The De-
Evolution
of the
PPO
Model
First generation
By Jason Davis At one point, over 55% of the PPO
contracts were based on per diem or
n the early 80's, the PPO model DRG rates. The future was bright for
PPOs offered an
I
was embraced as a more flexible PPOs, but they still needed to show
and customizable option for that they could provide cost-manage-
upfront discount off of
health care plans. ment versus discount management.
This would include removing abusive
billed charges with
PPO's continued to gain wide- providers and payers, if they are
spread acceptance and significant found to be compromising the PPOs
membership throughout the coun- value proposition.
few strings attached.
try in 1986 and 1987 for two prin-
cipal reasons: PPOs offered greater In fact, the success of second and
This model was fairly
cost savings than conventional third generation PPOs will be
indemnity insurance plans, and strongly influenced by the capacity
they offered more flexibility than of information systems to interre-
quickly replaced by staff or IPA-model HMOs.
1
late quality assurance programs,
utilization statistics, and cost-man-
second generation
First generation PPOs offered an agement techniques. The emphasis
upfront discount off of billed charges will be cost-effectiveness rather
with few strings attached. This model than cost cutting.
3
PPOs, which tried to
was fairly quickly replaced by second
generation PPOs, which tried to add If they are also able to control
add accountability to
accountability to the contracts with costs PPOs could become the sys-
DRG or per diem based rate structure. tem of choice for a very large
the contracts with
number of people.
4
The use of DRGs is noteworthy
because it gives hospitals a major We believe that these organizations
DRG or per diem financial incentive to keep their are only likely to succeed in the
stays short and their use of ancillary long-run if the PPO management is
based rate structure.
services low.
2
independent enough to control
both hospitals and physicians who
(see page 10)
The Self-Insurer
©
/ January 2010 • 9
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