Preferred Provider Organizations - Are They Better at Keeping Health Costs Down?

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).

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.