PSO solvency standard awaited
PSO solvency standard awaited
Concessions predicted
April 1 came and went without the scheduled release of HCFA's proposed solvency and capital requirements for provider-sponsored organizations (PSOs). As Physician's Payment Update went to press in late April, the Baltimore-based organization had not yet published its requirements, although many government insiders were able to offer speculation on the likely standards.
This much was clear, however: As part of a March 5 consensus agreement hammered out in public negotiating sessions between representatives of various health care provider and industry groups, HCFA agreed to a major concessions on the amount of tangible assets required by provider groups applying for a PSO license.
"We feel basically all right with what is supposed to be in the proposed rule. However, it is still a very complicated issue which will take a little time to digest," notes Pam Kurland, a lobbyist for the Englewood, CO-based Medical Group Management Association.
"While none of the different provider groups got all that they wanted, we feel this represents a reasonable compromise," states Lauren Maddox, a spokeswoman for the Federation of American Health Systems, a hospital-oriented trade group.
In a key concession, HCFA's proposed regulation gives provider groups some leeway in their capital requirements needed to qualify for a license. It allows groups to use intangible assets - things such as physician contracts, practice management agreements, and health care delivery networks - for up to 20% of the $1.5 million in required start-up capital. HCFA had wanted to limited the intangible asset credit to 10%, a move that would have substantially increased the amount of hard cash future founding PSO partners would have had to raise.
Under the expected solvency standard, pro spective PSOs must have a total minimum net worth of $1.5 million, at least $750,000 of which has to be in cash or cash equivalents, plus a $100,000 insolvency deposit.
HCFA, however, has the discretionary authority to reduce this $1.5 million net worth threshold to $1 million if it feels the PSO's business plan proves start-up costs will be low enough to justify a smaller capital cushion.
As part of the proposed solvency standard, prospective PSO applicants also must demonstrate that they have the available resources to fund all projected losses until they hit a projected break-even point, and then show secured financing to cover operations for one year after this point.
However, in another significant compromise sought by physician groups, HCFA agreed that an "irrevocable, clean, unconditional letter of credit" can be used instead of cash reserves to cover estimated losses.
Once the PSO is in the operating black, to stay in good standing its net worth must be the greater of:
· $1 million;
· 2% of premiums;
· the sum of three months' expenditures for any health-related expense not already covered by a contract, such as out-of-network referrals;
· the sum of 8% of noncapitated payments made to nonaffiliated providers, plus 4% of expenditures paid on a capitated basis to nonaffiliated providers and noncapitated payments to affiliated providers.
"You are still going to need cash - a lot of cash - to meet these initial solvency requirements," despite the leverage gained from including the 20% intangible asset provision in the start-up capital requirements, points out Patrick O'Hare, a partner in the Washington, DC, law offices of McDermott, Will & Emery.
Like many experts, O'Hare says most PSOs will be a joint venture between a local hospital or hospitals and a group of physicians, with the hospital half providing most, if not all, of the start-up financing and projected loss guarantees.
However, such things as the legal, organizational, and tax status of participating providers could create potential problems affecting how the entity will be structured, says O'Hare.
Governance will be a major issue, for instance. Most physician participants will want to control at least half of the PSO's board. Yet, "if a nonprofit hospital puts up 100% of the capital needed to launch the PSO but ends up sharing 50% of the governing authority with its physician partners, this vehicle will probably fail the IRS' joint venture test," says O'Hare.
The next issue of Physician's Payment Update will take a closer look at how HCFA's proposed solvency rule, combined with existing tax and antitrust considerations, could affect the structuring of potential PSO deals between different providers. We also will preview possible structures of future PSO models.
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