Offering a comprehensive, affordable health insurance package is one way for small businesses to attract and maintain top talent. There are several types of healthcare plans you can offer. While many companies offer a health maintenance organization (HMO) plan, an alternative option is a preferred provider organization (PPO) plan. A PPO differs from an HMO in several ways and has advantages and disadvantages for employers and employees alike. Understanding these details can help you determine whether a PPO is the right choice for your business and your team.
What is a PPO?
A PPO is a network of primary and specialty physicians, other healthcare professionals, and facilities (i.e., hospitals, clinics, and laboratories). Participating physicians, healthcare professionals and facilities – known as "in-network providers" – contract with insurance companies to provide care to covered individuals at an agreed-upon reduced rate. In-network providers are on what is called a "preferred provider list."
Generally, PPO plans give plan participants a significantly greater choice of medical professionals to choose from when they need medical care.
How does a PPO plan work?
When employees who are enrolled in a PPO plan obtain care from an in-network provider (doctors, hospitals, etc.), the insurance company pays the provider the full agreed-upon rate, and the employees cover any co-pay or deductible. When employees receive care from an "out-of-network" provider, the claim is paid, but not at the full, agreed-upon rate. In these cases, employees are responsible for more out-of-pocket costs.
"In a PPO, (you) generally have the freedom to pick from the preferred list," said Ed Oleksiak, senior vice president for the insurance brokerage firm Holmes Murphy & Associates. "If you don't use the list of preferred providers, then the provider can bill [you] for amounts above what the health plan is willing to pay – in addition to what the plan has defined as your share of the costs."
What are the major differences between a PPO and an HMO?
There are five significant differences between an HMO and PPO:
- Cost. Premiums for a PPO plan are higher than premiums for an HMO plan. The same is true of deductibles and copays for members.
- Choice of providers. When using a PPO, employees have more flexibility in terms of in-network providers. This is because the agreed-upon rates for a PPO provider are typically higher than rates for an HMO provider. More providers are willing to participate in a PPO plan than in an HMO plan, giving plan members (e.g., your employees) a more extensive choice of care options.
- Network reach. Unlike a PPO, which expands the number of providers across multiple networks, HMOs can be limited in that respect. "An HMO is usually limited to a geographic region or state and, in some cases, to certain facilities or medical systems," said Jason Pastrano, a partner at Brio Benefit Consulting.
- Extent of coverage. A member of a PPO plan is covered for care received from an out-of-network provider, albeit at a lower rate than for care received from an in-network provider. An HMO plan only offers coverage for care received from an in-network provider, except in an emergency.
- Utilization management and care coordination. An HMO plan generally comes with more cost control and utilization management requirements for members and providers. An HMO generally requires that members get a referral from their primary care provider (PCP) before visiting a specialist; failure to do so leads to a denial of the claim. Such a requirement is not usually imposed by a PPO plan, leading to a more streamlined care experience.
What are the pros and cons of a PPO for employers?
- Can offer uniform healthcare coverage. This is especially valuable to businesses with locations in multiple locations. "With a PPO, employers with offices in more than one state or region can offer national network access, with the same benefits available to all employees" no matter their location, Pastrano said.
- Happier employees and increased employee retention. Having more freedom in the medical professionals they can see can be a significant perk for some employees. "Because a PPO network is bigger, employees may be happier with this kind of plan, fostering employee retention," said Noor Ali, a physician, licensed health insurance professional and owner of healthcare insurance advisory firm Noor Healthcare Advisor. Ali has also found that employees prefer a PPO because they know it is both difficult and expensive to obtain this kind of medical plan on their own.
- Higher premiums. The increased flexibility PPOs offer does come with a cost. "The difference in price between the premiums employers pay for a PPO and the premiums employers pay for an HMO can be as much as 15%," said Grant Dodge, an insurance broker at Health Benefits Associates Inc.
- Susceptibility to medical inflation (and other complications). PPOs sell their product offering to employers by claiming to have "the biggest network" of providers, said Jim Edholm, a partner at the benefits consulting firm Business Benefits Inc. "That can mean lower discounts on care, because the benefits to providers from a larger network are less rich than those from a smaller network," he said. "So, there is little protection against medical inflation." Complicating matters, the Medical Loss Ratio (80/20) Rule, a component of the Affordable Care Act, prohibits insurance carriers from spending less than 80% to 85% of collected premiums on medical claims. Edholm said this allows for carrier overhead. An example Edholm gave is if the applicable premium to a $700 expense is $875, the carrier would "earn" $175. On the other hand, if the plan spent $800 and maintained the 20% overhead allowance, the premium would be $1,000 and the carrier would "earn" $200. "As a result, there is a perverse reverse incentive – that is, the carrier makes more when it pays for claims, which means it collects more from employers," he said. "It is a Catch-22."
What are the pros and cons of PPOs for employees?
- Access to a more extensive network of healthcare providers. Such flexibility can make it easier for employees to find care. It can also increase the likelihood that they will not be forced to "settle" for using in-network providers they do not like. But keep in mind – and remind employees – that "extensive" does not mean "unlimited." According to Dodge, some individuals believe PPO plans allow them to see any physician they choose. However, this is not really the case. While PPO members can go outside the network for care, doing so usually comes at a "much higher [out-of-pocket] cost." The reason: PPOs pay a smaller portion of the tab for service delivered by out-of-network providers than for services delivered by in-network providers.
- No referral requirements. PPO members can see a specialist without a referral from their primary physician, decreasing or eliminating delays in receiving the care they want or need.
- Higher costs. Employers aren't the only ones who pay a higher price for PPO plans. "Higher premium costs [paid by employers] can lead to higher contribution costs for employees," Pastrano said. Deductibles and copays may also be higher, even when employees use in-network providers. Confusion about, or complications around, providers' participation in a particular PPO can increase costs more. Edholm offered the example of a patient who undergoes surgery performed by an in-network physician. "Sometimes, the anesthesiologist at a hospital is not part of a PPO, even though the hospital is, and the employee receives a massive bill, he said.
What else should be considered when deciding whether to offer a PPO or HMO?
Ideally, you can give employees a choice of a PPO or HMO health coverage plan. However, budget-related constraints or other obstacles may force you to offer just one of these options. Consider these factors when determining which way to go.
- Budget. There are cost savings to consider when choosing between the two. An HMO is usually cheaper.
- Workforce demographics. Mike McNulty, an independent insurance agent said the type of plan you pick may be influenced by your workforce demographics. For example, if most of your employees are young and healthy, they may not mind the restrictions of an HMO – and you will probably appreciate the savings. If employees are older and/or visit specialists regularly, the simplicity and flexibility of the PPO could make it the right option for your business.
- Employee location. Where your employees live should also be a consideration. "It is important that the providers available on the list match well with your employees' geographic location," Oleksiak said. "Most health plans make sure they have an adequate network of providers across all medical disciplines. However, based on the geography or preferences of the employees, the 'preferred' list may not be a good fit." If your business has "employees across the country, a PPO plan is a must," said Dodge. This is because HMO coverage is typically limited to care delivered by providers in the state in which the employer is headquartered.
- Employee input. The sources we spoke with also recommended asking your employees about their preferences – it gives them a sense of ownership in the decision, which they appreciate. Additionally, employees are not always open to changing providers if they already have relationships with the physicians from whom they have been receiving care.
"The challenge to employers – and employees– is finding a balance between more choices and higher cost while always making sure quality isn't sacrificed," Oleksiak said.
Still, deciding between a PPO and an HMO – or figuring out whether you can offer both – does not need to be difficult, providing you understand the ins and outs as laid out here.