Preferred Provider Organization (PPO)

Simply defined, a preferred provider organization (PPO) consists of at least one network of providers of health care [Page 439]that is organized to contract for the delivery of its services on a discounted fee basis to a purchaser or purchasers. The network can be small, single specialty, and local. The network can be broad based and nationwide, and can include nontraditional providers. A PPO may own several such networks. Unlike a health maintenance organization (HMO), PPOs emphasize self-directed access to providers and do not require a relationship with a primary care practitioner often known as a gatekeeper. The number of PPOs in the United States grew 36% between 1994 and 1999,1 but demonstrated a 9% decline in 2000.2

More than two thirds of PPOs are owned by health plans and third-party administrators (TPAs). Hospitals and physician groups own approximately 10% of existing PPOs. Employer groups showed interest in owning PPOs in the past, but that number has declined to insignificance. The remaining 20% to 25% are distributed among multiple types of owners, including states, investors, and even members.1,2

While HMOs move toward elimination of the need for referrals (open access) or away from restriction to the HMO network (point of service), PPOs are adding HMO-like services, including utilization management, pharmacy benefits management, case management, and disease management to their operations. Originally, managed care was perceived as a continuum where the starting point was a discounted fee-for-service, uncredentialed PPO and the goal was to evolve to a highly integrated HMO. The current strategy appears to have become a race for the middle ground of care management.3

As the popularity of HMOs declined between 1995 and 2001, PPO enrollment increased from 34%4 to 44%5 of all employees in employer-sponsored health plans. This growth came from employees walking away from traditional indemnity plans and HMOs. There are a number of reasons why PPOs are the most popular type of employer-sponsored health plans. Restrictive networks, heavily managed limits on access to care not provided by a primary care practitioner in the office setting, and provider backlash all led to movement of members from HMOs to PPOs. Poor coverage and high out-of-pocket expenses make indemnity plans unappealing to employees. During the boom years of the last decade low rates of unemployment made attracting new people difficult. The relative cost containment offered by PPOs encouraged employers to offer these plans in place of traditional indemnity group insurance and HMOs. Finally, PPOs were attractive to self-insured groups because they were exempt from ERISA regulations and allowed more flexibility in designing benefits.

In comparing the benefits provided by one large health plan for its HMO and PPO members, there were 55 distinct categories that ranged from allergy testing to hospice care. Behavioral benefits were also included. Thirty-two (58%) of the benefits descriptions were identical. In the cases where there was a discrepancy, the covered services were similar or identical. However, in-network and out-of-network payment rules created distinct differences between the two types of plans. Copayments were fixed and limited in the HMO for covered benefits, and except for emergencies or approved exceptions, claims for out-of-network services would not be paid. The same services in the PPO would be covered in a fashion similar to the HMO in-network; however, out-of-network services carried as high as a 50% coinsurance that did not apply to the out-of-pocket maximum contribution by the member if the services were not authorized by the health plan.

...