Center for Studying Health System Change

Preferred Provider Organizations and Medicare: No Panacea for Cost, Quality Issues

Despite Private-Sector Success, PPO Model Will Face Challenges in Medicare

News Release
April 29, 2004

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ASHINGTON, D.C.—While policy makers hope that private plans—especially preferred provider organizations (PPOs)—can increase benefits, improve quality and slow cost growth in Medicare, Medicare PPOs likely will face serious challenges to achieving these goals, according to a study released today by the Center for Studying Health System Change (HSC).

"For the under-65 population, much of the appeal of PPOs lies in the fact that they are not health maintenance organizations and offer more choice of physicians and hospitals and fewer restrictions on access to services—typically for a higher premium than an HMO," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded principally by The Robert Wood Johnson Foundation.

"But the very reasons PPOs are so popular for privately insured Americans—more choice and less oversight of care than HMOs—will make it difficult for PPOs over the long haul to slow cost growth and improve quality in Medicare, especially since traditional Medicare already provides wide choice of providers and few restrictions on care," Ginsburg said.

Initially, substantial payment increases to private plans in the new Medicare managed care program, now called Medicare Advantage, will help retain many Medicare HMOs and draw in new private plans, including PPOs. If private plans can provide enhanced benefits, then enrollment is likely to increase. But if Medicare private plans have to pay higher rates to providers, cost savings are unlikely.

"When Medicare cost concerns rise to the forefront again—as they inevitably will—private plan payments will be targeted for refinement, potentially triggering a new round of instability that discredited Medicare private plan options in the late 1990s," Ginsburg said. "Indeed the prospect of tighter rates is likely to discourage insurers from investing in developing new products for the Medicare market."

The study’s findings are detailed in a new HSC Issue Brief—Preferred Provider Organizations and Medicare: Is There an Advantage? The study by Robert E. Hurley, Ph.D., an HSC consulting researcher from Virginia Commonwealth University, HSC Research Analyst Bradley C. Strunk and HSC Associate Director Joy M. Grossman, Ph.D., is based on HSC’s 2002-03 site visits to 12 nationally representative communities: Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y. Key study findings include:

• Policy makers believe PPOs are attractive options because they can offer broad networks to beneficiaries. Most PPOs in the commercial market are not exercising much selectivity in network assembly and typically pay providers more than Medicare. Likewise, PPOs are more limited than HMOs in steering patients to some providers and away from others, weakening PPOs’ ability to win substantial price discounts from providers or to coordinate care.
• The fact that traditional Medicare will remain an option for all providers and beneficiaries will undermine the potential leverage of PPOs. Some providers might consider accepting payments below traditional Medicare to expand market share, but experience to date—such as in the Medicare Select program that since 1998 has tried to encourage beneficiaries to use restricted hospital networks to enhance the value of private supplemental coverage—has been disappointing.
• A major attraction of the PPO option to policy makers is its broad geographic coverage. PPO options are widely available in the private sector, particularly beyond major metropolitan markets, and seem better positioned to serve Medicare beneficiaries in rural areas than did HMOs in the Medicare+Choice program. But discounts obtained in rural areas are greatly affected by provider market structure and (lack of) competition, so PPOs are likely to have to pay higher rates than traditional Medicare in these areas.
• The Medicare reform legislation imposes requirements on Medicare Advantage plans to offer quality improvement and chronic care management programs. Sponsors of many commercial PPO offerings are not strongly invested in care management and quality improvement techniques. To meet new Medicare requirements, many current PPOs would have to increase care management and information technology capacity—investments they may be reluctant to make in light of the history of private plan instability in Medicare.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded principally by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.