Basic PPO Fallacies Revealed

Alan T. Sorensen wrote a treatise on PPO discounts. He is affiliated with the Graduate School of Business, Stanford University. Below are a few excerpts in which he exposes some basic fallacies we all have been educated to believe.

“Payer size appears to affect bargaining power, but the economic significance of the effect is small. Much larger that the effect of payer size is the influence of payer’s abilities to “move market share” by channeling patients to hospitals with which favorable discounts have been negotiated.”

Interpretation: Size matters little, steerage matters greatly. However, when you look at the provider panels of PPO networks, you see almost every hospital on the network – therefore little or no steerage – we dont have PPO’s anymore, we have APO’s (all providers network).

“Pauly (1998) has noted (and the data here confirm) that even very small managed care organizations (MCO’s) often negotiate substantial discounts from hospitals.”

Interpretation: Size matters little

“Results from an econometric model suggest patient channeling is relatively more important than payor size in determining discount magnitudes; in particular, the impact on discounts of a one standard deviation increase in a payer’s ability to channel patients is roughly eight times larger than the impact on an equivalent increase in payer size.”

Interpretation: Size is not as important as steerage

“The second difficulty inherent in this study is that hospital’s listed rates may vary, so that reported discounts may reflect percentages of unequal bases. For instance, if two hospitals charge $200 and $180 (respectively) for the same procedure, and a payer negotiates a 10% discount at the first hospital but no discount at the other, the data will indicate that the payer has a more favorable discount agreement with the first hos;pital even though it pays the same price at either facility.”

Interpretation: Discounts off billed charges mean little when comparing PPO discounts

“The point estimate suggests that increasing a payer’s hospital payments in a county by 10% would enable the payer to extract an additional one tenth of a percentage point in discount negotiations with hospitals. Although this effect is statistically distinguishable from zero, its apparent economic significance is very small.”

Interpretation: Size matters little

Editor’s Note: Bigger is Better, or is it? Not according to this expert. How many times have you heard a group representative for one of the national carriers tout their “superior” discounts due to their large market clout? How then, did a small company out of San Angelo, Texas, for example, assist the Tyler Independent School District in negotiating better provider contracts and save +40%  without reducing benefits? Could the answer be “Steerage?”

For a copy of Mr. Sorensen’s treatise, email

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