Preferred provider organizations: An antitrust perspective

• Author: Robert E. Youle,Paul C. Daw
• Date: 01 June 1984
• Published date: 01 June 1984
• DOI: 10.1177/0003603X8402900206
• Subject Matter: Article

The Antitrust Bulletin/Summer 1984

Preferred provider organizations:

an antitrust perspective

BY ROBERT E. YOULE*

and

PAUL C. DAW**

301

••

I.

Introduction'

Preferred provider organizations (PPOs) have attracted substan-

tial interest in recent months as a strategy to promote the efficient

purchase

of

health care services. Recent publications indicate that

84 hospitals have already formed or joined PPOs, an additional

700 hospitals are considering

PPO

involvement,' and at least 160

PPOs

are currently doing business in California alone.' PPOs

have also engaged the attention

of

physician groups, third-party

payors, labor unions, private businesses, health care coalitions,

and independent entrepreneurs. The

PPO

concept has been en-

dorsed by state legislatures that have recognized its potential to

Member, Sherman &Howard, Denver, Colorado.

Associate, Sherman &Howard, Denver, Colorado.

IThe authors gratefully acknowledge

the

research assistance

of

Eric R. Decator.

2See Schroer &Taylor, A Survey

of

Preferred Provider Organiza-

tions,

HOSPITALS

85 (Mar. 16, 1984). These

data

were compiled in the

course

of

a survey initiated in September 1982.

3See Rundle, PPOs: The New Buzzword to Learn,

BUSINESS

INSURANCE

3 (May 30, 1983).

~:'

1984 by Federal Legal Publications, Inc.

302 The antitrust bulletin

increase competition in the health care industry

and

to reduce

total health expenditures.'

As has been the case with other innovative forms

of

health

care delivery, the future

of

PPOs

is clouded to some degree by

legal uncertainties. Perhaps most threatening are the antitrust

risks that face

PPOs.

This article will attempt to describe the

basic characteristics

of

PPOs, outline the jurisdictional and

substantive antitrust issues most likely to confront them, and

suggest organizational and operational methods

of

reducing a

PPO's

antitrust exposure. Our general thesis is that

PPOs

present

aunique mechanism by which competition in the health care

industry can be increased, and that if properly structured and

operated, their business should not be unduly constrained by the

antitrust laws.

II. Characteristics

of

PPOs

The term "preferred provider organization" refers to a con-

cept

and

not a specific kind

of

entity.' Among other things, a

PPO

can be an independent organization, acombination

of

otherwise unrelated health care providers, an insurance company

affiliate, or merely a contractual relationship.

PPOs

are intermediary organizations

that

arrange for third-

party

payors to purchase health care services for their subscribers

from selected providers, including hospitals and physicians." A

PPO

typically contracts with a limited number

of

providers

(physicians, hospitals, allied health care professionals, or some

4See generally American Hospital Association, State Regulation

of

Preferred Provider Organizations: A Survey

of

State Statutes (Mar.

1984).

5See Lundy &Blacker, Preferred Provider Organizations: The

Latest Response to Health Care

Competition-An

Overview,

HEALTHCARE

FINANCIAL

MANAGEMENT

(June 1983).

6Stromberg, Duncheon &Goldman, PPOs and the Antitrust

Laws,

HOSPITALS

65 (Oct. 16, 1983).

An

antitrust perspective 303

combination

of

the three) who agree to provide services in

consideration for payment by the

PPO

on a fee-for-service basis.

The payment rate is typically less than the provider's usual and

customary fee. In exchange for the discounted fee, the

PPO

provides economic incentives to its subscribers to use the partici-

pating or preferred providers. This incentive usually consists

of

payment

of

the subscriber's entire health care charge if a pre-

ferred provider is used, but a lesser reimbursement if the sub-

scriber uses a nonparticipating provider.

In essence, then, a

PPO

is a mechanism that delivers health

care services at preferred rates to subscribers who are given

incentives to utilize providers under contract with the

PPO.

Viewed in this light, a

PPO

is a form

of

vertical integration.

It

combines, or at least connects, the underwriting

of

risk with the

delivery

of

health care services. As such, it offers the usual

advantages of such integration, and its attractiveness to payors,

subscribers, and providers is manifest.

By creating incentives for subscribers to patronize preferred

providers, the

PPO

presents an attractive source of patient

volume to health care providers. This, in turn, should enable

providers to realize economies

of

scale. Furthermore,

PPOs

typically promise to pay claims promptly, thereby reducing the

provider's risk

of

uncollectible accounts and shortening the pe-

riod in which his bill remains unpaid.

PPO

affiliation may also

appeal to the provider as a defensive measure, useful in curbing

the inroads

of

health maintenance organizations (HMOs), com-

peting providers aligned with other PPOs, and so forth.

From

the payor's standpoint, a

PPO

provides aguaranteed

"supply"

of

health care services at predetermined rates. In this

manner, the payor can predict its costs and establish reasonably

stable premiums. The payor can also use the

PPO

mechanism to

exert pressure on providers for discounted rates in exchange for

increases in volume.' Moreover, the payor can attain cost efficien-

7Various health policy experts believe that PPOs and PPO-like

arrangements will stimulate price competition in the health services

market by channeling subscriber patronage to cost-effective provider