PSOs offering new partnership potential; provider service organizations: a possible gateway to 21st-century long-term care.

Among the sweeping changes of the recently adopted Balanced Budget Act (BBA) was a provision enabling providers (hospitals, physicians, nursing facilities, home health agencies, etc.) to contract directly with Medicare through the formation of a provider-sponsored organization (PSO). It was part of a package that created a new Part C, giving every eligible Medicare beneficiary the choice to elect to receive benefits through the traditional fee-for-service Medicare or through enrollment in a Medicare+Choice plan. All Medicare+Choice organizations, including PSOs, must be state licensed as risk-bearing entities, eligible to offer health insurance or health benefits coverage in the state in which it offers a Medicare+Choice plan, unless the PSO obtains a waiver from HHS.

A major goal of the Medicare+Choice program is to get more Medicare beneficiaries to choose managed care options. Over five million Medicare beneficiaries now belong to a managed care plan, more than double the number enrolled in 1994. In 1997 alone, Medicare risk HMO enrollment has growth by approximately 100,000 per month.

The Medicare managed care program allows plans and providers a great deal of flexibility in the delivery of care. This flexibility enables managed care organizations to maximize the most cost-effective services and sites of care. An integral and growing part of Medicare managed care consists of providers of post-acute care services, many of whom, of course, are skilled nursing facility-based. The opportunities for post-acute providers are substantial, especially for those who can be part of a PSO or offer their area's Medicare+Choice plan one-stop shopping through a continuum or network of post-acute care services.

The inclusion of post-acute care providers in Medicare PSOs is imperative because without post-acute care providers, Medicare PSOs could perpetuate outmoded acute care models and jeopardize successful Medicaid reform, as well. Indeed, in the Medicaid arena, 36 states already contract for full-risk arrangements with health plans; 27 of those states mandate enrollment into managed care for Temporary Assistance to Needy Families (TANF) recipients. Some states have included, or are planning to include, the disabled and long-term care populations who are dually eligible for Medicaid and Medicare. Medicare PSOs will undoubtedly be the models to which Medicaid programs will turn to implement reforms at the state level.

The statute defines a PSO as a public or private entity that is established or organized and operated by a healthcare provider or a group of affiliated healthcare providers; that provides a substantial proportion (as defined by the Secretary of HHS) of healthcare items and services under Medicare directly through the provider or a group of affiliated providers; and that directly or indirectly shares substantial financial risk.

Affiliation relationships require greater integration of provider resources to afford better coordination, enhanced quality and greater efficiency than typically is available through contractual agreements with HMOs. Long-term care providers, including nursing facilities, continuing care retirement communities, senior housing and home- and community-based services, are together playing an increasingly crucial role in effectively managing the health of our aging population. Medicare PSOs should include providers of long-term care services within their ownership or control structures. For this reason, the American Association of Homes and Services for the Aging (AAHSA) has been actively involved in educating interested parties regarding the future role of long-term care providers in geriatric and chronic care management.

How a PSO will be defined by regulation has yet to be determined. Meanwhile, solvency standards are being developed through a different process. A Negotiated Rulemaking Committee, composed of representatives from 18 diverse organizations, has been directed to reach an agreement on solvency standards for PSOs by April 1. (I have the privilege of representing the Post-Acute Care Providers, consisting of four groups: AAHSA, the American Health Care Association, the Home Health Staffing and Services Association of America, and the National Association of Home Care.)

Nevertheless, certain rules of the game are already known. A PSO must apply to the state for licensure, and if after the submission the state fails to complete action within 90 days, denies the application based on solvency standards other than those established by HHS, or denies the application based on discriminatory processes, the PSO may then apply to HHS for a waiver of licensure. This waiver process sunsets on November 1, 2002. Once a waiver is granted, it will be good for three years from the effective date.

The Negotiated Rulemaking Committee is assisting HHS in establishing standards for financial solvency and capital adequacy applicable to a PSO without a state license - i.e., with a waiver - in order to qualify as a Medicare+Choice organization. The Committee is instructed to take into account delivery system assets and alternative means delivery systems may have of protecting against insolvency, including reinsurance, unrestricted surplus, letters of credit, guarantees, organizational insurance coverage, partnership with other licensed entities, and other factors pertaining to the ability of the organization to meet its service obligations through direct delivery of care.

Originally the other details (including the definition of a PSO) were to be addressed by regulations to be issued by June 1; however, the Health Care Financing Administration has recognized the need to develop definitions ahead of the mandated date.

Until now, nursing facilities and post-acute care providers have mainly stood on the sidelines in the managed care arena. Those offering specialized services, such as rehabilitative therapies, have not received a material share of their revenues from managed care, primarily because of the small proportion of Medicare beneficiaries covered by managed care. Similarly, nursing facilities that provide long-term care residential services have received a substantial portion of their revenues from fee-for-service Medicaid and from individual private payers. Likewise, because the long-term care insurance industry is relatively immature, managed care has not played a substantial role in its reimbursement strategy.

However, demographic changes dictate a dramatic increase in the demand for chronic and long-term care and services. An integrated, chronic care-focused delivery system is essential to successfully coping with the healthcare and social service needs of this growing population, as the focus continues to shift away from acute care and toward a preventive and restorative emphasis that avoids "over-medicalization." This approach would recognize both quality of care and quality of life issues, while truly encouraging value - in short, maximum quality for a reasonable cost. The resulting opportunity for PSOs to keep 100% of the Medicare premium by contracting directly with the Health Care Financing Administration should be enticing for these providers.

Looking into the future, it is predictable that healthcare services will be delivered through systems that coordinate these across time, place and provider. These systems will emphasize prevention, risk sharing and appropriate utilization, based on consumer and community demand for high-quality health care at lower overall cost. Managed care organizations already receive substantial cost savings from the use of subacute care services without a three-day prior hospital stay and from the substitution of post-acute care for unnecessary hospital days. PSOs should help accelerate this trend and, in the process, afford long-term care providers a meaningful role in these integrated organizations.

Judith Peres, LCSW-C, is Director of Health Policy for the American Association of Homes and Services for the Aging, Washington, DC.