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?

Health Affairs
March 31, 2004
How Federalism Could Spur Bipartisan Action On The Uninsured
By Henry J. Aaron and Stuart M. Butler

… we share the belief that federally supported state experimentation is apromising way to make progress. States should be allowed to try widely differing solutions with federal financial support under legislated guidelines, including specific protections and measurable goals.

Crafting a single-payer experiment:

ERISA, which exempts self-insured plans from state regulation, is the primary technical obstacle to testing single-payer plans. The political sensitivity to modifications in ERISA is difficult to exaggerate. Anyattempt to carve out an exception from ERISA for state programs to extend coverage would probably doom federal legislation. But states could create”wraparound” plans to cover all who are not currently insured, or even to cover all who are not insured under plans exempted by ERISA from state regulation. While such n arrangement would not be a single-payer plan, it could achieve universal coverage, which is one defining characteristic of single-payer plans, and arguably be sufficient for a valid test. After all, the U.S. health care system is characterized by different subsystems for certain populations and has a form of single-payer coverage for militaryveterans. But of course the real test is whether advocates of single-payer plans regard such a limited arrangement as a fair trial.

http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.168

ERISA compliance:

http://www.dol.gov/ebsa/compliance_assistance.html

Comment: The Employee Retirement Income Security Act of 1974 (ERISA)requires employers to meet certain minimum standards in the administration of employee pension and welfare benefit plans.

An important provision of the ERISA regulations is that self-insured plans of large employers be exempt from state regulation. In fact, comprehensive reform proposals, such as the single payer model, are often rejected simply because the design would not comply with existing ERISA regulations since exempt programs would be folded into a state regulated system.

Because of ERISA’s importance in protecting benefit programs, it has achieved the status of being written in stone. Rather than modifying ERISA to comply with new programs, new programs are designed to comply with ERISA regulations. Aaron and Butler are even making the ridiculous suggestion that a proposal that has absolutely no resemblance to the single payer model be tested as a single payer model, in name only, merely to comply with ERISA regulations.

But any law or regulation can be modified. Even the United States Constitution can be amended. Since a single payer system would fulfill essentially all of the reasons that ERISA health benefit regulations exist, while providing even greater additional advantages, modifying ERISA to enable enactment of a single payer system certainly would be a step forward.

(From the slide presentation of Gerald Shea, Assistant to the President for
Governmental Affairs, AFL-CIO)

Bill Dreher, Deutsche Bank Securities:

“From the perspective of investors, Costco’s benefits ($10/hour starting wage, 90% paid health benefits after 3 months for full-timers, after 6 months for part-time) are overly generous. Public companies need to care for shareholders first. Costco runs its business like it is a private company.” (Wall Street Journal, 3/26/04)

http://www.cmwf.org/programs/insurance/collins_affordability_723.asp

Comment: The Wall Street solution of eliminating employer generosity may be good for business, but it fails to address the problem of ensuring employee access to affordable health care.

A universal, publicly funded and publicly administered health insurance
program would ensure that access while relieving business administrators of this clear conflict of interest, allowing them to more appropriately concentrate their efforts on maximizing profits.

The Commonwealth Fund
March 29, 2004
Health Care Reform a Major Campaign Issue for Voters: New Survey

Percent of adults ages 19-64 with any medical bill problem or outstanding Debt (Problems paying/not able to pay medical bills, contacted by a collection agency for medical bills, had to change way of life to pay bills, or has medical debt being paid off over time)

Income less than $35,000:
62% of uninsured have problems
45% of continuously insured have problems

Income over $35,000:
57% of uninsured have problems
29% of continuously insured have problems

http://www.cmwf.org/media/releases/collins723_hisurvey_release03292004.asp

For the full report:

http://www.cmwf.org/programs/insurance/collins_biennial2003_723.pdf

Comment: For those who are still not convinced that we have a crisis in health care funding, these numbers should be an awakening. Perhaps the most shocking number is the group that is least impacted, those with incomes over $35,000 who are continuously insured. This is mainstream America. These individuals have been relatively complacent since many of them have believed that the crisis in health care coverage has not affected them. But it has. 29% of mainstream America, in spite of continuous health care coverage, have financial problems due to medical bills!

The outrageously wasteful, expensive, and ineffective private health plan industry is no longer providing us with adequate financial security for medical costs. Let’s throw them out and establish our own publicly financed and publicly administered program of health insurance. Now!

Canadian Medical Association Journal
January 20, 2004
Does universal comprehensive insurance encourage unnecessary use?
Evidence from Manitoba says “no”
By Noralou P. Roos, Evelyn Forget, Randy Walld and Leonard MacWilliam

Many have argued that escalating health care costs in Canada are exacerbated by the fact that patients face no costs when they visit doctors or use hospital services. A zero price, it is said, leads to unnecessary use of the system.

Various policies focusing on reducing patient demand have been proposed to address this purported overuse – user fees and medical savings accounts being the 2 most popular. All are supposed to work by creating an incentive for people to decide whether their intended use of the health care system is really necessary. We know that user fees are effective in reducing physician visits by those with low economic status, but have little impact on physician use by the more affluent or on hospital use.

Is there any evidence that a universal health care system encourages the less affluent to see physicians more often than necessary? We have already shown that the great majority of people incur few health care expenditures while a small group incurs high expenditures. This report extends our earlier work by first examining the health and socioeconomic characteristics of those in each expenditure group. We then assess whether residents of low-income areas overuse health care services (particularly physicians) relative to their health status.

