Where do HMOs and PPOs locate? Debunking an urban myth

By James Grefer, Lee Mobley, HE Frech

The potential geographic distribution of preferred provider organizations (PPOs) differs greatly from that of health maintenance organizations (HMOs). We explain this theoretically by the natural ordering of insurance types according to the degree of consumer choice of provider. We examine the issue empirically, employing a unique data set based on California hospital discharges in 1998, a time when PPO and HMO insurance types were coded separately. Because HMOs are more restrictive than PPOs in the provider networks allowed, we find that they require urban areas with many physicians to form viable networks. PPOs are less restrictive in the provider networks, which we find allows PPOs to thrive outside of urban areas where HMOs cannot. We find that indemnity-type plans, also known as fee-for-service plans, can survive anywhere because they do not impose restrictions on provider choice. These findings have real world implications for Medicare modernization efforts aimed at increasing the proportion of seniors enrolled in Medicare managed care plans. Regional PPOs established under the Medicare Modernization Act of 2003 are likely to thrive, extending the geographic coverage of managed care service options to all seniors.


Grefer, J., Mobley, L., & Frech, HE. (2009). Where do HMOs and PPOs locate? Debunking an urban myth. (RTI Press Publication No. RR-0004-0903). Research Triangle Park, NC: RTI Press. https://doi.org/10.3768/rtipress.2009.rr.0004.0903

© 2019 RTI International. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.


James GreferJames Grefer received his PhD in economics from the University of California, Santa Barbara in 2003. He is a research analyst at CNA in Alexandria, Virginia, where he has written about the effectiveness and efficiency of the military medical care organizations and about Navy and Marine Corps medical manpower and personnel requirements.

Lee MobleyLee Mobley received her PhD in economics from UC Santa Barbara, in 1990. She is a senior fellow in health economics at RTI International and specializes in health care markets, disparities, and spatial epidemiology.

HE Frech

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