After dominating the healthcare scene for a decade, HMOs appear to be faltering.
The financial struggles of Norwalk, Conn.-based Oxford Health Plans and other major HMOs have been well-publicized. Now, adding insult to injury, HMO enrollment is down slightly, and PPOs are becoming increasingly dominant.
Anti-HMO sentiment is high, and many providers view this latest trend as good news, believing PPOs will help them out of financial trouble. But as their popularity grows, PPOs inevitably will face pressure to reduce expenditures and likely will further discount reimbursement fees or begin capitating payments like their HMO predecessors.
According to global consulting firm William M. Mercer, HMO enrollment fell for the first time in five years in 1998 to 47% of eligible employees. Enrollment in PPOs, however, jumped five percentage points in 1998 to 40%, Mercer found. In addition, the number of PPOs rose to 1,035 in 1998 from 983 in 1997, according to the Fort Lee, N.J.-based Association of Managed Healthcare Organizations.
Since 1996, PPOs have been the plan of choice for most large employers. Some of PPOs' popularity likely is due to employers' cost savings, which largely result from provider discounts and employee contributions, according to the Mercer study. Among larger employers, PPO cost rose 2.4% between 1997 and 1998 to $3,602 from $3,518 per employee. About 75% of employers require contributions for employee coverage.
A few years ago, many healthcare analysts predicted PPOs would be a temporary stop for consumers. They assumed employers eventually would make the move to the more economical world of HMOs, and PPO enrollment would fall accordingly. The Mercer study illustrates that consumers aren't making that move. Further, the study shows that even those enrolled in HMOs want more choice and are jumping ship to PPOs.
"It's too early to tell whether the decline in HMO/POS (point-of-service) enrollment is a short-term phenomenon or, more ominously, a sign that these managed-care plans may not become the centerpiece of the nation's healthcare delivery system after all," says Blaine Bos, a Mercer consultant and one of the study's authors.
Whether the changes in HMO and PPO enrollment constitute a temporary blip or a permanent shift of the managed-care marketplace, there's no question physicians can expect more PPO business. Right now, PPOs are less restrictive than HMOs, but if PPOs are going to thrive in today's marketplace, they will have to start acting more like HMOs, say providers and insurers.
"Over the next five or six years, I think you'll see a lot of blurring of the lines between HMOs and PPOs. A lot of PPOs are tightening their plans (through more utilization review), and HMOs are loosening up theirs," says Brad Kalish, executive director of the American Association of PPOs in Fort Lee.
A PPO is an entity through which a group of preferred providers (physicians, hospitals and ancillary providers) have contractual agreements to provide specific healthcare services for negotiated prices. The prices typically are discounted at fee-for-service rates similar to Medicare's reimbursement structure.
HMOs pay providers on a capitated, per member/per month basis. Because consumers have clamored for more access to specialists, HMOs recently began offering POS products, which are similar to PPOs. POS plans generally require enrollees to work with a primary-care physician who authorizes referrals, but enrollees can pay additional out-of-pocket fees to see providers outside the preferred network.
While PPOs offer patients more choice and the ability to see specialists without pre-approval, until recently they were not as effective as HMOs in reducing healthcare spending because they did not utilize the same cost-management practices. As PPO enrollment and expenses rise, more PPOs are starting to employ cost-control measures.
The number of PPOs that use full or shared risk contracts jumped to 35% in 1998 from 30% in 1996, and 95% of PPOs performed some type of utilization review for outpatient services in 1998, according to the Association of Managed Healthcare Organizations.
John Gastright, M.D., a managed-care consultant based on Johns Island, S.C., agrees PPOs are starting to look more like HMOs out of necessity.
"What's going to happen is healthcare costs will start to rise again as you get more access and more choice. Clearly, employers are not going to go back to double-digit inflation," he says. "We're going to see a vehicle where patients can have a lot of choice, but built into that will be as many of the utilization controls and contracting and network capabilities that the HMOs had in the past."
Unicare, a national PPO network of 229,000 physicians based in Thousand Oaks, Calif., already credentials participating physicians, requires pre-certification of benefits and even utilizes some disease management programs, says Medical Director Victor Diaz, M.D.
Gastright advises physicians to understand their practice patterns and costs, including CPT codes, before entering contract negotiations with a PPO.
"Look at the reimbursement the PPO is offering and compare it to Medicare. Under Medicare, I know my costs and what my margin is. And if this fee schedule is within that threshold, then I can accept that," he says.
Also, he advises, examine what incentives there are for patients to use the preferred network. Succeeding in a PPO network depends on maintaining a high patient volume.
"The PPO benefit structure has to (be an incentive for) the patients to use the network doctors," he says. "As long as you have that, rarely would patients go outside the network because it's to their significant financial advantage to stay within the network."
Also, be sure partner physicians and hospitals are part of the PPO network. "You will quickly get into trouble if you refer to your favorite orthopedist, and three months later your patient finds out they're not in the network," Gastright says.
Before everyone jumps on the bandwagon, Vicki Buxton, vice president of managed care and contracting at Houston's Kelsey-Seybold Clinic, warns that PPOs do have drawbacks. About 30% of Kelsey-Seybold's 1.2 million annual patient visits are PPO enrollees. The clinic contracts with more than 50 PPOs, and about 15% of its HMO patients are enrolled in POS plans.
"The people who make money in PPOs tend to churn patients, and that's alien to the way we try to practice," Buxton says. "They are also very poor payers. We find that they often don't pay in accordance with the negotiated rates. If you negotiate a fee for $45, they'll pay you $42 with no explanation."
Small groups simply don't have the time or resources to fight PPOs for those lost dollars, Buxton says. In addition, she says, large groups like Kelsey-Seybold already have care management practices in place that are underutilized in a PPO environment.
"People want a lot of choice, but there's no management of PPOs," she says.
"With choice comes poor utilization as well. So it's bound to eventually catch up with us."
Thomas Morrow, M.D., medical director of Atlanta-based One Health Plan of Georgia, cautions that PPOs may be a temporary result of economic good times, and HMOs should not be abandoned. One Health Plan is a managed-care company that offers both PPO and HMO products. Across the Southeast, it has 290,000 enrollees, 270,000 of whom are enrolled in a PPO or POS product.
"A good economy breeds the ability to pay for choice," he says. "A bad economy doesn't allow that excess capital for healthcare choices, and you start settling for something less expensive. HMOs have already demonstrated that they're less expensive."
