Do California HMOs 'Cost' More Than PPOs? It Depends on Who's Paying

Jeffrey Rideout, President and CEO, Integrated Healthcare Association

October 04, 2016
Jeffrey Rideout
Jeffrey Rideout

If value means buying the best quality at the lowest cost, then California health care purchasers need to rethink whether it makes sense to opt for lower-premium, lower-quality preferred provider organizations (PPOs) instead of lower-cost, higher-quality health maintenance organizations (HMOs).

Employers and consumers who believe otherwise should consider the striking new findings in the California Regional Health Care Cost & Quality Atlas: Commercial HMOs in California frequently outperform PPOs on both clinical quality and total cost measures across the state, according to this new web-based interactive tool produced by the Integrated Healthcare Association (IHA). Based on 2013 data before implementation of the Affordable Care Act coverage expansions, the atlas shows the total cost of care under both models, including patient out-of-pocket cost sharing. This provides an apples-to-apples comparison of total patient care costs among HMO and PPO products.

The quadrant chart below clearly illustrates the differences in HMO and PPO quality and cost performance in 18 California regions based on data from almost 14.5 million commercially insured people. Each orange circle represents a region's PPO products, and each blue triangle represents a region's HMO products.

Linking California Commercial HMO and PPO Quality and Cost Performance, 2013

When regions are placed in quadrants based on the statewide combined commercial HMO and PPO averages for clinical quality (vertical axis) and total cost of care (horizontal axis), a clear pattern emerges. Only HMOs land in the higher-quality, lower-cost quadrant, while only PPOs fall in the lower-quality, higher-cost quadrant. All HMO regions are above the statewide average for clinical quality, while all PPO regions fall below.

Cost performance is more variable. Twelve of the 18 HMO regions are above the statewide cost average, placing them in the higher-quality, higher-cost quadrant, while a similar number of PPO regions fall into the lower-quality, higher-cost quadrant.

However, in spite of better quality and at least comparable and often better cost performance than PPOs, commercial HMO enrollment in California (excluding Kaiser Permanente) is declining. If HMOs provide better value, why is HMO market share declining? One likely reason is the near-term desire of many employers to reduce premium increases.

Greater Cost Sharing

Compared to HMO benefit designs, PPOs typically rely more on patient cost sharing to offset the higher costs of offering broader, less integrated provider networks. By increasing patient out-of-pocket costs through higher deductibles and co-insurance, purchasers in effect shift costs to enrollees and "buy down" the price of premiums. This often makes PPO products less costly for employers but not necessarily for employees, who then pay more out of pocket for needed care — or put it off altogether.

Taking into account both quality and total cost of care, HMOs appear to produce superior value. I believe a major reason for the higher performance among HMO products is their reliance on integrated care delivery networks, which include physician organizations that typically have more sophisticated care management infrastructure, such as IT and data systems, and more established care coordination procedures.

In California, most physician organizations contracting with HMOs also generally receive per-member, per-month payments, or capitation, so they are accountable and generally rewarded for the health of a defined patient population. This organizational model is consistent with the overall goal of the US Centers for Medicare & Medicaid Services and other purchasers to drive more care and payments through so-called alternative payment models that aim to deliver high-quality, affordable, patient-centered care. These are the essential characteristics of high-value care.

The Takeaway

If California purchasers and consumers of insurance products focus only on premiums and not on the bigger picture of total cost of care and quality performance, they are likely miscalculating the quality-cost value equation. Employer purchasers especially should take a fresh look at HMOs and the integrated care delivery systems that support them. Doing otherwise may not be in their workers' best health or financial interests.