PREFERRED PROVIDER ORGANIZATIONS

The common language of services provided (as described in subsection “I”) and the common and comparable costs per type of services provided (as described in subsection “II”) are building blocks which enable Preferred Provider Organizations (“PPO’s”) to exist.

Contracted Network of Participating Providers

PPOs have a contractual agreement with a defined group of providers – typically both hospitals and physicians – to offer discounted services to a particular group of individuals, usually a firm’s employees or a pension fund’s clients. Providers are willing to offer discounts of their usual and customary charges to the payers or brokers because the PPO agreement should result in a larger pool of patients that will use their services. Typically, patients are given an incentive to use the network of contracted providers (“preferred providers”), often through lower deductibles and/or copayments. PPOs typically reimburse providers at a discounted rate such as: per diems (a flat rate per day) to hospitals for inpatient stays, discounted fee for service (for example, taking the usual and customary rate and paying 90% of charges instead of the usual 100%), and DRG reimbursement (based on diagnosis related groups reimbursement for case-mix).

When PPOs originated they basically offered employer groups a contracted network of providers to use at discounted rates. PPOs generally did not offer utilization management services such as concurrent, preadmission, and retrospective hospital review or mandatory second opinion or conducting reviews of outpatient services and compiling profiles of physician utilization patterns. PPOs did not assume financial risk of high utilization. Originally when PPOs were first created they were basically a contracting vehicle to allow employer groups to use the contracted network of providers at reduced rates. However, as PPOs add more services, they may start looking and acting like Health Maintenance Organizations (“HMOs).