Preferred Provider Organizations (PPOs)

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.

Preferred Provider Organization Benefits

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.

Point of Service (POS) Programs

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. 

Point of Service Plan Benefit

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.

Integrated Health Systems

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.

PLANS FOR SPECIAL TYPES OF ORGANIZATIONS

Plans Covering Partners and Proprietors

Under federal tax law, partners and proprietors (sole owners) are not considered employees of their unincorporated business, even if they perform substantial services for the business. By comparison, shareholders of a corporate business who are employed by the business are considered employees for retirement planning and other employee benefit purposes. For many years, there were restrictions on the benefits available from a qualified plan to partners or proprietors. Special plans called Keogh or HR#10 plans were used if partners or proprietors were covered. Since 1983, most of these restrictions no longer apply, and qualified plans can cover partners and proprietors on virtually the same terms as regular employees of the business.

S Corporations

An S corporation is a corporation that has made an election to be treated substantially like a partnership for federal income tax purposes. Certain shareholder employees of S corporations were once subject to qualified plan restrictions similar to those for partners and proprietors; however, after 1983, most of these restrictions do not apply. Thus, as with partners and proprietors, S corporation shareholder-employees are now treated basically like regular employees for qualified plan purposes. However, an S corporation employee who owns more than 2 percent of the corporation's stock is treated as a partner for other employee benefit purposes, such as group life and health plans.

Multiple Employer, Collectively Bargained, and Multiemployer Plans

In this text, if not stated otherwise, it is assumed that any qualified plans referred to are maintained by a single employer or by a group of related employers. It is possible, however, for more than one employer or related group to participate in a single qualified plan. If such a plan is established under a collective bargaining agreement (as is usually the case), it is referred to as a collectively bargained plan. With a collectively bargained plan, the plan is usually designed and maintained by a labor union, and employers who recognize the union as a bargaining agent for their employees agree to contribute to the plan on a basis specified in the collective bargaining agreement. If the plan is not the result of a collective bargaining agreement, it is referred to as a multiple employer plan. Such plans might, for example, be maintained by trade associations of employers in a certain line of business. There are special rules for applying the participation and other requirements to these plans.

There are also provisions for a special type of collectively bargained plan known as a multiemployer plan (Code Section 414(f)). A multiemployer plan is a plan to which more than one employer is required to contribute and that is maintained under a collective bargaining agreement covering more than one employer; the Department of Labor can also impose other requirements by regulation. Presumably, most large collectively bargained plans will qualify as multiemployer plans. Because of the nature of the multiemployer plan, the funding requirements are somewhat more favorable than for other plans. However, the employer may incur a special liability on withdrawing from the plan.

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.

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.