Mid-Atlantic Health Law TOPICS

Background hero atmospheric image for Provider-Sponsored Organizations

Provider-Sponsored Organizations

In the fast moving world of risk bearing, managed health care entities, a new player has emerged, namely "provider-sponsored organizations" (or PSOs). These companies, in addition to HMOs, will be able to contract on a full risk basis with Medicare to provide services to Medicare enrollees.

More specifically, PSOs are the creation of the Balanced Budget Act of 1997 (the Act). The Act revamps the Medicare program, including the establishment of a new "Medicare Part C," also known as "Medicare+Choice," which replaces the existing managed care options for Medicare enrollees.


Unlike existing Medicare provisions, Part C allows entities not licensed as HMOs to participate in the provision of capitated services to Medicare enrollees. These entities may take on the full financial risk of providing the complete package of Part A (facility) and Part B (professional) services to Medicare enrollees choosing to receive their services in this manner.

These new entities are referred to in the law as "provider sponsored organizations." Provider sponsored organizations are entities comprised of affiliated providers who own a majority of the interest in the entity, and who share substantial financial risk in the performance of the Medicare contract. Traditional physician/hospital organizations, or groups of these entities, may qualify to meet the new Medicare PSO definition, as may other groupings of providers organized to take advantage of this new Medicare contracting opportunity.

B. State Licensure

Congress has required PSOs to be licensed as "risk- bearing entities" under state laws. Nevertheless, a waiver provision in the statute allows an entity otherwise meeting the PSO definition to apply for a Medicare contract, even though it is not licensed. A PSO may receive a three-year federal waiver if:

  1. The state fails to act in a timely manner on a PSO application;
  2. The state denies a PSO application on a discriminatory basis; or
  3. The state applies solvency standards that differ from federal PSO solvency requirements (to be adopted by regulation no later than April 1, 1998).

Since many states, including Maryland, provide only HMO or insurance licensure for "risk-bearing entities," PSOs without an HMO or similar license in such states will need to apply for federal waivers, which, based on the terms of the federal law, can only be granted for one three-year period. At the end of the three-year period, and absent any change in law, a non-licensed PSO will either have to cease operations or have to acquire an HMO or similar license.

C. Additional PSO Requirements

According to the new federal law, a "substantial proportion" of the PSO's services must be provided by "affiliated providers," that is, providers with an ownership interest in the PSO, or who share financial risk with the PSO. This provision was included to preclude PSOs that look like HMOs from trying to evade state licensure. The term "substantial proportion" of services is to be defined by the federal Health Care Financing Administration (HCFA), and such definition will undoubtedly be the subject of heated debate.

In addition, PSOs will be required to accept all eligible applicants without restriction, and must have a minimum of 500 enrollees on a start-up basis. The existing rule, that requires Medicare HMOs to have at least an equal number of non-Medicare enrollees, has been repealed for HMOs, and will not be imposed on PSOs.

D. Implementation

Medicare Part C is to be up and running on January 1, 1999. PSO applications will be reviewed by HCFA as early as April, 1998. Given the complex application process, and the many organizational requirements that will have to be met, PSOs must act now to be ready to participate in the new Medicare program by January 1, 1999.


March 21, 1997




Rosen, Barry F.


Health Care