Results

Although the data suggest that the health of those with lower socioeconomic status is worse than those of higher status at every level of health care expenditure, there was no pattern of higher physician expenditures on those
whose socioeconomic status is lower.

The 70% of the population on which the province spends 10% of its health
care dollars scored well on all health indicators, and the 10% of the population on which 74% of the dollars are spent scored poorly. In each expenditure group, those with lower socioeconomic status had poorer health.

Despite their poorer health, in each expenditure group, residents of the neighbourhoods with the lowest household incomes incurred physician expenditures that were similar to those of residents of wealthier neighbourhoods.

Interpretation

Most residents of Winnipeg are healthy, infrequent users of physicians and hospitals. Those incurring high health care costs are sick by every measure used. These high-cost users are drawn from every neighbourhood and every
socioeconomic group, and their health care expenditures are driven by hospital costs. High-cost users who are residents of low-income neighbourhoods incur more hospital costs. Other research based on review of medical records has shown the acuity levels of hospitalized patients in the lowest socioeconomic group to be just as high as acuity levels of hospitalized patients in higher socioeconomic groups. Hence the greater use of hospitals by residents of low-income neighbourhoods should not be dismissed as “social admissions”; their high use is consistent with their poorer health status.

Physician visits are the one type of health care use where at least the first visit in any episode is strongly influenced by patient behaviour. The Winnipeg data confirm that physician use by low-income groups is already lower than would be expected given their health status (or physician use by high-income groups is higher than one would expect).

The patterns of health care costs that we examined are driven by poor health and hospital expenditures. Policies aimed at reducing patient demands, such as user fees and medical savings accounts, are not likely to reduce overall costs. User fees discourage physician contact, not hospital use. Thus, user fees would discourage preventive contacts, particularly among the poor, a group in which pap smears, childhood immunizations and prenatal care are already known to be underutilized. Since the RAND study demonstrated that user fees discourage patients from seeking both appropriate and inappropriate care, their effects on even the healthy poor would be pernicious.

Physicians are the gatekeepers to hospitals, and the health status of the patient largely drives the decision to admit and, hence, expenditure patterns. Although higher income patients may be more articulate in asking for high-profile surgical treatments, overall those with the poorest health status show the highest hospital use and expenditure rates. There is scope for decreasing hospital expenditures by focusing on evidence-based medicine, physician practice patterns and hospital management. However, user fees and medical savings accounts are unlikely to contribute to this process.

http://www.cmaj.ca/cgi/content/full/170/2/209?maxtoshow=&eaf

Comment: 70% of the Winnipeg population consumes only 10% of health care costs. For this healthy sector, creating sensitivity to health care costs through user fess or health saving accounts would have a negligible impact on total health care spending since only 10% of the budget would be manipulated.

It should come as no surprise that Canada spends most of its universal health care funds on people in poor health who need health care regardless of socioeconomic status. Since the health care system should be designed to enable access for those with needs, user fees are superfluous for the affluent but would create financial barriers for low income individuals with legitimate health care needs.

This and other studies show that skyrocketing health care costs are not due to healthy people demanding unnecessary care. Consequently, user fees and health savings accounts cannot possibly have a significant impact on controlling health care costs. Reasonable solutions are possible only once the real problems are more precisely defined.

For a brief discussion of some of the true reasons for cost increases and a suggestion for more rational solutions, read PNHP’s written testimony for the House Ways and Means Committee hearing on the Trustees 2004 Report for Medicare:

https://pnhp.org/news/2004/march/pnhps_written_testim.php?page=all

The Washington Post
March 25, 2004
House Panel Hears Concerns About Offering Health Savings Accounts
By Stephen Barr

The House civil service subcommittee plunged into a debate yesterday over whether federal employees and retirees should be offered “health savings accounts” as one of their choices when buying health insurance.

Yesterday’s hearing began with an overview of the FEHBP by Dan Blair, the deputy director of OPM. But the questioning soon turned to the issue of HSAs, with Rep. Jo Ann S. Davis (R-Va.), the subcommittee chairman, asking Blair whether the option might siphon off young people from fee-for-service and other insurance plans.

Blair said OPM did not project a “mass migration” into HSAs based on FEHBP’s
experience in offering “consumer-driven options” since 2002. Consumer-driven
options provide a spending allowance for health care, a free checkup and some other preventive care. But they also are designed to encourage enrollees to hold down medical spending, because they include substantial deductibles when the spending allowance has been used up.

Only 13,151 people have enrolled in consumer-driven plans, Blair said, suggesting that HSAs, if offered, would likely start off with modest enrollment and would not undermine FEHBP’s ability to spread insurance risks across its enrollment — about 9 million Americans.

But Del. Eleanor Holmes Norton (D-D.C.) repeatedly challenged Blair and contended that young people would be drawn to the tax savings provided by
HSAs — splitting FEHBP’s “risk pool.” If that trend developed, Blair said, OPM would step in and redesign the program so that no insurance plans would
be stuck with a higher share of the ailing and sick.

http://www.washingtonpost.com/wp-dyn/articles/A22467-2004Mar24.html

Comment: How would you redesign an insurance program that has concentrated high cost individuals into a separate risk pool? Wouldn’t it be more logical to design the program so that it would prevent risk segmentation?