In the 1940s, unions demanded that big manufacturers provide health care for workers. Heeding the request, employers looked into doing so and found the costs significantpotentially prohibitive. Ultimately, some creative person hammered out a viable plan: Contract with a network of physicians near the factory. Under the new arrangement, the manufacturer guaranteed participating physicians patient volume and the physicians promised the manufacturer discounted services. Over time, the manufacturers added hospitals and ancillary providers to the initial network of physicians and physician groups. The preferred-provider organization (PPO) was born.

Most of these original networks covered one metropolitan area. When other employers in the area chose to provide health care, they tapped into the network. To meet demand and to ensure that the network fully covered an employer's location, the PPOs expanded geographically. Over time, a PPO covered a state, a region, or even the country.

In the late 1950s, HMOs and insurance companies began to pay PPOs to use their networks to expand insurance coverage for traveling enrollees. This arrangement caused mass confusion in the medical community. Many erroneously started to think that a PPO was a type of insurance company. PPOs make care accessible at a lower cost, but they do not insure it. In the beginning, PPOs were not insurance companies and usually they are not insurance companies today. For example, PPOs traditionally do not perform claims. Under the PPO arrangement, the physician bills the self-insured employer directly. A subsidiary of the self-insured employer or a contracted vendor, called a third-party administrator (TPA), pays the employer's physician bills.

The confusion over a PPO's nature and purpose exists today even in state governments and, to some extent, at the federal level. In 2001, the state of California prepared a law that would regulate PPOs as insurance companies. Ultimately, it was discarded, but only after a great deal of education and lobbying by the PPO industry.

When large HMOs entered the PPO business by creating their own networks, the confusion increased. Because HMOs consist of insured populations, they are heavily regulated: they must meet net-worth requirements, credential their physicians, guarantee a minimum access to care, perform site visits, and improve care while keeping costs down. In most states, HMOs must be accredited, ensuring that quality-assurance and best-practice processes are in place.

This development allowed employers to provide variety in health care: employees could choose an HMO or PPO option. Also, the HMO had credentialed and site-assessed its PPO network for its HMO productan appealing alternative to the traditional PPO.Yet this option poses formidable competition for the traditional stand-alone PPO.

To compete with HMOs for PPO business, stand-alone PPOs must offer services, such as credentialing and site assessment, that they historically have not had in-house. In fact, the National Committee for Quality Assurance (NCQA) has developed a quality-assurance accreditation program for PPOs. Compliance with these requirements means significantly increased costs for the stand-alone PPO.

According to Bill Hale, president and CEO of Beech Street Corporation, the largest independently owned PPO, "One of the many competitive challenges facing independent, non-risk-bearing PPOs and specialty, non-risk-bearing PPOs will be the increasing product development and product offerings from the Blues plans and the other, larger risk-bearing carriers, [such as] Aetna, Cigna, and United, that will be targeting the medium-sized market segments, including the smaller TPA niche, which they have stayed away from until recently. Independent PPOs and specialty PPOs will need to strengthen their alliances or partnerships with risk-bearing entities to guarantee a place at the table during the next 5 years."

What does this mean to the radiology provider? A lot.

Traditionally, PPOs have been the radiology provider's highest payors. Due to market pressure and the increased cost of added services, PPO revenue per procedure may decrease significantly for radiologists who fail to take a proactive stance.

According to the American Association of Preferred Provider Organizations, PPOs link nearly 111 million individuals to physicians nationwide. In order to retain the business of this vast number of enrollees, whose visits are reimbursed at a higher rate than those of HMO-insured patients, radiologists must become market-aware.

Physicians must help PPOs bring down costs, thereby making a higher contract price more viable. American College of Radiology accreditation will help PPOs off-load site visits to participating radiology providers by providing evidence of adherence to quality standards. Credentialing physicians through a universal credentialing application and registering the credentials at a third-party verification organization will help maintain historical pricing. Also, physicians with long-standing, favorably priced contracts should lock in 3-year contracts now. They will not be sorry.

Cherrill Farnsworth is president, CEO, and chairman of the board, HealthHelp, Houston, Tx, which provides radiology management services, and a Decisions in Imaging Economics editorial advisory board member.