Preferred Provider Organization

views updated

Preferred Provider Organization

What It Means

A preferred provider organization (PPO) is a network of health-care providers in the United States that contracts with an insurer (usually an insurance company) to offer medical care at discounted rates in exchange for an increased volume of patients. Medical procedures can be very expensive, especially for serious conditions, and the need for them is unpredictable. As with all insurance plans, a PPO is designed to make medical expenses manageable for patients and ultimately to protect people from financial hardship in the event of illness or injury.

A PPO provides a kind of health insurance known as managed care; the other main form of managed care in the United States is the health maintenance organization (HMO). The two work according to a similar approach. With both, members pay an annual fee called a premium. In exchange they receive medical care at reduced rates from a preapproved list of doctors, hospitals, and other providers.

There are significant differences between PPOs and HMOs. A PPO offers members more freedom in choosing a health-care provider; whereas HMO members are only covered for seeing doctors in the HMO network, PPO members may see doctors outside the network (at a reduced rate of coverage). Further, with an HMO a primary-care physician manages the patient’s care and must provide a referral to a specialist provider, but with a PPO the member may go directly to a specialist. The trade-off for having more choice is that PPOs cost more than HMOs.

When Did It Begin

After World War II (1939–45) it became common for U.S. companies to provide their employees with health insurance. These plans usually operated on a fee-for-service basis, with the insurance company simply paying for the insured person’s medical expenses. As insured patients became accustomed to having their expenses fully covered, they sought out more frequent and extensive medical care. And as health-care providers became accustomed to full and unquestioned reimbursement from insurance companies, they developed more advanced (and more expensive) treatment methods. By the 1960s this had resulted in a dramatic rise in the cost of medical care. To control these costs, many employers and insurers in the 1970s turned to managed-care plans, in which both patients and providers are given incentives to keep costs down. One type of managed care, the HMO, became especially popular during the 1970s. With an HMO a patient chooses a primary-care physician, who manages the patient’s treatment options, serving as a sort of gatekeeper to specialized care.

PPOs as they are known today emerged in the 1980s, largely in response to patients’ frustrations with the limitations of HMOs. The idea of having access to a broader range of providers appealed to consumers. Many employers, meanwhile, found that because they had more flexibility in designing PPO contracts, they could find more ways to cut costs.

More Detailed Information

A PPO essentially offers a discount plan for medical expenses; providers who join the network agree to accept fees that are lower than the market rate. The insurance company will have contracted with a range of health-care providers and facilities, including doctors, hospitals, laboratories, mental-health professionals (such as psychologists), and physical therapists. Members will also usually be given a list of pharmacies affiliated with the PPO.

As with HMOs, most people enroll in PPO plans through their employers, with the employer covering part of the cost. The employee pays the rest of the annual fee, called a premium, in installments; this is typically done by having payments subtracted directly from each paycheck. Because they cover a broader range of providers, PPOs cost more than HMOs. The premiums are higher and usually have a deductible, an amount that the member must pay before the insurer will take over payment (for instance, the member might be responsible for the first $600 of a hospital stay, and then the insurer will pay for the rest of it). They may also require a higher co-payment (a portion of each expense for which the patient is responsible).

The main feature that sets PPOs apart from HMOs—and that makes them a more attractive option to many consumers—is that PPO contracts allow members to see any health-care provider, even those that do not belong to the PPO. The member will pay more to do so, usually by having to meet a higher deductible or having a smaller percentage of the expense covered (for instance, the insurer might cover 80 percent for providers in the PPO but only 60 percent for out-of-network providers). In addition some plans require the patient to obtain authorization (also called precertification) from the insurer before seeing an out-of-network provider, unless it is a medical emergency. These increased charges and authorization requirements are intended to encourage members to seek care from providers who are in the network. Most plans have a similar rule for hospital stays (both network and out-of-network), requiring that the patient’s doctor request authorization from the insurer. This is another cost-cutting measure; because hospital care is so expensive, the insurer wants to make sure that it is absolutely necessary. Likewise insurers try to minimize their customers’ use of emergency rooms, which are extremely expensive; although they acknowledge that it is not always possible, insurers usually suggest that their PPO subscribers consult with their doctor before going to an emergency room.

PPO plans vary widely in terms of what treatments are covered and to what extent. Every contract has a summary of benefits that sets out its rules; these outline the specific coverage for each possible medical circumstance (these might include, for instance, annual checkups, emergency-room visits, organ transplants, speech therapy, prescription drugs, mental-health treatment, newborn care, and hearing aids). The summary of benefits also lists what the coverage will be for out-of-network providers of each of these services. In addition the contract details what treatments are not covered (common examples are cosmetic procedures that are not medically necessary, dental procedures, and alternative treatments such as acupuncture).

Recent Trends

In 1990 PPO enrollment overtook HMO enrollment in the United States and grew steadily over the decade that followed. In 2000 HMO membership began declining. By 2006 the majority (60 percent) of Americans with health insurance were enrolled in PPOs, while only 20 percent were enrolled in HMOs.

The growing preference for PPOs over HMOs was usually attributed to people’s assumption that having more choice would provide a more satisfactory health-care experience. Some studies, however, concluded that this assumption was unwarranted. For instance, in 2001 Consumer Reports released survey results indicating that HMO customers were just as satisfied with their overall health-care experience as were PPO customers, in terms of both choice and the quality of care.

Industry observers reported that HMOs and PPOs were actually becoming more similar to each other. In response to waning customer interest, HMOs had begun expanding patients’ options; for instance, some eliminated the requirement for referrals to specialists. Meanwhile PPOs sought to control costs for employers by developing plans with more restricted benefits.