PPOs and Other Health Plan Types

PPOs and Other Health Plan Types

Objectives
After completing this module, you will be able to:
define a preferred provider organization (PPO) and describe its main features,
and
define and describe an exclusive provider organization (EPO), a point-of-service
(POS) product, and a managed indemnity plan.
In the last two modules we studied HMOs, and now we will look at some other health
plan designspreferred provider organizations (PPOs), exclusive provider organizations
(EPOs), point-of-service (POS) products, and managed indemnity plans. These plan
types are not as tightly managed as traditional HMOs, but they also differ from traditional
indemnity insurance in that they employ healthcare management concepts and
techniques. They fall in the middle of the managed care continuum discussed earlier.
We will learn the main features that characterize each of these plan types and
distinguish it from others. But it should be kept in mind that distinctions between types
are not always clear-cut. In an effort to be responsive to consumer and purchaser needs
and preferences and to remain competitive, health plans develop designs that in a
variety of ways balance managing costs with giving members a choice of healthcare
providers. As a result, a product of a certain type may take on the features characteristic
of other types, blurring the difference between them.

Preferred Provider Organizations (PPOs)

What Is a PPO?
A preferred provider organization (PPO) is a healthcare benefits arrangement with
these main characteristics:
The health plan contracts with healthcare providers to deliver services to its
members, and these providers agree to discounted compensation. That is,
contracted providers charge the PPO less than their normal fees for services.
Why are they willing to do this? Affiliation with a PPO generally brings a high
volume of patients, so although a physician or hospital may receive less per
service, more services are performed and billed.
Like an HMO, a PPO has a network, made up of its contracted providers. But
unlike a traditional HMO, a PPO does not cover only care received from network
providersmembers can go to outside of the network and still receive benefits.
However, members have strong incentives to use preferred (network) providers.
The benefit package for network care is typically richer than for non-network
carethat is, more procedures and services are covered. Also, members pay
more in cost-sharing when they go out of networkcopayments or coinsurance
is typically higher. And there may be a limit on a members out-of-pocket costs
for network care but no such limit for non-network care.

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Unlike traditional HMOs, most PPOs allow members to see a specialist without a
referral from their primary care physician (PCP), adding to the flexibility of the
PPO model.
The contracted providers agree to comply with certain utilization review, care
management, and quality management requirements.
Thus PPO members have the freedom to choose any provider, as in indemnity
insurance, but other features (such as incentives to stay in the network, utilization
review, and quality management) promote cost-effective, high-quality care. Consumers
like this combination, and a majority of employees with health coverage are in PPOs (58
percent in 2010).1 There are over 500 PPOs in the United States. (This number has
been declining somewhat, but this is a result of consolidation, not decreasing
enrollment.2)
PPO Structure and Organization
As mentioned, a PPO involves a contract arrangement between healthcare providers
(physicians, hospitals, and others) and purchasers, such as insurance companies and
employers. One of the primary functions of a PPO is to negotiate contracts between
providers and purchasers.
A PPO can be sponsored by a group of physicians and/or hospitals, a Blue Cross/Blue
Shield plan, a third-party administrator (TPA), or an employer. But more than half are
owned by insurance companies. Some of the largest insurers have developed their own
PPO networks, while others lease provider networks or form cooperative ventures with
independent PPOs.
PPOs take many different forms, with a wide variety of structures. Two key ways in
which they differ are risk and centralization.
As we explained earlier in the course, a healthcare organization assumes risk if it
is exposed to possible financial losses by having to spend more to provide
healthcare than it is paid for providing that care. Some PPOs are risk-bearing
entities, but most are not. In many cases, the risk is assumed by self-insured
employers or other organizations.
A PPO can be a decentralized network of preferred providers, established and
maintained by the entity that insures the members, or even just leased by it. At
the other end of the spectrum, a PPO can be a highly centralized organization,
with not only its own network but an administrative structure that pays claims and
performs other functions. Such a PPO may also assume risk.
Like other health plans, PPOs provide comprehensive healthcare benefits. In addition to
standard medical care they typically cover many types of specialty care. Nearly all cover
behavioral healthcare, and a large majority include pharmacy benefits. A PPO network
may include primary care providers, specialists, hospitals, diagnostic facilities, and other
healthcare providers.

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Provider Compensation
For physicians contracted with PPOs, the most common method of compensation is
discounted feesthe PPO pays the physician a fee for the service she provides, but the
amount is reduced from her normal charge. Fee amounts are commonly based on a fee
schedule (also referred to as fee caps)the physician receives her billed fee up to an
amount set by a schedule. In 2008 over 80 percent of PPOs used a fee schedule (fee
caps) and over 30 percent paid doctors based on a discount off the billed charge; less
than 5 percent used capitation. (Some plans use more than one method.)3
For hospitals PPOs use several payment methods, including per-diem payments (a set
amount for each day a member is hospitalized), used by 85 percent of PPOs in 2008;
discounted charges, used by 77 percent; and rates based on classes of medical
conditions called diagnosis-related groups (DRGs), used by 55 percent.4
Historically, most PPO were structured so that providers did not assume any risk for
providing care, and many of the compensation methods mentioned above (such as
discounted fees and charges) do not entail provider risk. But others, such as per-diem
payments, DRG-based rates, and capitation, do. Some PPOs have included such risksharing arrangements in their provider contracts to promote more cost-effective care and
greater provider involvement in managing utilization.
Utilization Management, Care Management, and Quality Management
A PPO generally requires contracted providers to follow utilization and care
management procedures to achieve cost-effective, appropriate care. PPOs have
adopted many utilization and care management techniques once common only to
HMOs. Some PPOs, especially those owned by HMOs or insurance companies, have inhouse utilization review staffs; others contract this to outside firms or delegate it to
providers.
PPOs also employ many quality management techniques typical of HMOs. Nearly all
PPOs routinely credential and recredential contracted physicians, and increasingly
PPOs are obtaining accreditation for their quality management programs from well
known independent third-party organizations such as URAC.

