The effects of preferred provider organizations on health care use and costs

Preferred provider organizations (PPOs) now account for half the enrollment in managed care plans. There are more than 1,000 PPOs, and over 20% of the insured population in the United States are enrolled in this type of plan. Still, there have been few investigations of use and cost of health services in these plans. This paper presents an analysis of a convenience sample of 1,977 companies, most of them mid-sized, from 1988 to 1990. On average, PPOs were associated with cost savings of 12% per covered life (95% confidence interval, 7.2% to 16.9%) as compared to traditional plans with utilization review. The source of cost savings was primarily through lower utilization rates, including a 9.7% lower rate of physician office visits (5.2% to 14.3%) and a 9.3% lower rate of hospital admissions (4.1% to 14.5%). Cost savings were found in seven individual PPOs and a group of small PPOs in the study. Two PPOs were associated with added costs and results were indeterminate for four others. While PPOs may not achieve the level of savings reported by some health maintenance organizations, they may provide a means to achieve some degree of managed care savings for some employer groups.