Preferred Provider Organizations and Medicare: Is There an Advantage?

Preferred provider organizations (PPOs) had emerged as an increasingly important option in the Medicare program, offering beneficiaries more flexibility in choosing providers than traditional Medicare HMOs while still providing the supplemental benefits and cost protections that attracted seniors to managed care, according to research from the Center for Studying Health System Change (HSC). The growth of Medicare PPOs reflected broader trends in the commercial insurance market, where PPOs had largely supplanted HMOs as the dominant plan type.

PPOs Enter the Medicare Market

Medicare PPOs allowed beneficiaries to see any provider willing to accept the plan's payment rates, without the referral requirements and restricted networks that characterized HMOs. While using in-network providers was less expensive, PPO enrollees could also seek care from out-of-network providers at higher out-of-pocket costs. This flexibility appealed to Medicare beneficiaries who valued choice of provider -- a preference that contributed to the managed care backlash among working-age populations in the 1990s.

The Medicare Modernization Act of 2003 created a specific pathway for PPOs to participate in the Medicare Advantage program, responding to policymakers' interest in expanding private plan options for seniors beyond the HMO model. PPOs were seen as a way to extend managed care benefits -- including supplemental coverage for prescription drugs, dental care, and vision services -- to areas of the country where HMOs had limited presence, particularly rural and suburban communities.

Potential Advantages and Concerns

Proponents argued that Medicare PPOs could offer beneficiaries a better combination of choice and value than traditional fee-for-service Medicare while giving private plans a broader platform for managing care and coordinating services. The PPO model's wider network could also appeal to beneficiaries who had been reluctant to join HMOs because of concerns about restricted access to specialists and out-of-network care.

However, skeptics raised questions about whether Medicare PPOs could achieve meaningful savings for the program. The flexibility that made PPOs attractive to beneficiaries also limited plans' ability to manage utilization and steer patients to more efficient providers -- the very tools that HMOs used to control costs. If PPOs attracted healthier beneficiaries through favorable selection while providing less effective cost management, the net effect on Medicare spending could be negative rather than positive.

The geographic expansion of private Medicare plans into areas previously served only by fee-for-service Medicare also raised questions about network adequacy, provider payment rates, and the capacity of plans to operate effectively in markets where they had limited experience and negotiating leverage. How PPOs balanced consumer appeal with cost-effective care management would be a key determinant of their long-term viability in the Medicare program.

Sources and Further Reading

HSC research on preferred provider organizations in the Medicare program, based on analysis of Medicare Advantage enrollment data and market trends.