Why PPOs are no longer effective at controlling insurance costs

Preferred Provider Organizations (PPOs) were once central to managing healthcare costs by offering flexible provider networks. However, the cost-effectiveness associated with this plan type has recently diminished, and the cause of this decline isn’t so simple. PPOs face increasing challenges from rising costs, fragmented care, market shifts, and regulatory changes, necessitating reevaluating strategies to manage healthcare expenses effectively.

Let’s take a closer look at why PPO insurance costs are on the rise. 

What is a PPO?

Before we discuss why PPOs may not be as effective at controlling healthcare costs, let’s define a PPO. This type of healthcare plan works because it partners with select doctors and hospitals. If the plan holder uses those medical providers for their care, they won’t spend nearly as much if they go outside of their plan network. However, they can choose to go out-of-network (an option some individuals really value), but they will spend extra to do so.

It’s easy to confuse PPOs with EPOs and HMOs, but those plans function differently (which affects healthcare spending). 

• EPO: An Exclusive Provider Organization (EPO). Plan only covers in-network care unless you need to receive emergency medical care out-of-network.

• HMO: Health Maintenance Organization (HMO) Plan only allows you to receive care from medical providers who either have a contract with the HMO or work directly for the HMO (again—unless an emergency arises). You often need to live or work in the service area the HMO covers to be eligible for the plan. These plan types put a lot of emphasis on preventative care.

Why PPOs don’t help control healthcare costs

PPOs are notoriously expensive, but that’s often chalked up to the fact that you can choose to receive care in-network or out of it. That is part of why these plans are no longer helpful in controlling healthcare costs, but it isn’t the only reason. 

Rising costs

Rising healthcare costs affect everyone, but PPOs are especially affected. As briefly mentioned earlier, the ability to receive care out-of-network while, in some cases, still receiving some financial support from your healthcare plan (this is not a guarantee) makes PPOs more expensive for both the plan holder and the company that offers this plan type to its employees.

Fragmented care

Fragmented care is a significant issue within PPOs because this plan type generally doesn’t enforce strict coordination between healthcare providers. Since patients in a PPO can see specialists or other healthcare providers without needing a referral, there’s less communication between primary care physicians and specialists. This lack of coordination can result in:

1. Redundant testing: Different providers may order the same tests or procedures without knowing that another medical professional has already performed them. Without an integrated system to share patient records efficiently, these duplications drive up costs and expose patients to unnecessary procedures, costing everyone more money.

2. Delayed diagnosis and treatment: Poor communication between providers can lead to delays in diagnosis or treatment, which can result in even more visits or tests and increase overall healthcare spending.

3. Higher administrative costs: Fragmented care makes billing and administrative tasks more complex as each provider operates independently. Separate insurance claims and paperwork can be inefficient and expensive. 

Managed care models like HMOs emphasize care coordination, which helps reduce redundant testing and streamline treatments. While PPOs offer greater provider choice and fewer restrictions, they aren’t efficient at managing overall healthcare expenses.

Provider market power

As health systems consolidate, their bargaining power with insurers increases significantly. Large healthcare systems can negotiate higher reimbursement rates for their services because they control a substantial portion of the local market. PPOs are often left behind due to their lack of bargaining power. 

When large hospital systems dominate a region, PPOs have little leverage to negotiate lower prices. As a result, the insurer often has no choice but to accept the provider's higher rates, leading to increased premiums for employers and patients.

Patient choice

Having choices is great, but those choices can have financial consequences. When patients choose to pursue care out-of-network, they typically spend much more, even though the PPO allows this. To help keep their spending down, plan holders should double-check that they are using an in-network provider before utilizing any medical services. 

Administrative complexity

PPOs are known for their flexibility, as this health insurance plan permits patients to choose from a wide network of providers without referrals. However, this freedom comes with significant administrative complexity. Managing a vast network of providers leads to increased claims processing, out-of-network billing confusion, and pre-authorization issues and denials. The administrative overhead associated with managing such a flexible network erodes the cost-control advantages PPOs once had, making them less efficient compared to more streamlined models.

Regulatory changes

The healthcare landscape has seen significant regulatory shifts in recent years, impacting the effectiveness of PPOs in controlling costs. Key regulatory changes, such as surprise billing legislation thanks to the No Surprises Act, are a great example of relevant regulatory changes. This act aims to protect consumers from unexpected out-of-network charges. While this act benefits patients, it further constrains a PPO’s ability to manage out-of-network costs, particularly in emergency situations where patients have little control over provider choice.

The Takeaway

If you decide a PPO isn’t right for your company, you may want to consider an ICHRA (Individual Coverage Health Reimbursement Arrangement) instead. With an ICHRA, your startup or established business can provide employees a monthly tax-free allowance. This stipend allows them to purchase individual health coverage tailored to fit their unique needs and helps control costs—all while addressing ACA compliance for applicable large employers.

Not sure if an ICHRA is the way you want to go? Let’s talk about it. Thatch democratizes the process of procuring health insurance for your company, offering a new, more seamless, and cost-effective way to do so. Learn more with a free demo of Thatch today.