Retaining freedom of choice in a managed care plan; employers use PPos as a cost effective alternative to stringent managed care plans - preferred provider organizations

Employers use PPOs as a cost effective alternative to stringent managed care plans.

The steady growth in the number of employers offering PPOs might seme curious to those with strict managed care programs. But many employers still reluctant to restrict employee choice offer PPOs as an alternative to high-cost indemnity plans.

In doing so, they retain choice and cut costs by offering incentives to remain in the provider network. And employers can make a PPO network as flexible or as stringent as possible, merely by changing the financial incentives to stay in-network.

The percentage of employers offering PPOs increased from 31% to 39% from 1991 to 1992, according to the 1992 Health Care Benefits Survey, conducted by A. Foster Higgins & Co. Inc., New York benefits consultants. John Erb, a principal at Foster Higgins, says although employers in major metropolitan areas may still have a difficult time holding the line on costs without going to total manged care, he no longer view PPOs as a transitional step toward total managed care.

There's0 a steady growth in managed care plans that retain an out-of-network benefit, according to the Foster Higgins survey of 2,448 employers. (The Foster Higgins survey distinguishes between PPOs and point-of-service plans. POS plans, unlike PPOs, require that patients use a primary gatekeeper physician.)

The growth in PPO use was fastest among smaller organizations. By the same token, employee enrollment in PPOs grew from 17% in 1991 to 21% in 1992.

Certainly, PPOs are more attractive than indemnity plans to employers. While the average costs of a traditional indemnity plan rose 14.2% in 1992, the average cost for PPOs rose only 10.5%. HMO cost rose by only 8.8%, and POS by 8.4%. The average cost of an indemnity plan is $4,080 per employee, compared with $3,708 for a PPO, and $3,313 for an HMO.

In addition, PPOs offer employees a much greater choice of physicians and hospitals than do HMOs. "The major insurers are selling a kinder and gentler form of managed care," says Erb. Because they want to see a lot of doctors and hospital in their networks, the networks generally do offer more choice.

Researching a PPO

Most employers, however, say it makes sense to do some research before contracting with a PPO. For example, an employers can increase its cost savings by contracting with a PPO whose network include many physicians who employees already visit for care.

Georgia Power Co., an Atlanta-based utility with 12,000 employees and 3,500 retirees, chose a PPO to maintain freedom of choice. But the company's benefits manager did her homework first. The company analyzed clains data and tried to find a network that included facilities where its employees already sought their medical care.

Beyond making the network employer-friendly, Georgia Power also anted to make sure the charges its would be responsible for from those facilities were lower than what they already were paying, says Lynn Martin, health care design manager.

After doing an extensive analysis of its paid claims data from hospitals across th state, Georgia Power compared the data to its PPO vendor's hospital cost analysis of metropolitan Atlanta providers. The vendor's analysis is based on data which is publicly available from the State Health Planning Agency. The ranking is case-mix adjusted to compensate for differences in patient mix. Both the Georgia Power data and the PPO vendor's analysis showed comparable cost-effectiveness of the network hospitals.

Georgia Power also used a health are consulting firm, William M. Mercer, New York, to help analyze the PPO's quality control measures, including the physician credentialing process. "We did a lot of projections on how much money we would save," says Martin. "We were hoping to save $1.3 to $1.5 million in the first year, but we're going to do better thann that. We've saved over $1 million in the first six months." the PPO was implemented in January.

Martin credits the company's savings to the fact that more employees used network physicians and hospitals in the first six months of this year. In fact, expansion of the provider network has allowed for greater employee choice within the network. "We started the year with 22 hospitals in the network statewide. We now have 30. As the network expands, we get gredater savings," she adds.

While Georgia Power has seen impressive savings so far, Martin notes that the company intentionally sacrificed additional savings to achieve employee acceptance. The company kept reimbursement levels high for out-of-network providers because it didn't want the reimbursement levels to affect employees' freedom of choice. "In the first year, we were trying not only to save money, but to achieve employee acceptance to more managed care," says Martin. "In the years to come--although probably not in 1994--we will move toward additional managed care." The company is now looking at different plan designs for its PPO, as well as setting up Centers of Excellence for tertiary care.

