January 2001

Grant Results

National Program

Changes in Health Care Financing and Organization

SUMMARY

From 1992 to 1995, researchers at the University of Michigan Institute for Social Research, Ann Arbor, Mich., assessed the overall effects of preferred provider organizations (PPOs) on hospital, outpatient, physician, and total health care costs and utilization. They compared costs of care in the PPOs with those of managed indemnity plans.

This project was part of the Robert Wood Johnson Foundation (RWJF) national program Changes in Health Care Financing and Organization (HCFO) (for more information see Grant Results).

Key Findings
PPO plans allow enrollees to use the services of any physician of their choosing and pay a set percentage of the price of services that are covered under the benefit package.

PPOs rely solely on utilization controls — limiting coverage of services in the benefits package to control costs and setting limits on the usual and customary fee on which the plan pays a percentage.

The researchers found that:

  • On average, PPOs showed costs savings of approximately 12 to 14 percent above indemnity plans with utilization controls.
  • Smaller PPOs were more likely to have insignificant cost savings than larger PPOs.
  • The majority of cost savings were the result of lower rates of use rather than lower prices per procedure.
  • PPOs deny fewer services than indemnity plans and have lower levels of cost sharing.
  • Savings associated with denial of benefits because the service/procedure is not included in the benefits package are more common in indemnity plans than in PPOs.

Funding
RWJF supported the project with a grant of $197,535 between June 1992 and May 1995.

 See Grant Detail & Contact Information
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THE PROBLEM

A growing number of Americans are enrolled in preferred provider organizations (PPOs). PPOs are health plans with a specific set of providers who have agreed to receive a pre-determined payment rate for providing all necessary care to enrolled members and to comply with utilization review and other administrative requirements. Despite the popularity of PPOs, very little information has been available comparing the use and cost of health care services within PPOs to that of non-PPO plans.

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THE PROJECT

To assess the overall effects of PPOs on hospital, outpatient, physician, and total health care costs and utilization, researchers examined claims data and other records from 1988 through 1990 for a group of 71 PPOs (13 large and 58 small) operating in 34 states. They compared costs of care in the PPOs with those of managed indemnity plans. Indemnity plans allow enrollees to use the services of any physician of their choosing. The plans pay a set percentage of the price of services that are covered under the benefit package. Physicians are typically reimbursed on a fee-for-service basis rather than a pre-determined rate. Indemnity plans rely solely on utilization controls — limiting coverage of services in the benefits package to control costs and setting limit on the usual and customary fee on which the plan pays a percentage.

The researchers looked at both overall costs and utilization of care as well as costs and utilization for 23 specific medical procedures for which appropriateness of utilization has been questioned, including hernia repair, adenoidectomy, cholecystectomy, tonsillectomy, coronary artery bypass, colonoscopy, sigmoidoscopy, endoscopy, urinalysis, proctosigmoidoscopy, chest x-ray, and cataract removal. By focusing on specific procedures, the study explored whether PPO cost savings are associated with reduced costs per procedure or overall lower costs and utilization. The study also examined prescription drug cost savings by PPOs.

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FINDINGS

The researchers found that, on average, PPOs showed costs savings of approximately 12 to 14 percent above indemnity plans with utilization controls. Smaller PPOs were more likely to have insignificant cost savings than larger PPOs. The majority of cost savings were the result of lower rates of utilization rather than lower prices per procedure. The study added a note of caution to these findings: While PPOs on average save money, there was variation between substantial savings and minimal. The researchers attributed this variation to factors such as the management of the PPO.

Other study findings related to PPO cost savings include:

  • PPOs deny fewer services than indemnity plans and have lower levels of cost sharing.
  • Savings associated with denial of benefits because the service/procedure is not included in the benefits package are more common in indemnity plans than in PPOs. This savings averaged $48 to $103 per covered person per year for the insurer.
  • PPOs achieve much higher levels of cost savings than indemnity plans through provider discounts. Provider contracts yield cost savings in two ways: higher co-insurance charges for use of non-preferred providers and higher discounts from preferred providers.
  • Within a PPO, a change in the rate of copayment per prescription from three to five dollars resulted in a 5 percent decrease in the number of prescriptions and a 10 percent decrease in employer costs per insured person. Much of this was offset by an increase in the ingredient costs per prescription. The researchers noted that drug utilization review, incentives for pharmacists to offer generic drugs through changes in their dispensing fees, and long-term solutions aimed at pharmaceutical manufacturers' pricing policies hold more promise for pharmaceutical cost savings than do small changes in copayment rules.

Communications

The researchers disseminated their findings through an article in the journal Inquiry and several presentations at major conferences.

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GRANT DETAILS & CONTACT INFORMATION

Project

Research on the Effects of Preferred Provider Organizations (PPOs) on Health Care Use and Costs

Grantee

The University of Michigan Institute for Social Research (Ann Arbor,  MI)

  • Amount: $ 197,535
    Dates: June 1992 to May 1995
    ID#:  020040

Contact

Project Director: Dean G. Smith, Ph.D.
(313) 936-1196

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BIBLIOGRAPHY

(Current as of date of this report; as provided by grantee organization; not verified by RWJF; items not available from RWJF.)

Articles

Smith DG. "The Effects of Copayments and Generic Substitution on the Use and Costs of Prescription Drugs." Inquiry, 30(2): 189–198, Summer 1993. Abstract available online.

Presentations and Testimony

Smith D. "The Cost Management Activities of PPOs: The Information Content of Accounting-Based Reports vs. Statistical Analyses of PPO Cost Savings," at the American Risk and Insurance Association Annual Meeting, Toronto, Ontario, August 1994.

Smith D. "An Analysis of the Effects of PPOs on the Use and Cost of Potentially Over-Used Procedures," at the American Public Health Association Annual Meeting, Washington, November 1994.

Smith D. "An Analysis of the Effects of PPOs on the Use and Cost of Potentially Over-Used Procedures," at the Association for Health Services Annual Meeting, Chicago, June 1995.

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Report prepared by: Karin Gillespie
Reviewed by: Marian Bass
Reviewed by: Molly McKaughan
Program Officer: Nancy L. Barrand

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