PPO evolution

April 1, 2011

Flexibility in response to market pressures has made PPOs the most popular type of managed care organization model.

Flexibility in response to market pressures has made PPOs the most popular type of managed care organization model. But the PPO model's ability to quickly adjust to changing needs among employers, providers and members could be tested by the aftereffects of the recent economic recession as well as the Patient Protection and Affordable Care Act (PPACA).

"We have a lot of internal squabbles within the industry about this," says Michael Taddeo, chairman of the American Association of Preferred Provider Organizations (AAPPO).

Even though they might not have a watertight definition, PPOs remain the most popular product choice.

Most covered workers (58%) are enrolled in PPOs, followed distantly by Health Maintenance Organizations (HMOs) with 19%, according to the 2010 Employer Health Benefits Survey released by the Kaiser Family Foundation and the Health Research & Educational Trust (HRET). PPOs overtook HMOs in number of enrollees in 1999.

"The hard numbers aren't as dramatic as people think," says Peter Kongstvedt, MD, an industry consultant and a senior health policy faculty member in the Department of Health Administration and Policy at George Mason University. "Part of the HMO drop from 2001 to 2003 was the result of Aetna leaving the small markets. PPOs have grown at the expense of point-of-service (POS) and traditional indemnity. POS was very popular from 1995 to 2002-but it turned out to be more expensive than people thought."

But by all accounts, cost savings are not the driving factor behind the steadily rising popularity of PPOs. It's convenience. Self-referral management has made the difference, according to Taddeo.

"In years past, as an industry, we've attempted to manage referrals in many forms-HMOs, fee for service and capitation, and point of service, for example," he says. "The savings of costs haven't offset the inconvenience to members. PPOs provide members with the ability to choose, and the cost differential between HMOs and PPOs was never significant. Our members overwhelmingly voted with their feet to self-refer. I think if the cost differential were more significant, members might select a different option."