President Clinton's vision of national healthcare reform, with its emphasis on tightly managed health plans, last year seemed to be tolling the doom of PPOs.
That threat to PPOs may be over for now. But reform and market changes have taken place, and, for the most part, they are ballooning the fortunes of HMOs. PPOs face several challenges as they try to keep pace. In response, many are forming HMOs and exploring ways to take on risk. PPO executives also are lobbying for more inclusion in government-sponsored programs.
"People who say PPOs are dead are faced with a lively corpse," said Peter Kongstvedt, a partner with Ernst & Young in Washington.
Identity crisis. One of the problems
PPOs encounter is that many lawmakers don't know what a PPO is, though they do know what an HMO is, executives said during the National Managed Health Care Congress in Washington last month. PPOs, therefore, are second-class citizens when it comes to government initiatives to funnel beneficiaries of federal programs into managed care.
PPOs are networks of designated providers who accept discounted fees and agree to abide by certain utilization guidelines. As a result, PPOs are thought of as "managed care with a little `m,'*" Kongstvedt said. "PPOs do not have the ability to control cost and quality to the same degree as HMOs."
Yet, PPOs "are still a very viable alternative in the marketplace," he said. They have a lot of strength in rural and semirural areas because those markets aren't overly saturated with providers, he said.
Executives are pressing for legislation allowing PPOs to take more of the coming managed-care business in federal programs such as Medicare (April 10, p. 10). HCFA is readying proposals to allow risk-bearing PPOs to provide primary coverage to beneficiaries.
PPOs outpace HMOs.
Despite their lower profile, PPO companies are bustling with activity.
"You're seeing them trying to become more HMO-like, putting in utilization measures and risk-like mechanisms like putting physicians on a budget," said Barbara Wachsman, western regional practice manager at Towers Perrin's integrated health systems consulting unit. "It's the only way they feel they can compete in this environment and still offer the flexibility" that is their hallmark.
PPOs have a strong base to build on. Enrollment in the plans across the country outpaced that of HMOs in 1993. PPOs grew 19% to more than 60 million enrollees in December 1993 from 50.4 million enrollees at the end of 1992, according to the American Managed Care and Review Association.
In the same period, the nation's HMOs grew slightly more than 9% to 46.1 million enrollees from 42.1 million enrollees, AMCRA found.
The number of PPO plans jumped to 1,107 in October 1994 from 895 in October 1993, while the number of HMOs grew more modestly to 625 from 566 in that period, according to the AMCRA.
Last year, provider-owned PPOs saw enrollment growth of 14.7% to 7.1 million from 6.2 million in 1993, according to MODERN HEALTHCARE's 1995 survey of provider-owned managed-care organizations. Enrollment in provider-owned HMOs grew more slowly-14.3%-to 2.21 million in 1994 from 1.94 million in 1993.
MODERN HEALTHCARE annually surveys provider-owned HMOs and PPOs for enrollment and revenue data (See related charts throughout this section).
If you can't beat 'em, join 'em.
Consultants warn that PPOs must diversify or they won't make it in a market that seeks "one-stop shopping."
Provider-owned PPOs increasingly are looking to form HMOs. For example, Healthcare Advantage began as a PPO formed by 337-bed Touro Infirmary in New Orleans in 1989. It launched an HMO, Advantage Health Plan, last October, said Jane Cooper, the company's president.
With high utilization rates and excess bed capacity, the Louisiana market is ripe for managed care. "Yankees see us as a gold mine," Cooper told executives at the National Managed Health Care Congress. But major carriers operating in Louisiana didn't have high HMO enrollment and weren't dominating the market.
Healthcare Advantage decided to form an HMO to ensure the hospital's future and its own, she said. The HMO now numbers 4,000 enrollees, and Healthcare Advantage offers a full continuum of products for the insured and self-insured marketplace, she said.
Several large, regionally successful provider-sponsored PPOs that are Ernst & Young clients have decided that HMO growth is pretty robust in their markets, Kongstvedt said. "They felt very strongly that they built provider and brand loyalty. They want to use the same provider base and develop a whole new product line for an HMO."
None of the companies plan to kill their PPOs. They'll let the customers decide whether to buy the PPO or the new HMO product, Kongstvedt said.
Another PPO launching an HMO-in a supposedly saturated market-is Community Care Network, which is owned by publicly traded Value Health, Avon, Conn. CCN said it will partner with Northwestern National Life Insurance Co. to offer a new HMO in California in early 1996.
