PREFERRED-PROVIDER ORGANIZATIONS (PPO) - Benefit Structure

The basic benefit structure of a PPO is very similar to that of the traditional comprehensive major medical contract. The most significant difference is that there is a higher level of benefits for care received from network providers than there is for care received from nonnetwork providers. Many PPOs have extensive networks of preferred providers, particularly in the geographic areas in which they operate, and there is little reason to seek care outside the network. Some of these PPOs also have reciprocity agreements elsewhere with networks of other PPOs and hospitals (called centers of excellence) that have excellent outcomes and reputations for certain types of medical procedures, such as cancer treatment, organ transplants. or burn treatment. Under these agreements, benefits are paid as if care was received from network providers. Other PPOs have more limited networks, and the need and desire for treatment from nonnetwork providers is greater. Table 11-2 shows excerpts of the benefit structure from an actual PPO.



The level of benefits under PPOs may vary because of differences in deductibles, coinsurance, maximum lifetime benefits, and precertification rules. There may also be a few additional benefits that are available only if care is received from a network provider. Finally, the procedures for filing claims also differ. The major purpose of these differences is to encourage an employee or dependent to receive care from preferred providers who have agreed to charge the plan a discounted fee.

Deductibles
A PPO may have annual deductibles that apply separately to network and nonnetwork charges. For examples, these might be $100 and $250, respectively. However, many PPOs have no deductible for network charges. Deductibles may be waived for some medical services, such as emergency or preventive care.

Coinsurance
Most PPOs use coinsurance percentages that are 20 percent (and occasionally 30 percent) lower when care is received from nonnetwork providers. The most frequently found provision applies 90 percent coinsurance to network charges and 70 percent coinsurance to nonnetwork charges. Coinsurance provisions of 100/80, 90/80, and 100/70 are also frequently used. As with deductibles, the percentage participation may be waived for certain medical services. In addition, different stop-loss limits or coinsurance caps, such as $1,000 and $3,000, may apply to network and nonnetwork charges.

While PPOs typically have higher coinsurance percentages for network charges than do traditional major medical plans, a covered person may be responsible for modest copayments in some circumstance. For example, there might be a copayment of $5, $10, or $15 for each visit to a primary care physician.

In evaluating PPOs, it is important to determine the basis the PPO uses to apply the coinsurance percentage. For example, assume a plan uses 80 percent coinsurance for nonnetwork charges and that a charge of $100 is incurred for a medical procedure from a nonnetwork provider. Most PPOs first determine whether this charge is usual, customary, and reasonable. If it is, the plan pays $80. If the plan determines that the usual, customary, and reasonable charge is $90, it will be 80 percent of that amount, or $72. However, some plans apply the coinsurance percentage to what is often referred to as allowable charges. In most cases, this is the amount that is paid to network providers for the same procedure. In some cases, network discounts are quite large and, for example, the allowable charge in this example might be only $60. For a nonnetwork charge, the plan pays 80 percent of this amount, or $48. Thus the insured has an out-of-pocket expense of $52. Needless to say, few employees and their families are going to seek nonnetwork care under this type of plan. For this reason, plans that pay nonnetwork charges on this basis are sometimes referred to as phantom PPOs.

Maximum Benefits
While there are variations, most PPOs have a lifetime maximum of $1 million for nonnetwork benefits. The lifetime maximum for network benefits is seldom less that $2 million and may even be unlimited.

Precertification Rules
PPOs often have precertification requirements for many types of hospitalizations, outpatient procedures, and medical supplies. For network benefits, the person responsible for obtaining the needed certification is the network provider, and the covered person is not penalized if the network provider fails to obtain the proper precertification. (This becomes an issue between the PPO and the provider.) However, this responsibility shifts to the employee or family member for nonnetwork services. If precertification is not obtained when required, there usually is a reduction in benefits. For example, what was once 80 percent coinsurance might shrink to 60 percent.

Additional Network Benefits
For the most part, PPOs pay benefits for the same medical procedures, whether they are performed by a network or a nonnetwork provider. However, a few procedures may be covered only if they are received from network providers. For example, routine physical exams may be covered only in the network. In addition, there might be coverage for more outpatient psychiatric visits if a network provider is used.

Claims
No claim forms are required for network services. The covered person merely pays any required copayment, and the provider of medical services does the paperwork needed to receive the additional amounts payable by the plan. Just as in traditional major medical plans, it is the ultimate responsibility of the covered person to file the claims forms necessary to receive benefits for nonnetwork care. Of course, the provider may do much of the paperwork and accept an assignment of benefits.

Regulation
PPOs have been subject to much less stringent regulation than HMOs with respect to their managed care activities. In fact, until recently, they were largely unregulated. As a result, the NAIC passed the Preferred Provider Arrangements Model Act, which has now been adopted by more than half the states. The act is relatively brief and establishes only a minimal regulatory framework. The act requires that PPOs incorporate cost-containment mechanisms, such as utilization review, to determine whether a service is medically necessary. Covered persons must be given reasonable access to medical services. The act also allows PPOs to provide incentives for persons to use the preferred-provider network and to place limitations on the number and types of providers with whom they contract.

It should be noted that most PPO contracts also meet the definition of insurance and are subject to the same regulation by state insurance departments as traditional insurance contracts with respect to contract provisions and benefit mandates.