When preferred provider organizations first emerged on the health plan market in the early 1980s, they veered sharply from traditional insurance models and prompted concerns from physicians.
Former Texas Medical Association General Counsel Rocky Wilcox, who retired last year after 42 years of service, remembers the hullabaloo.
“PPOs were just the Wild West at that time,” he told Texas Medicine.
Now commonplace, the PPO concept was novel at the time: An insurer contracts with physicians, hospitals, or other health care entities to create a network of “preferred providers,” with enrollees accessing in-network care at a lower cost than out-of-network care.
Back then most Texas physicians dealt with indemnity insurance, under which health plans would cover a portion of the bill from any health care professional or facility. And many physicians weren’t too happy with the new, unregulated PPO product.
So they turned that angst into advocacy.
Heeding doctors’ concerns and following in the footsteps of other states that had already adopted their own PPO rules, TMA thwarted a health plan-backed bill in the 1983 Texas legislative session that proposed to regulate the new product – in insurers’ favor.
In the absence of legislation, the Texas Bureau of Insurance, now the Texas Department of Insurance (TDI), oversaw PPO regulation at the time.
TMA participated in the rulemaking process for PPOs but took issue with TDI’s final rules, ultimately suing the state agency over its determination that an insurer could steer patients to hospitals it owned in conflict with state laws. That suit led to the 1986 adoption of Texas’ first PPO rules, which limited such skewed financial incentives.
Alfred Gilchrist, who joined TMA in 1977 as a lobbyist and left as legislative director in 2004, says these advocacy efforts proved crucial for physicians and their patients, given that PPOs have grown ascendant in the ensuing years.
“There have been a lot of fallbacks to the PPO in today’s marketplace,” he said.
Texas’ first PPO rules also set the stage for decades of regulatory fights – and wins for medicine. Those battles include TMA’s advocacy for more transparency among “silent PPOs,” which rent physician-contracted discounts to third-party payers without physicians’ knowledge or consent, and for stronger protections against the corporate practice of medicine and for network adequacy.
Bohn Allen, MD, a retired general surgeon in Arlington and former TMA president who chaired the association’s Council on Socioeconomics in the early 1990s, says PPOs have accelerated consolidation among physicians, given that larger groups have more leverage when contracting with health plans and being in network for such plans is often essential to practice viability.
“In today’s market, there is no indemnity insurance anymore,” he said.
PPOs arrived in the wake of health maintenance organizations, upon which they tried to improve, and which represented an overture to what is now called value-based care.
In an attempt to contain costs, HMOs limited coverage to care provided by physicians who worked for or contracted with health plans.
But Dr. Allen says patients balked at these limitations, namely that HMOs restricted them to a primary care physician and gatekept access to specialists. And Texas had regulated HMOs by the 1970s.
“The message that the plans got in Texas, and probably nationwide, is there’s one thing patients want, and that’s choice,” he said. “They hate to be locked into a system where they have no choice.”
Insurers then began exploring PPOs.
Mr. Wilcox expounded on their appeal in the August 1984 issue of Texas Medicine, writing, “[T]he PPO fad is upon us, and the motivations to jump on the bandwagon are many.”
Insurers, for instance, marketed PPOs to employers in search of health plans with cheaper premiums.
Mr. Gilchrist says these cost savings were the result of conferring “preferred provider” status to a limited network of physicians.
“The PPO was basically a concept that said, ‘Doctors will give a discount in their fees for the promise of patient volume,’” he explained.
Some states began regulating PPOs as soon as the early 1980s.
The California Legislature, for instance, passed a series of reforms to its state Medicaid program in 1982, which allowed public and private insurers to contract with hospitals and physicians, paving the way for PPOs, according to a 2001 report by the California Health Care Foundation.
The California Medical Association called early versions of the legislation “communistic” and “un-American,” according to a 1984 article in the Journal of Health Politics, Policy, and Law. One individual physician who opposed the legislation said it made doctors out to be “crabs in a bucket.”
Around the same time, the Federal Trade Commission took its “first step into the cloudy legal issues surrounding the PPO concept” when it granted tentative approval for a PPO health plan in New Jersey, as Texas Medicine reported in October 1983.
But PPOs’ rising profile didn’t assuage physicians’ concerns.
“Doctors didn’t like that concept, that the law or insurance companies would call one group of doctors or a doctor preferred over another,” Mr. Gilchrist said. “There was a whole lot of dissatisfaction with that concept at the time.”
Rule-breaking and -making
The arrival of PPOs in Texas raised questions about their compliance with state law, which TMA endeavored to answer through advocacy, rulemaking, and – ultimately – a successful lawsuit.
Mr. Wilcox says Texas law – at least in the early 1980s – didn’t allow health plans to “steer” patients to certain health care professionals or facilities, even as other states opened the door to the practice. Health plans lobbied to change this during the 1983 legislative session – but failed in the face of staunch opposition from TMA and others.
Mr. Gilchrist says some of the details are foggy, but nearly 40 years later he easily recalls the headline of a high-priority legislative “action alert” TMA sent to member physicians, rallying them to oppose the problematic bill: “PPOs Imperil Access to Care.”
By the mid-1980s, TDI had drafted PPO rules, soliciting input from TMA, health plans, and others.
Then-TMA President D. Clifford Burross, MD, a family physician in Wichita Falls, voiced his concerns about the proposal during a January 1986 hearing. As Texas Medicine reported in March of that year, Dr. Burross told TDI the rules as drafted would:
- “[A]uthorize insurance carriers to veto (by denying [payment]) the treating physician’s medical judgment before and during diagnosis and treatment”; and
- Allow PPOs to “place the insurance company’s bottom line ahead of the insured patient’s need and legally protected right under the Insurance Code to freedom of choice of physician and to the medical care prescribed.”
(Dr. Burross died in 2009.)
Nevertheless, TDI soon adopted the rules as final, prompting TMA to pursue litigation. An eventual settlement led to the implementation of PPO rules that gave patients freedom of choice by limiting health plan steerage. The regulations did this by allowing for enhanced benefits for patients who stayed in network but not for a reduction in benefits if they went out of network.
Since 1986, TMA has not stopped advocating for the fair regulation of PPOs on behalf of physicians and patients.
Even during the 2023 Texas legislative session still underway at press time, TMA was backing legislation that would promote adherence to the state’s strong network adequacy rules – which, like the early PPO regulations, TMA was instrumental in developing – by putting them into statute and by strengthening enforcement by TDI.