PPOs gain advantage over HMOs

Preferred provider organizations grew to be largest of all health care delivery models in 1997, outpacing health maintenance organizations, according to a report released by SMG Marketing Group, Chicago, for the Association of Managed Healthcare Organizations.

The number of eligible employees rose from 88.6 million to 89.1 million by the end of 1997, and the number of PPO plans rose to 1,035 during that time, analysts found. This growth represents 34% of the total market; HMOs account for a 31% share of the health care market.

The PPO trend, according to analysts, is a result of two primary factors: greater participation by Medicare and Medicaid populations, and more flexibility in patients' access to out-of-network providers. PPOs give patients the option of going out of a preferred network for an increased out-of-pocket price, whereas HMOs only do this in certain types of plans, such as point-of-service plans.

Because of the Balanced Budget Act passed in 1997, patients eligible for Medicaid and Medicare are now able to enroll in a wider range of managed care organizations, including PPOs.

The Balanced Budget Act called for major changes to the Medicare health program. It changed how payments are made to doctors, hospitals and HMOs; reduced fees; contributed roughly $100 million to countering fraud in reporting and provided new insurance options for seniors.

Consequently, 38 million beneficiaries were granted the choice of enrolling in managed care plans, including PPOs, unmanaged medical savings accounts and private, fee-for-service plans. The government encourages participation in Medicare managed care, known as Medicare+Choice. As a result, the Health Care Financing Administration is free to contract with a greater variety of managed care and fee-for-service plans.

However, the success of PPOs depends heavily on their ability to adopt some of the cost-control and efficiency strategies that have made HMOs successful. Although HMOs are increasingly criticized for restricting access to health care providers and specialists through the use of gatekeepers, they are sagacious when it comes to management methods.

HMOs typically have full and shared risk contracts with providers, perform utilization reviews and enforce formularies. They rely on pharmacy benefit management companies to manage their pharmacy benefit programs.

According to SMG's report, new PPOs (those established within the last three years) are following HMOs lead in several respects. In 1997, for example, more than 86% of new PPOs worked with PBMs to manage their pharmacy benefit programs. This was an increase from 74% in 1996. And more than 83% of PPOs performed utilization reviews in-house in 1997.

HMOs are learning from PPOs' successes, too. The point-of-service plan, which SMG's analysts describe as a hybrid of an HMO and a PPO, provides pre-paid comprehensive health coverage for hospital and physicians services. It is similar to an HMO in requiring members to enroll with the plan and select a primary care physician. However, it is similar to a PPO in that it allows patients to go out-of-network, albeit at higher cost to the patient.

Given the growing demand for more diversity and flexibility, it is likely that both PPO and POS plans will see growth in the upcoming year. SMG Marketing Group's analysts noted the following regarding future market growth:

• PPO networks will not experience the large increase in costs seen in HMOs.

• Accreditation will remain the most prevalent quality standard.

• Modest growth in PPO usage is expected among employees.

• The new Medicare legislation allowing Medicare beneficiaries to use PPOs could trigger double-digit growth.

• Growth of PPOs will be dependent upon their ability to save costs and improve quality and/or provide choice.

The American Managed Healthcare Organization is a national trade group whose members represent PPOs and other network-based plans. PR