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HMOs and PPOs – KEY CHARACTERISTICS
Managed Care – Overview of 2 Key Types of Managed Care Health Insurance Plans.
The goal of managed care is to limit the amount and type healthcare services provided to the managed care organization’s members in order to control costs and to ensure that effective healthcare is provided in appropriate clinical settings, thus increasing the quality of the care provided. Managed care is about maximizing resources (effectively managing financial risk) and effectively managing the health of enrollees and in some cases of whole populations. Managed care organizations accomplish this goal through a variety of mechanisms, including provider payment methodologies, and controls on a member’s access to services. There is a wide array of managed care organizations in the United States.
Health Maintenance Organizations
The term “health maintenance organization”, or “HMO”, is an amorphous term, as HMOs have evolved over time in response to market demands. Generally, however, an HMO is an organization that arranges for or provides healthcare services to members in exchange for a pre-paid payment. HMOs are responsible for providing basic healthcare services, usually with a focus on preventive care. Because HMOs are responsible for “arranging” or “providing” for these services, HMOs are characterized by comprehensive provider networks that cover the full spectrum of healthcare services covered by the organization, including physicians, hospitals, and ancillary providers.
Traditional HMOs were characterized by the “gatekeeper” concept, which requires members to select a primary care physician who is responsible for coordinating all of the member’s healthcare and making appropriate referrals to specialists. Coverage is usually not available under an HMO plan unless a service was provided or arranged by the member’s primary care physician. The gatekeeper model became increasingly unpopular through the 1990s, as members felt their HMOs were unduly interfering with provider treatment decisions and patient access to care. Today many HMO offerings provide members with “open access” options in which the member is not required to select a primary care provider, or may seek treatment from a provider who does not participate in the HMO’s network.
HMOs use a variety of financial incentives to encourage providers to render services in a cost-efficient, appropriate manner. Some HMOs pay providers a fixed monthly fee to their primary care physicians, called a capitation payment, that covers all of the care the provider is obligated to provide to the HMO member for that month. Capitation payments may reduce costs, but they can also result in under-utilization of healthcare services, if the capitation payment is so low that the provider wrongfully limits or denies treatment. Essentially, capitation payments shift the risk from the HMO to the provider. Some states regulate capitation agreements between HMOs and providers specifically to regulate problems that arise when providers take on more risk than is fiscally responsible. HMOs may also compensate providers on the basis of withhold arrangements, where the HMO retains a portion of the compensation due to the provider, and will return to the provider a specified amount of the withhold depending on whether the provider meets established targets. HMOs may also use percent-of-premium or pooling arrangements to compensate providers. The fundamental characteristic of all of these payment methodologies is a risk transfer between the HMO and the provider.
HMOs are also characterized by a variety of medical management techniques in order to control costs. These techniques primarily include prior authorization or pre-certification requirements, concurrent review, and retrospective review. Under this scheme a plan member must seek prior approval before receiving certain types of treatment, and the HMO monitors the member’s course of treatment to ensure services continue to be medically necessary and cost-efficient. HMOs may also use disease management programs to manage patients with complex conditions.
There are several types of HMOs that differ primarily on the level of integration between the health care delivery and financing functions of the organization. The five primary types of HMOs are, from most integrated to least integrated: (i) staff model HMO, (ii) group model HMO, (iii) network model HMO, independent practice association HMO, and the direct contract model HMO.
Preferred Provider Organizations
The defining feature of a preferred provider organization, or “PPO”, is that it consists of a panel of “preferred” providers from whom members may receive healthcare services as part of their health benefits coverage. PPO plan members generally pay lower out-of-pocket expenses if they receive their care from a preferred provider. In contrast to HMOs, members are free to seek care from providers outside of the network without a referral, usually at increased out-of-pocket expense in the form of higher deductibles or coinsurance.
Providers who participate in PPOs may be compensated in several ways. The traditional method is a discounted fee-for-service methodology, under which the provider is pay a certain percentage of his or her usual rate for the service, also known as the provider’s usual, reasonable, and customary rate, or “UCR”. Providers may also be compensated a pre-determined flat fee for a particular service or course of treatment. This methodology may be called a case rate payment, per diem payment, or diagnosis-related group payment, depending on what items or services are included in the payment.
PPOs that are operated by insurance companies are regulated by the state Department of Insurance. PPOs may operate independently, in which case they may not be subject to state regulation. Approximately half of the states regulate independent PPOs. When PPOs are regulated, the most frequent forms of regulation are provider contract, utilization review, and patient access-to-care requirements.
B. Managed Care – Changing Role of the 2 Key Types of Managed Care Health Insurance Plans: HMOs and PPOs.
(THE INCREASED POPULARITY OF PREFERRED PROVIDER ORGANIZATIONS (PPOS) OVER CLASSIC HMO MANAGED HEALTH INSURANCE PLANS BEGINNING IN THE LATE 1990’S):
1. We all remember the strong backlash against managed care during the late 1990s. Although almost 10% of the U.S. population are still served by HMOs, the managed care vision has been largely in exile for more than a decade now. PPOs are now the dominant model, with relatively small financial incentives to patients to seek their care from providers within relatively large provider networks. Many PPOs have dabbled in “pay for performance,” but the physician incentives involved have been relatively small and the performance bar set relatively low. The use of more heavy-handed managed care approaches has declined significantly. For example, plans usually don’t require a referral authorization by a “gatekeeper” primary care physician before granting access to specialists. And the use of pre-authorization by health plan staff for many expensive procedures has declined significantly. Health plans did not drop these heavy-handed approached because they became convinced they were ineffective. They dropped them because they feared they would face a consumer backlash and lose membership.
2. Rapid growth in preferred provider organization (PPO) participation in the period 1999 through 2004 is both impressive and puzzling. More than half of people with private health care benefits, or more than 100 million people, now (2004) receive their care through these arrangements, far surpassing enrollment in health maintenance organizations (HMOs).
Not only has the PPO become the health benefit design of choice for private employers and consumers, it also has emerged as the “private plan” option most frequently touted by proponents of market-based Medicare reform.
What is curious about the strong popularity of the PPO is that its definition is fairly amorphous, and the industry itself appears to characterize itself less by what the PPO is than by what it is not—namely, an HMO. Even less clear is what value, if any, the PPO arrangement yields to its customers.
The widening appeal of the PPO is generally portrayed as a result of the managed care backlash directed against a discredited HMO product.
The PPO benefit option is assumed to offer more choice of providers, less restrictive features for consumers, fewer impositions on caregivers, and lower administrative costs to purchasers.
Less apparent is that many employers, increasingly concerned about
controlling rising costs, are adopting benefit offerings that are more flexible in
terms of customized design and less subject to regulatory strictures. For them, the appeal of PPO options is that they can offer an infinite set of alternative arrangements including broader or narrower networks, richer or more meager benefits, maximum or minimal medical management, and more or less consumer cost sharing.
Why PPO participation has grown so rapidly in recent years has not been well
documented, and whether PPOs actually control costs, provide active care management, promote quality improvement, and afford a measure of health plan accountability has received little attention.
