Economics of Participation in Preferred Provider Organizations

by Adele Palmer

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This report examines the economic properties of health care delivery and financing systems commonly known as Preferred Provider Organizations (PPOs) as viewed by each type of participant — hospitals, physicians, payors, and beneficiaries. It aims to help potential participants make better informed judgments about whether a particular PPO will benefit them, and to set the stage for future empirical studies of PPO performance. The analysis suggests that the potential for a PPO's survival is greatest when its provider members are the most cost-effective ones in the community, when the PPO insurance plan offers adequate incentives to redirect patients to member providers (and when the patients would otherwise use alternative providers), and when the plan does not include provisions that substantially increase overall demand for health care. Under these conditions, the PPO has a chance of yielding financial gains that can be shared by all participants, though perhaps to varying degrees.

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