Other Types of Health Plans

After PPOs became popular, health plans further refined and customized products to
meet the needs and preferences of consumers and purchasers, and new plan designs
were introduced.
Specialty PPOs
Specialty PPOs are structured and operate like regular PPOs, but they provide
specialty healthcare services such as dental care, behavioral healthcare, prescription
drugs, vision care, physical therapy, laboratory services, chiropractics, and podiatry.
(Specialty health plans are discussed in the next module.)
Exclusive Provider Organizations (EPOs)

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An exclusive provider organization (EPO) is structured and operates like a PPO, but it
is like a traditional HMO in one important wayout-of-network care is generally not
covered. If a member receives services from a provider not in an EPOs network, she
receives no benefits and must pay out for the services of her own pocket.
Many PPOs developed EPOs to help them compete directly with HMOs. In most states
EPOs are regulated as insurance companies under state insurance laws and are not
subject to state and federal HMO legislation. But some states either prohibit EPOs or
regulate them as HMOs.
Point-of-Service (POS) Products
A point-of-service (POS) product is a hybrid that combines features of PPOs, HMOs,
and indemnity insurance. POS products are called by several names, and there are a
number of variations, so defining this design and distinguishing among types can be
complicated. The basic characteristics of a POS product are these:
When members need healthcare, they choose at that time (at the point of
service) whether to go to a network provider or one not in the network. Members
going out-of-network normally pay higher cost-sharing, giving them an incentive
to remain in network. In this way, POS plans are more flexible than traditional
HMOs and similar to PPOs.
POS plans are like HMOs in that they usually require members to select a
primary care physician (PCP), who delivers routine care and serves as a
gatekeeper, giving referrals to specialists.
POS plans also resemble HMOs in their strong emphasis on preventive care and
wellness (including such services as vaccinations and smoking cessation
programs).
POS products are offered by network-based health plans and by insurers. Often an
HMO offers a POS option to its members; in this case, the HMO generally compensates
PCPs by means of capitation, and it may also withhold compensation pending PCPs
meeting utilization or cost-saving goals. The HMO reimburses non-network providers on
a fee-for-service basis.
As mentioned, under a POS product members receiving out-of-network care pay more,
typically higher cost-sharing. In some designs, the member must pay the difference
between what the POS plan pays network providers for a service and what a nonnetwork provider charges. HMO members with a POS option pay relatively small
copayments for network care and 20 or 30 percent coinsurance for out-of-network care,
and there is also generally a cap on non-network benefits. However, some plans provide
greater benefits for non-network care if the member has obtained a referral for his PCP
to see a non-network specialist.
Some employers like POS products because they are a compromise between less
restrictive designs like indemnity and PPOs and more tightly managed HMOs. In the
past POS products had a major drawbackhigher administrative costs, resulting from
the need to administer benefits for both network and non-network providers. But this is
less of a problem today because of the increased use of technology and enhanced

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managerial expertise. A significant percentage of employees are covered by POS

products (8 percent in 2010), but the number has declined over the last decade (from an
estimated 24 percent in 1999).5
Managed Indemnity Plans
Some indemnity health insurance plans have adopted certain managed care techniques
and so are called managed indemnity plans. These plans are typically organized and
administered like traditional indemnity insurance; there is no provider network, insureds
use any provider they choose, and provider payment is by fee-for-service. But certain
health plan cost-control measures, such as precertification and utilization review, are
used.
The Road to Consumer Choice
PPOs, POS products, and similar designs addressed the demand for greater flexibility in
health plan products, but they still insulated consumers from the cost of care. The next
step in the health plan industry's evolution was the consumer-directed health plan
(CDHP), in which the consumer is directly involved in the cost of care. CDHPs and the
rise of consumer choice will be discussed in Modules 9 and 10.
Notes
1

Kaiser Family Foundation, Health Research and Education Trust (HRET). 2010. Employer
Health Benefits 2010 Annual Survey, Summary of Findings.
2

Sanofi-Aventis U.S., LLC. 2009. HMO-PPO Digest 2009 (Sanofi-Aventis Managed Care Digest
Series), pp. 24-27.
3

Ibid., page 28.

Ibid.

Kaiser Family Foundation, Health Research and Education Trust (HRET). 2010. Employer
Health Benefits 2010 Annual Survey, Summary of Findings.

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