PPOs change shape.
The activity at PPOs isn't limited to starting HMOs. For example, Newport Beach, Calif.-based Cost Care, a PPO, is controlling costs by selective utilization management. It analyzes data "to pinpoint where we can make an impact instead of doing blanket utilization management," said Ken Beckman, M.D., vice president of network management. "The whole concept of being able to profile physicians in order to selectively do utilization management is a fairly new area for PPOs," although HMOs have been doing this for a long time, he said.
"People are looking for ways to make PPOs look more like HMOs as far as management techniques and cost savings" without the restrictive features of HMOs, he said. "We are looking at various risk-taking options, such as gatekeepers and other mechanisms."
With large, self-insured employers, for instance, Cost Care is exploring the possibility of giving providers bonuses for beating cost-containment targets. They also may tie increases in provider fee schedules to closely monitored levels of quality.
The latter mechanism would amount to a guarantee that the employer wouldn't see a rate increase if a certain level of quality wasn't achieved.
Enrollment at Cost Care, which is owned by John Hancock Mutual Life Insurance Co., grew to 261,958 employees and dependents in 1994 from 238,118 in 1993.
HMOs buy PPOs.
Meanwhile, HMOs are trying to add the flexibility that attracts payers and patients to PPOs. They're buying or forming PPOs and starting point-of-service plans, Towers Perrin's Wachsman said.
"The two markets are converging, and that's exactly where you want to be," said Tom Carter, vice president of sales and marketing at Lifeguard, a Milpitas, Calif.-based HMO that also offers a point-of-service plan.
"There are still some companies that don't want to give up their PPO. They want to offer (employees) a PPO alongside of an HMO," Carter said.
Lifeguard is planning to roll out its own PPO on July 1. Besides offering buyers what they want, a PPO will give Lifeguard a statewide presence for the first time. Lifeguard's 9,000 physicians in 21 counties will be "blended" with the California Foundation for Medical Care, a 20,000-plus physician network spanning counties where Lifeguard doesn't have networks, Carter said.
Lifeguard will oversee its expanded network with the same utilization management system that controls its HMO providers. HMOs that follow that strategy "frequently achieve pretty good utilization management" for their PPOs, Kongstvedt said.
Giant HMOs are buying PPOs to expand into new markets. Before announcing their merger last month, Woodland Hills, Calif.-based WellPoint Health Networks and Health Systems International separately acquired Texas-based PPOs.
WellPoint bought AHI Healthcare Corp. in Houston, which serves 700,000 enrollees through 161 institutional providers and more than 6,000 physicians. The price wasn't disclosed. AHI also has a pending application to market an HMO in the greater Houston area.
The acquisition is a platform for WellPoint to offer a broad array of products "to a market with attractive growth potential," said WellPoint Chairman and Chief Executive Officer Leonard Schaeffer.
HSI's PPO subsidiary, Preferred Health Network, purchased the networks of Arlington, Texas-based Health Corporation International, which has contracts with 230 hospitals in 31 states. The acquisition makes PHN one of the five largest PPOs in the nation, and allows HSI to lay a foundation to expand its HMOs and offer products in new markets, said Ronald E. Seibel, president and CEO of PHN, which plans two or three more acquisitions this year.
Nashville, Tenn.-based Columbia/HCA Healthcare Corp. also recently acquired a PPO. It bought PPO Alliance, a network serving nearly a million enrollees in California, from not-for-profit Adventist Health System/West, Roseville, Calif., and UniHealth America, Burbank, Calif.
"We view (the PPO) as a service that our customers have requested," a Columbia spokeswoman said. "It is not a risk-based product. We are not seeking the purchase or development of a risk-based product."
PPOs here to stay.
PPOs aren't expected to fade away anytime soon.
"They will not necessarily disappear, because they meet the needs of many employers," said Howard Wizig, a consultant in the Kansas City, Kan., office of Towers Perrin. "But they will evolve.
"A 1997 PPO will not look like a 1984 PPO. There will be elements of risk-sharing added," Wizig said.
"Which leads us to the definitional problem," he said. Apart from licensure, how much difference is there between a risk-bearing PPO with a gatekeeper as well as significant differences in benefits for in- and out-of-network service and an HMO offering a 70% benefit for out-of-network providers in a point-of-service plan?
"They'll start to look the same," Wizig said (See list of repondents, p. 48).