Preferred Provider Organizations (PPOs)

History

While PPOs have been in existence in some form or another for decades, the development of modern [Page 943]PPOs was the result of key legislative actions at the state and national level. In the 1970s and 1980s, many states passed enabling legislation to specifically allow for the development of PPOs. In 1974, the U.S. Congress enacted the Employee Retirement Income Security Act (ERISA). A very small portion of this law gave Taft-Harley Funds and other organizations the right to self-insure their healthcare benefits. Under the new law, organizations that self-insured would not be subject to various state coverage mandates or to state premium taxes; instead, they were now free to develop employee healthcare benefit programs. Recognizing the unique opportunity, third-party administrators began providing some or all of the services required by the self-insuring companies.

As a rule, however, these third-party administrators did not develop their own delivery networks and instead looked to another fledgling group of companies-preferred provider organizations-to credential and supply networks of physicians and healthcare institutions. Insured products grew and employers and other purchasers came to see PPOs as the middle ground between health maintenance organizations (HMOs) (traditionally lower cost but more restrictive) and indemnity insurance plans (permissive but more expensive). This fueled the development of local PPO organizations in the 1970s and 1980s and-beginning in the 1990s-encouraged the expansion of a limited number of national PPOs. The growth in PPO plan enrollment at the expense of traditional indemnity insurance and point of service plans is shown in Figure 1.

Today PPOs are tremendously popular. Over the past few years, there has been a consolidation of the PPOs marketplace resulting in fewer regional PPOs and larger national plans as regional plans merge or are bought by larger national plans.

In 2007, more than 158 million individuals were enrolled in a PPO program, which represents 64% of all Americans with healthcare coverage. One reason for this strong market share is that PPOs have delivered what the public has called for: choice, flexibility, and a balance between delivery of appropriate care and cost control.

Characteristics and Types of PPOs

There are two basic types of PPOs: a nonrisk PPO and a risk PPO. A nonrisk PPO's primary focus is to contract with providers in a geographical area to form an interconnected network of providers and services. The nonrisk PPO network leases and/or “rents” its network for a fee to insurance companies, self-insured employers, union trusts, third-party administrators, business coalitions, and associations. In contrast, a risk PPO assumes the financial risk for an enrollee's healthcare costs.

Figure 1 A Comparison of Medical Plan Enrollment, 1993 to 2006

Source: Association of Preferred Provider Organizations (2007).

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