Are PPO’s Relevant In Managing Health Care Costs Today?


MyHealthGuide Source: Dwight Mankin, President, NCN,, 12/2009 via Passion for Subro

Over the last few months we have seen a spotlight directed at healthcare. Whether the debate is focused on access or cost, we are faced with dealing with the structure and delivery of healthcare for the future. But as the debate goes on, one has to ask the question, “How did we get here?” It is by asking the question and answering it in an intelligent manner are we best able to avoid the mistakes of the past and provide a workable solution for the future. We cannot afford to have history repeat itself.

What Happened

For decades, the concept of pre-negotiated discounts for in-network care has been the most common approach for keeping rising healthcare costs at bay. Employers keenly focus their cost-containment efforts on in-network services offered by PPOs, since between 70 and 90% of medical expenses of insured patients are incurred on in-network procedures. So if most insured procedures are in-network with deep, negotiated discounts, why are medical costs so extreme and health insurance premiums so high?

The Promise of Steerage

What does the PPO vendor have to offer a provider in exchange for a deep discount? The answer is, simply, patients — what the heath care industry refers to as “steerage”. In theory a carrier approaches a provider (facility or physician) and offers a volume of customers — its members — in lieu of discounts passed on to those members. By listing the provider as part of its exclusive network, the PPO can offer its patients better pricing for that service than the patient would get otherwise. Patients want more than just discounts, they want options.

The Appeal of Options

For patients and employee groups, the price of the health insurance premium plays a huge part in selecting a PPO network, but that factor can adjust with co-pay and deductible thresholds. The real appeal is the PPO’s size and relevance of its network. For example, brokers to large employers measure their effectiveness on how well they can fit a company’s plan with a carrier that manages and covers the employee base with as many in-network facilities and doctors as possible. In essence, a larger, more developed network gives patients (the employee base) more choices, making opportunity for in-network pricing more likely. It is the development of these large PPO networks and even the supplemental (wrap) networks outside them that are a driving force in the rising cost of healthcare.

Over-developed Networks

As PPO networks expand their list of “preferred” providers, their steerage becomes less exclusive. Yet deep discounts are still required of providers to maintain their inclusion in the network. As a result, providers have to raise the “retail” cost of care to offset the discounts offered, since the discounts are not overcome by the volume and steerage expected. Bruce Japsen, long-time health-care business reporter for the Chicago Tribune, puts it in blunt terms: “Once the market is saturated with PPOs (and HMOs), rates must reflect the true costs of delivering care plus a modest profit or the health care market will collapse.”

A New Model

Industry veterans agree that the quickest way to bring US healthcare costs in check is real price transparency that helps the patient make informed decisions. Dr. Stanley Feld, retired endocrinologist and avid proponent of healthcare reform states that “The consumer is not stupid. When they are in control of their healthcare dollar, they will force real price transparency.” The “real price transparency” he refers to is a cost-based model, not a superfluous detailing of charges. Until such cost-based methodology is widely adopted by healthcare payers and providers, patients will suffer the consequences of an industry that ineffectively tries to repair itself through contract negotiations, restructured administration and expanded PPO networks. If this if not dealt with quickly, history will surely repeat itself.

About NCN

NCN is the national leader in cost management for out-of-network claims. We use cost-based data and transparent reporting to maximize savings on healthcare claims. At NCN we claim a better way for payers, providers and patients. Visit

Editor’s Note:  Cost-plus hospital reimbursement methodology is becoming an important risk management tool employed by self-funded employer groups. See White Paper – Health Care Strategies for Texas Political Subdivisions