Why PPOs Are No Longer Effective at Controlling Healthcare Costs

AUGUST 6, 2024

Preferred provider organizations, or PPOs, have been incredibly popular since the model first emerged in the 1980s. Up to that point, most employer-sponsored health plans were either costly indemnity plans with no restrictions on care and full flexibility in choice of providers, or cost-restrictive “health maintenance organization” (HMO) plans with significant restrictions on care and a very narrow selection of providers. PPOs offered an in-between option that provided similar cost savings to an HMO but with a broader network.¹

At the time, PPOs achieved savings using strategies like utilization review and pre-certification to regulate the appropriateness and effectiveness of care. Most importantly, PPOs created a network of providers that accepted lower reimbursements in exchange for preferential access to members enrolled in the PPO. These cost reductions came in the form of discounts off regular billed charges. Additionally, the majority of the providers (around 70% to 80%) within PPO networks were known for delivering lower-cost but higher-quality healthcare. Using this model, PPOs could provide premium savings of about 7% to 12% while still offering broad access to most providers. 

However, not long after the PPO model emerged, the design began to change. Employers and plan members urged health insurance carriers to add more hospitals and physicians to their PPO offerings and further broaden their networks. As network size became one of the main criteria for selecting a carrier, insurers eventually caved to this request, and networks ballooned to cover 97% of providers in a geographic area. Experts at the time observed that if everyone in the network was preferred, then no one was. This was the beginning of the end of PPOs as a cost management strategy for employers.

With ever-broadening networks, large insurance carriers looking to reassert their value began to claim continually increasing discounts off billed charges. However, it became understood that providers could mark up whatever billed charges they could imagine as long as the insurance carrier could still illustrate the value they were providing by claiming to offer a large discount. This led to many examples of providers in the same network with reimbursed charges two to three times more expensive than other network providers. The integrity of the original PPO concept was no longer intact — yet, by the early 2000s, 60% to 65% of health plan members were enrolled in some version of a PPO plan.

Today’s PPOs Have Become Very Expensive for Employers To Offer

PPOs remain as popular today as they were in the early 2000s — though healthcare costs continue to rise. Because of this, today’s PPOs seem to have nothing to do with controlling health plan spending. Instead, they create a false sense of savings for employers and members without providing cost savings or any better quality of care by:

• Preventing plan members from being balance-billed if they remain “in-network.”
• Having network size and spread still heavily influence employer decisions on insurance carriers.

Compared to other countries, the U.S. spends nearly 20% of its gross domestic product (GDP) on healthcare — roughly 50% higher than the next country. This is a clear indication that PPOs are no longer a cost-effective strategy.

In response, new models have been developed, generally based upon the principles of the early PPOs. Designed with limited provider choice, these cost-control models drive utilization to more cost-effective, higher-quality care providers, using financial incentives to increase member engagement. Several large carriers have developed alternative incentivized networks that employers can use to supplement or replace a traditional PPO plan.

As PPOs in their current form have outlived their usefulness, employers should consider more cost-effective approaches to health plan spending. Contact your local USI benefits consultant or ebsolutions@usi.com to learn more.

Source:
¹ Michael A. Morrisey, PhD, Health Insurance, Second Edition, 2013; https://account.ache.org/iweb/upload/Morrisey2253_Chapter_1-3b5f4e08.pdf