of graduate medical education (GME) from the HMO payment formula as proposed in the Clinton budget also is likely to cut incomes.

The GME has become one of the hot buttons in the Medicare cost debate. Some lawmakers believe reimbursements that cover medical residency programs at teaching facilities should be cut back or eliminated, especially from Medicare managed care.

• Competition, particularly from rival health plans, is not going to make it any easier for PSOs, says Michael P. Lance, CPA, chief executive officer of PennMed Member Services Company in Harrisburg, PA.

In fact, a PSO can seriously hurt its commercial business by competing with a contracting HMO. "When you begin taking away their Medicare business, I doubt if they’ll take it mildly," says Lance, whose organization develops integrated networks as a subsidiary of the Pennsylvania Medical Society in Harrisburg.

Ultimately, providers will have to ask themselves whether a risk contract is truly worth the risk and the capital investment, or "whether remaining downstream in the [contracting] process is a wiser course," says Abbey.