Sources and uses of capital.
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The Securities and Exchange Commission's (SEC's) final disclosure rule affects healthcare providers who have $10 million or more in bonds outstanding and providers that plan to be active in the bond market in the future. As managed care providers, HMOs come under the jurisdiction of the rule and are required to expand their reporting of financial information and operational data to include secondary market bond purchasers. The SEC's broadened disclosure rule significantly affects the financial reporting practices of healthcare providers involved in capitated contracting--especially the areas of contract reporting, confidentiality of information, and catastrophic case loss reporting.
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Capitation introduces a number of significant considerations to financial reporting that normally are associated with insurance. These considerations arise for two reasons: (1) because providers receive revenue before services are rendered and (2) because providers assume the risk that the expenses they incur in delivering contracted services may exceed revenue. Both factors should be accounted for on financial statements by creating reserves representing actual and potential liabilities associated with capitation contracts as of the statement date. Continuous review of these reserves is necessary to ensure they remain adequate and are allocated appropriately.
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Providers can sponsor their own HMOs in one of three ways: by creating their own HMO, by joint venturing with an existing HMO, or by purchasing an existing HMO. When selecting the best option, providers must consider various market conditions. Managed care penetration in the area, potential competitive responses of existing HMOs, market demand, provider reputation, and provider marketing ability will all influence the feasibility of each option. Providers also must examine their own organizational identity, their ability to raise the necessary capital to start an HMO, their managed care expertise and risk contracting experience, and their information systems capabilities.
The 1995 Republican House Medicare reform proposal introduced the provider services network (PSN) concept as a new healthcare delivery model for accepting and administering Medicare risk contracts. A PSN operates much like an HMO, but is not subject to the reserve requirements established for HMOs. Providers that want to enter the Medicare risk contracting arena and exercise more control over the delivery of healthcare services may consider forming a PSN. To form a PSN, providers must be sufficiently capitalized to compete with HMOs, create a formal legal organization, and develop a financial plan. To ensure that its goals are met, the PSN must develop a sales promotion plan, enroll members, control and monitor financial resources and clinical outcomes, and implement a management information system. Other crucial capabilities that a PSN must develop include establishing mechanisms for utilization review, membership information maintenance, claims adjudication, physician credentialing, quality assurance, and member grievance procedures.
Specialty physicians are feeling the heat from managed care because of shrinking reimbursement, selective paneling and clinical re-engineering. They have felt the need to leverage their influence by developing specialty groups and networks. While each network is unique in its external circumstances, there are several common elements to successful specialty networks, including having a clear network mission, obtaining adequate capitalization, obtaining equity, accepting only a manageable amount of risk, gaining member volume establishing and maintaining payer diversity, being high quality and efficient, developing and using information tools, supporting network efficiencies, allying with other physician organizations, exercising network panel selection and deselection, and empowering physicians with knowledge.
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Provider-sponsored organizations (PSOs) are health risk-bearing entities that assume risk either by contracting directly with individuals, employers, or other groups, or by entering into risk agreements with HMOs. Under the former arrangement, the PSO is generally subject to state insurance licensure requirements. Under the latter arrangement, the PSO is generally not directly regulated. The National Association of Insurance Commissioners (NAIC) has recommended that direct-contracting PSOs be subjected to the same requirements as HMOs, including minimum cash reserves. Arguments have been made that requiring such reserves of PSOs is burdensome and inappropriate. The NAIC has begun a Consolidated Licensure for Entities Assuming Risk (CLEAR) initiative to establish means by which states may regulate all organizations that perform managed care functions and assume health insurance risk.
As PHOs and other similar organizations grow and meet their initial goals, they often find themselves needing large amounts of capital in order to take the organization to the next level. Some of these systems are looking to get this capital by partnering with publicly traded physician practice management companies (PPMC). Finding the right PPMC to partner with is largely a matter of weighing strengths and weaknesses so that the PPMC's strengths fill in the PHO's weaknesses and vice versa.
Physician practice management companies (PPMCs) are one of the most visible entrants into the industry of managing physician practices, and anywhere from 100-150 are already in operation. Although PPMCs and hospital-based integrated delivery systems (IDSs) differ from each other in many ways, they share a number of common features, including the pursuit of capitation contracts from payors. As a result, PPMCs pose a growing, direct threat to hospital systems in competing for managed care contracts that cover physician service. PPMCs also provide an alternative to hospital-based IDSs at the local market level for physician group consolidation. This article looks at the structure, operation, and strategy of PPMCs and examines what implications their growth will have for hospital-based IDSs.
HMOs are increasingly relying on risk-bearing IPAs to expand their networks. Physicians see IPAs as a way to access HMO patients without relinquishing their autonomy. To build a sustainable IPA to bear global risk for HMO enrollees, the IPA's organizers should select a provider panel that is committed to centralized medical management and dominated by primary care physicians, invest in talented managers, empower a strong governing board, and access a management information system that can perform the functions necessary to manage care. Additionally, the interests of any potential outside capital sources should be weighed carefully, and the financial incentives of all of the IPA's providers aligned with the IPA's goal of providing appropriate, cost-effective care.
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This article considers Michael Porter's five forces of industry competition as it relates to provider sponsored organizations and asks four important questions on marketing differentiation, quality, size of market, and product/service scope.
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