A preferred provider organization is formed when a group of medical providers such as hospitals and doctors contract with employers, insurance companies, or other plan sponsors to provide various medical services. The medical providers usually offer discounted pricing because of the volume of business received from the contracting organizations. The medical providers are reimbursed on a fee-for-service basis, but the fees are lower than in a traditional plan because of the negotiated discounts.
Benefits provided through a preferred provider organization vary depending on the capabilities of the providers in the organization and the overall size of the PPO. A PPO could be the only source of medical care for an employee group, or the PPO may be one choice among several medical plans the employer offers. Alternatively, a PPO may provide the in-network benefit for a point of service plan, described below.
Another type of managed care program is the point of service program. This managed care product is somewhat of a cross between an HMO and the comprehensive major medical plan. Essentially, the plan sponsor either contracts with a number of health care providers or a managed care company to provide cost-effective medical care through a preferred provider organization of health care providers. Plan participants are free to use the network of preferred providers when they need health care. Alternatively, the plan participants can decide to utilize other medical providers who are not included in the network. However, if the participant uses out-of-network providers, he or she incurs additional expense in the form of greater deductibles and copayments. It is at the point of service that the plan participant is making the decision whether to remain in-network and receive a higher level of coverage or, alternatively, to select a medical provider who is out-of-network and be personally responsible for a larger share of the cost for this care. The POS program can be an attractive delivery system for participants who do not want to be restricted to receiving medical care only from network providers yet still would like to receive the same coverage and wellness benefits provided through a managed care system. This system of health care delivery suits some medical providers who are willing to join the PPO and provide medical services for discounted fees but are unwilling to assume the financial risks of HMO participation where a monthly fee is often paid to the doctor for each member regardless of the frequency of visits and the care provided. However, the particular financial arrangement and whether service providers bear any financial risk can be determined in various ways.
The POS plan is a hybrid of sorts, offering managed care case-management features and health maintenance approaches to medical care within the network but allowing plan participants the added flexibility of going outside the network if they are willing to bear a larger share of the cost for such flexibility. The extent to which subscribers are either penalized for going outside the network, or rewarded for staying within the network, can be determined by the deductible and coinsurance levels that are set. An organization could have varying reasons for setting the deductible and coinsurance levels either low or high. Also, these coinsurance levels can vary by various types of medical services. For instance, if the network of medical providers is not particularly well-developed in certain specialty areas, such as pediatrics, a company would find it difficult to penalize employees for not utilizing an in-network benefit. Another example could be that on certain types of medical services, for instance, psychiatric benefits, a company may perceive it as intrusive to require use of an in-network benefit. This may be particularly true if the POS plan is newly installed and would result in disruption of ongoing treatment. Some organizations have used POS plans as a means to transition from an indemnity plan to an HMO. In this situation, deductibles and coinsurance might initially be set slightly lower than in the traditional indemnity plan for employee relations reasons and later be increased as utilization grows in the managed care environment and employees become more comfortable with using in-network providers.
As the managed care delivery structures continue to grow, what started out as HMOs or PPOs are evolving into larger health systems that may include a managed care company, various physician and multispecialty practices, as well as entire hospitals and ancillary service providers. The preceding discussion of health care delivery structures is not meant to provide strict classifications into which each health plan must be distinctly assigned. Rather, it is hoped this characterization will be helpful in understanding basic differences between existing health care delivery systems and a starting point for understanding the relative merits of alternative designs. An employer's health plan should be configured matching the plan sponsor's objectives and assisting in meeting total compensation and human resource objectives.
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