The Puzzling Popularity Of The PPO
Health Affairs
March/April 2004
The Puzzling Popularity Of The PPO
By Robert E. Hurley, Bradley C. Strunk and Justin S. White
The PPO benefit option is assumed to offer more choice of providers, less
restrictive features for consumers, fewer impositions on caregivers, and lower administrative costs to purchasers. Less apparent is that many employers, increasingly concerned about controlling rising costs, are adopting benefit offerings that are more flexible in terms of customized design and less subject to regulatory strictures. For them, the virtue of the PPO design is its malleability, as its component parts can be shaped into an infinite set of alternative arrangements including broader or narrower networks, richer or more meager benefits, maximum or minimal medical management, and more or less consumer cost sharing.
As the drumbeat for increased consumer responsibility builds with more cost sharing, increased benefit buy-down opportunities, multi-tier provider networks, and various consumer-driven health plan designs, PPO arrangements
seem well positioned to respond to these preferences. The positioning to offer one or more of these options is apparent in every market, as employers grow more restive about what existing product designs can deliver by way of cost containment and interest shifts from supply-side to demand-side interventions. The coinsurance feature of PPO options is especially valued as a means to cultivate price-sensitivity as consumers begin to spend more of their own money for their medical care.
The fact that PPOs have grown in popularity at the same time that overall
health benefit costs have risen sharply is not a ringing endorsement; nor are the trends reported for PPO premiums different from HMO premium trends. Thus, it does not appear that PPO arrangements have played much of a role in
cost containment despite the fact that more than half of all commercially covered lives are in PPOs. What they do seem to deliver is cost displacement by moving costs from employer-sponsors to individuals, which, nonetheless, has the real effect of moderating the rate of increase in employers’
contributions for benefits. In addition, the flexible PPO design enables employers to buy down benefits by requiring more cost participation for existing benefits or to lower their premium contributions by shifting more cost to consumers in the form of user fees.
These findings are pertinent to the current debate regarding the suitability
of the PPO as a policy option for major public-sector programs such as Medicare.
Much of the appeal of the PPO option lies in its asserted superiority relative to HMOs in terms of choice, limited medical management, accommodation of providers’ preferences, and lower administrative expenses. However, the PPO arrangement enjoys none of these advantages relative to traditional Medicare. Moreover, as current trends indicate, much of the recent growth of the PPO is driven by its flexibility to enable employers to shift more costs to consumers and shrink benefit packages, not augment them. Finally, the fact that most PPO networks harbor limited aspirations to manage care, reward provider behavior, and promote aggressive quality improvement for participants makes it far from clear what it is that Medicare hopes to obtain from the PPO product.
The popularity of the PPO is subject to much misunderstanding. The confusion is attributable in part to the diversity of forms in which PPO offerings
appear in the market. It is also related to the fact that PPO participation growth resulted from flight from the undesirable features of the HMO and widespread skepticism about the value of managed care, rather than from a migration to the attractive features of the PPO. Seen from a slightly different angle, however, PPO growth also represents a retreat from the era of benefit expansion of the 1990s because financing these benefits, particularly via provider discounts, has proved unsustainable. In this vein, the PPO option is an instrument for private purchasers to realign what they wish to pay for health benefits with what they believe they can afford to pay. For consumers, the continued “success” in PPO growth almost certainly translates into paying more to try to hold onto what they have.
http://content.healthaffairs.org/cgi/content/abstract/23/2/56
Comment: With the loss of indemnity plans and the dissatisfaction with
network model HMOs, PPOs have become the favored model, both for employer
sponsored coverage and for individual plan purchasers. High deductible PPOs
will be the primary model to fulfill the catastrophic requirement for the new health savings accounts. And Medicare + Choice was converted into Medicare Advantage primarily to shift Medicare into the private PPO market.
PPOs will continue to expand as benefits and affordability contract. We need to understand that as we shift more into PPO “insurance” products, we are
relinquishing the financial security that insurance should be providing to protect us against the risk of excessive health care costs.
There are better options. A universal, single payer system of social insurance would ensure affordability and financial security in the face of potential health care risks. Why should we lend support to the PPOs at the cost of our own financial and health security?