PPOs record high growth rate, strong payments

Reimbursement remains higher than Medicare

One of the first glimpses of the powerful growth of PPOs came in spring of 1996 in a study funded by HCFA and conducted by scientists at the The Urban Institute in Washington, DC.

"Among the broad range of managed care arrangements that are evolving, PPOs represent one of the fastest growing alternatives to fee for service or traditional health insurance," wrote co-authors Diana K. Verrilli, MS, and Stephen Zuckerman, PhD.1

PPOs grow from 10 to 700

"The recent growth in PPOs has been remarkable," the researchers said. In the 1980s, PPOs barely existed — fewer than 10 were on record in 1981. By 1987, that number had increased to over 100, and in 1994, the year of the authors’ most recent data, more than 700 plans were in force. As of 1994, over 20% of physician payment was derived from PPOs. The authors, writing in 1996, say they expect that rate has grown even more by this point.

HCFA researchers surveyed only two PPO payers, but they are two of the nation’s largest insurers, both of which have beneficiaries in 50 states (names of payers were kept confidential under the terms of the study). They found some useful trends for physician practices to consider when negotiating PPO contracts:

• Despite achieving large discounts relative to indemnity plans (10% to 20% on average), PPO contracts pay at rates substantially above Medicare levels.

• How much a PPO discounts its payments to a provider tends to be a function of its initial price levels. More generous payers achieve bigger discounts than less generous payers, suggesting that physician groups are holding the line on how deep a discount they will accept.

• PPOs are not confined to the stated intent of Medicare’s resource-based relative value scale, which was designed to reduce payments to specialists and improve payments to primary care physicians. For example, the survey found that imaging and test payments were considerably higher than evaluation and management (EM) services.

• The discount range is wide open. For example, even among these two payers, discounts show a variation ranging from 6.3% to 23.1% for a 15-minute EM service; from 40.8% to 35.5% for a CAT scan.

• National average Medicare fees are not much closer to private-payer fees than they have been, as some argue. The public-private payer payment gap remains. That’s the case even based on 1993 data, Verrilli and Zuckerman contend.

"Although we acknowledge that these results are based on 1993 data and that the rapidly changing market may have already led to lower private fees than those observed here, a great deal of ground would have had to have been closed in order to put Medicare fees near those of the average private payer."

Increase patient loads without capitation

In sum, relying on PPO contracting can be a smart move for physicians, the researchers suggest. "Providers can potentially increase their patient loads by agreeing to discounted fees and forms of utilization review, while often avoiding capitated payments."

In highly competitive markets, however, administrators such as James Linz, chief executive officer of Towson Orthopedic Associates, a 12-physician practice in Baltimore, aren’t convinced they are faring all that well with discounted fee for service.

"One of my physicians pointed out the other day, ‘People pay more to get a bumper fixed than they do for a total hip replacement,’" he recounted. "Think about it. Most bumper repairs are $1,000 or more, which is more than we’re paid for replacing a hip."


1. Verrilli DK, Zuckerman S. Preferred provider organizations and physician fees. Health Care Financing Review 1996; 17:3.