PSOs must resemble integrated systems

The first thing you do is build an infrastructure . . .

If your physicians want to participate when lawmakers decide what provider-sponsored networks should look like and what requirements will be placed on them, they’d better be willing to work within a large IPA-like organization, experts say.

Success in a provider-sponsored organization (PSO) will depend on how the organization is structured and the range of services it can provide. That’s why pundits are predicting that large physician organizations with strong ties to a hospital will be in the best position to win Medicare and employer contracts.

For example, the federal government is pondering legislation that would require PSOs to deliver a majority of services from within the organization. In order to win a Medicare risk contract, not only will a PSO need a hospital component, but it also will need a vast physician network that would cover a wide range of illnesses and procedures.

"I think an IPA or a physician organization, regardless of what you call it, is going to have to be able to demonstrate that it can truly manage the care of these patients," says Michael Able, MD, chairman and chief executive officer of Brown & Toland Medical Group in San Francisco. "Part of the requirement for PSOs is to have established institutional relationships if you are a physician organization, or vice versa if you are an institution."

Large IPAs such as Brown & Toland seem to be in a good position to form a PSO. Brown & Toland has a network of 350 primary care physicians, 1,250 specialists, and partnerships with California Pacific Medical Center in San Francisco and the University of California San Francisco Hospital. Like the San Francisco IPA, other IPAs and physician-hospital organizations (PHOs) will need capitation experience to garner Medicare risk contracts.

"I think HCFA [Health Care Financing Administration] is going to have strict guidelines on who will be the participants," Abel says. "Would-be PSOs must have demonstrated experience in delivering care to this population. I think some risk experience is necessary — not necessarily with Medicare but with a commercial population."

A significant investment

DeMarco advises physician organizations to begin building a network of physicians and facilities that resembles (or becomes) an integrated delivery system. It is likely that HCFA will require PSOs to deliver at least 60% of services from within the organization, rather than subcontract with outside providers.

"My speculation is that [HCFA] will follow some sort of definition of an integrated care system. Most likely, the definition will come from the HMO Act," DeMarco says.

Taking on risk is an entirely different endeavor. Physician organizations with little or no experience in capitation, including information systems that track capitation data and manage utilization, will find themselves in over their heads. The absence of a capitation-ready infrastructure will require a significant investment, one that can reach millions of dollars depending on the sophistication of the system.

That means upfront capitalization for a fledgling PSO could soar to more than $2 million, depending on the cash reserve and solvency requirements the federal government and state legislatures enact.

"The first thing you do is build an infrastructure and a local delivery system," DeMarco says. "Most IPAs are clubs. They have to get out of the club business and build a delivery system that has the ability to predict cost and outcomes. If you can’t do that, you’re going to lose your shirt on a Medicare contract."