PSOs enable physicians to go head to head with HMOs

Federal and state laws still being hammered out

In the struggle to gain control of how health care is delivered, the advent of provider-sponsored organizations (PSOs) has given your physicians a powerful new weapon. Depending on how states and the federal government define these vehicles for direct contracting, well-organized and well-capitalized PSOs may find themselves in the catbird seat.

Until now, your hospital and physicians have been at the mercy of managed care organizations, which sell their products to employers and contract with providers for the required medical services. Now, there is a movement afoot to allow hospitals and physicians to compete head to head with HMOs and take on full risk like their insurance counterparts.

President Clinton and Congress have separate proposals that would allow PSOs to contract directly with the Health Care Financing Administration for Medicare managed care contracts. Essentially, that would mean these organizations would participate as the managed care plan for Medicare enrollees. State legislatures across the country are considering similar provisions.

But before your health system can sound the cannons in celebration of their victory, they must wait for state and federal governments to set forth the ground rules for this new game. At issue is how these networks should be structured.

For example, the president’s proposal makes hospitals the centerpiece of the PSO. It’s not clear whether Congress will allow physicians to form PSOs where the physician entity is the centerpiece and a hospital is the subcontractor.

"We are anxiously awaiting the exact definition of a provider-sponsored network," says Michael Abel, MD, chairman and chief executive officer of Brown & Toland Medical Group, an IPA in San Francisco with an eye on forming its own PSO. "We are all hoping it is going to look like an IPA or physician organization."

Various state and federal regulations being considered range from requiring PSOs to have an HMO license in order to contract directly with Medicare and employers, to merely requiring them to have reserve cash to ensure solvency.

"There are two definitions of a PSO floating round in Washington as it relates to Medicare: the AHA [American Hospital Association] model, which would resemble a physician-hospital organization, and the AMA [American Medical Association] model, which would resemble an IPA," says William J. DeMarco, MA, CMC, president of DeMarco & Associates in Rockford, IL.

Need new laws for new goals

As one might expect, with so much at stake, the titans of the industry are lobbying for the interests of their constituents.

The Medical Group Management Association in Englewood, CO, a trade association of practice administrators and physicians, has been trying to lobby Congress to change current federal laws or enact new ones to achieve the following goals:

• to allow physicians to subcontract with hospitals for hospital-related physician services;

• to allow physicians to subcontract with either hospitals or some other venture capital partner in order to accept risk.

The Washington, DC-based AHA argues that a hospital component, not a subcontracted facility, is an essential service in the care of the elderly.

"Not all PSOs will be able to qualify to serve Medicare patients," said John C. McMeekin, president and CEO of Crozer-Keystone Health System in Media, PA, during recent testimony on behalf of the AHA. "Medicare-qualified PSOs must provide the entire Medicare benefit package and should deliver a substantial portion of their services directly through their own affiliated providers, to ensure a high level of coordination of patients. PSOs must meet the same consumer protection standards currently required by HMOs, with a few revisions."

These revisions include:

Waive the 50/50 requirement. Medicare risk contractors are required to have at least 50% commercial enrollment. The AHA argues that the 50/50 rule prevents PSOs from offering a package of benefits truly aimed at the senior population. Instead, the AHA wants to see quality measures implemented.

Require federal certification for PSOs. With both state and federal governments considering PSO legislation, PSOs could be bound by two different sets of laws. The AHA wants to see PSOs directly enrolling Medicare beneficiaries and only being required to obtain federal certification, thus avoiding state licensing.

Apply HMO requirements. These requirements include financial soundness, insolvency plans, provider contracting, and continuity of care.

The AMA is concerned that proposed legislation won’t allow physicians to play a major role in the formation of these organizations. Specifically, the AMA has notified Congress of the following concerns:

• Proposed legislation would not allow physicians and physician organizations to organize PSOs.

• The bills would not allow for non-provider capital partners. This would eliminate many physician groups that would not have the capital to meet cash reserve requirements and invest in the infrastructure needed to manage risk.

• The solvency standards, which require a minimum net worth and substantial claims reserve, may be inappropriate for physician-organized PSOs that have difficulty raising the capital needed to meet this requirement. (See related story on the AMA’s position on PSOs, at right.) But if the American Association of Health Plans in Washington, DC, has its way, provider-sponsored organizations would be subject to the same regulations as the HMO industry, including solvency and cash reserve requirements.

"We have no problem with competition," says Don White, spokesman for the HMO trade association. "If it walks like a duck and takes on risk like a duck, then it should be regulated like a duck."

At stake is whether physicians can gain equal footing with their HMO counterparts as the federal government moves more of its Medicare enrollees into capitated plans. DeMarco predicts that some markets could see large swings in where Medicare enrollees seek care. Those physicians not in PSOs could suddenly find their Medicare patients going elsewhere.

"The alternative to not being in a PSO or not forming a PSO is that Medicare will shift all that patient base somewhere else," DeMarco says. "There is really something laying in the balance that has not been seen before. A lot of these docs will wait forever because they don’t believe those charts will leave their office. But it can literally happen overnight."