HSN Insurance Inc., a subsidiary of Home Shopping Network, Clearwater, Fla., has a high rate of employee participation in its network because the company tried to choose a PPO whose networks doctors and hospitals closely matched those employees were already visiting for treatment. Suzanne Morrow, HSNI president and CEO, estimates that 85% of Home Shopping Network employees stayed in-network in 1992.

"It is very important to determine whether the PPO has contractual obligations with the facilities in your area that your employees prefer to utilize," says Morrow. "Your current provider can give you a report on the exact dollar amount and number of days employes spent in a particular hospital. If the greatest percentage of claims is coming from Hospital A, and the PPO you are considering does not have Hospital A in its program, you may not benefit by contracting with that network."

Although the company still maintains an indemnity plan, Morrow attributes the high employee in-network rate to good access to physicians with whom the employees are already familiar.

Of course, there is also a financial incentive to use network physicians and facilities. The employee receives the negotiated discount on the network physicians' services and has to pay only 10% of the bill. In the indemnity plan, the employee is responsible for 30% of the total bill.

The majority of Home Shopping Network's 4,400 eligible full-time employees are in Florida, although there are also employee bases in California, Virginia, Nevada, and Iowa. PPOs are available in all locations except Iowa. "It's only worth it to contract with a PPO if we have a coupled of hundred people or more," says Morrow, because the fees to participate in the network don't pay off unless you have a larger employee base. "It depends on the PPO negotiation rate in that area. In our Iowa location, for example, why go into the PPO and pay the fees for it when there is only one hospital in the area and no physician participation?" adds Morrow. "You have to make a business decision on what is cost-effective for the company, while still getting the best care for your employees."

In Florida alone, Morrow estimates the company saved about 35% on submitted charges last year. Computations elsewhere are harder to calculate because the company has undergone so many divestitures and acquisitions in the last year, she adds.

Home Shopping Network switched from a self-funded full indemnity plan to PPOs in 1991, as a way to provide a better handle on cost containment and allow the company to negotiate per-diems and other costs. "We looked at HMOs," Morrow says. "Some HMOs we looked at would have cost us more than PPOs."

Despatch Industries, a Minneapolis manufacturer of heating units, contracted with a PPO for greater flexibility of plan design and because it wanted to introduce some form of managed care to control costs. Despatch has 370 employees--225 of whom are eligible for the PPO. The rest are union employees covered under different plans.

Until 1988, the company has been self-insured under a traditional indemnity plan. But then, faced with rising health care costs, it introduced a PPO, and also, for the first time in the company's 86-year history, asked employees to fund some of their health care costs through payroll deductions. "One of the things we liked about the PPO was tht we could stay sel-insured," says Gail Hanson, personnel manager. "The HMOs in the Minneapolis area are not keen on writing something on a self-insured basis," she says.

Hanson says she also liked the opportunity for benefit design flexibility. Under Despatch's plan, employees can choose to enroll in one of three plans--two provide 80% covrage, one with a $100 deductible, and the other with a $400 deductible. The third provides 100% coverage, with copayments ranging from $5 to $15 for selected services.

Hanson says the PPO's discounted provider fees have resulted in a 22% savings over what costs would have been with a traditional indemnity plan. "We've also seen savings in soft areas that you can't measure," she says, "such as case management, PPO review of billing practices by provider, and quality assurance."

Drawbacks

Although PPOs do provide a transition to managed care, while maintaining choice for employees, employers need to be aware of some of their disadvantages. "The lack of risk assumption by providers is troubling in the are of cost containment," says Erb of Foster Higgins, "because it encourages fee for service. PPOs require utilization review and case management to control costs."

In addition, he argues, one thing employers like about PPOs--a large network that offer more choice--could be another drawback. "The network's large size diminishes the PPO's capacity to negotiate good prices."

COPYRIGHT 1993 A Thomson Healthcare Company
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