PREFERRED-PROVIDER ORGANIZATIONS (PPO)

A concept that continues to receive considerable attention from employers and insurance companies is the preferred-provider organization. A few PPOs have existed on a small scale for many years, but since the early 1980s PPOs have grown steadily in number and in membership. Today, PPOs provide coverage for medical expenses to more Americans than do HMOs, primarily because of the flexibility of covered persons to choose their own medical providers.

What Is a PPO?
The term PPO tends to be used in two ways. One way is to apply it to health care providers that contract with employers, insurance companies, union trust funds, third-party administrators, or others to provide medical care services at a reduced fee. Using this definition, a PPO may be organized by the providers themselves or by other organizations such as insurance companies, the Blues, HMOs, or employers. Like HMOs, they may take the form of group practices or separate individual practices. They may provide a broad array of medical services, including physicians' services, hospital care, laboratory costs, and home health care, or they may be limited to only hospitalization or physicians' services. Some of these types of organizations are very specialized and provide specific services such as dental care, mental health benefits, substance abuse services, maternity care, or prescription drugs. These providers are referred to not as PPOs but as preferred providers or network providers.

The second use of the term PPO, and the one generally assumed when the term is used is to apply it to benefit plans that contract with preferred providers to obtain lower-cost care for plan members. PPOs typically differ from HMOs in several respects. First, the preferred providers are generally paid on a fee-for-service basis as their services are used. However, fees are usually subject to a schedule that is the same for all similar providers within the PPO, and providers may have an incentive to control utilization through bonus arrangements. Second, employees and their dependents are not required to use the practitioners or facilities that contract with the PPO; rather, a choice can be made each time medical care is needed, and benefits are also paid for care provided by nonnetwork providers. However, employees are offered incentives to use network providers; they include lower or reduced deductibles and copayments as well as increased benefits such as preventive health care. Third, most PPOs do not use a primary care physician as a gatekeeper; employees do not need referrals to see specialists.

Employers were disappointed with some of the early PPOs. While discounts were received, they seemed to have little effect on benefit costs because discounts were from higher-than-average fees, or providers were more likely to perform diagnostic tests or prolong hospital stays to generate additional fees to compensate for the discounts. Needless to say, these PPOs seldom lasted long. The successful PPOs today emphasize quality care and utilization review. In selecting physicians and hospitals, PPOs look not only at the type of care provided but also at the provider's cost effectiveness. In this era of fierce competition among medical care providers, these physicians and hospitals are often willing to accept discounts in hopes of increasing patient volume. It is also important for a PPO to monitor and control utilization on an ongoing basis and to deal with groups of preferred providers that monitor their own costs and utilization. As a general rule, however, PPOs do not monitor their preferred providers as closely as HMOs do.

Variations
Over time, PPOs have continued to evolve. A few PPOs compensate providers on a capitation basis, while a few others perform a gatekeeper function. If a specialist is not recommended by a subscriber's primary care physician, benefits may be reduced. With these changes, it is sometimes difficult to determine the exact form of a managed care organization. However, those that operate as traditional HMOs generally provide medical expense coverage at a slightly lower cost than those that operate as traditional PPOs, but there are wide variations among HMOs as well as among PPOs. Therefore, a careful analysis of quality of care, cost, and financial stability is necessary before a particular HMO or PPO is selected.

Another variation of the PPO is the exclusive-provider organization, or EPO. The primary difference is that an EPO does not provide coverage outside the preferred-provider network, except in those infrequent cases when the network does not contain an appropriate specialist. This aspect of an EPO makes it very similar to an HMO. The number of EPOs is small.

Sponsorship
Most of the early PPOs were established by insurance companies to provide products to compete with HMOs. In the 1990s, the number of PPOs grew significantly to about 1,100, with about 60 percent still owned by insurance companies. Another 10 percent are owned by HMOs to give them another product in their health plan portfolios to offer employers. The remaining 30 percent have a variety of ownership forms, including the Blues, third-party administrators, private investors, and groups of physicians and/or hospitals.