In order, to introduce the exclusive provider organization (EPO) plan, one must first acknowledge that
an EPO is a subset plan of a Preferred Provider Organization (PPO).
Structurally, an EPO can look quite like a PPO, an EPO can simply be a network of health care
providers, formed perhaps by an insurance carrier, or by an employer, or even by the providers themselves.
From the beneficiarys' point of view, however, an EPO does not function like a PPO. In the classic PPO
arrangement, the beneficiary can go for service outside the assigned network and still have some portion of
the costs picked up by the plan sponsor. But in a classic EPO, the beneficiary cannot go out of the network.
Or rather, if he does, he must pay the entire cost himself. In that sense, an EPO functions much like a
Health Maintenance Organization (HMO). When a beneficiary chooses the HMO option, he knows that he
is locked into the HMO panel of providers(Madin,1991).
On the other hand, an EPO differs structurally from an HMO in a number of ways. For instance,
whereas an HMO typically receives a monthly pre-payment per beneficiary(and capitates or pre-pays) its
providers, EPO physicians are reimbursed only for services actually provided to the plan beneficiaries.
EPO's not only require exclusive use of the EPO provider network, but also use a "gatekeeper" approach to
authorizing non-primary care services(Kongstvedt,Ernst & Young, 1997).
The primary difference between an HMO and an EPO is that the HMO is regulated under HMO laws
and regulations, whereas the EPO is regulated under insurance laws and regulations or the Employee
Retirement Income Security Act of 1974,(ERISA), which governs self-insured company health plans.
Some insurers like The Hartford and General American, have found that EPO's are inexpensive, easy-to-
start-up alternatives to HMO's (Madin,1991). For one thing, in starting up an EPO - unlike an HMO - you
don't have to go through the hassle and expense of acquiring a license from a states' insurance department
and you don't, with an EPO, have to go through any credentialing process. Nor are EPO's subject to
premium taxes - as HMO's are - and they do not have to achieve the financial reserves typically required by
But insurance companies are just one of the groups promulgating EPO's. An EPO can also be run by an
employer who is self-insured. EPO's have been created by PPO's as well.
For example, the Rose Hill s Company, a cemetery and mortuary supplier in Whittier, California, with
400 employees, decided to offer an indemnity plan, a PPO, and an EPO through the General American
Insurance Company, and were so impressed with the savings on the EPO side - between 20 percent and 25
percent less than what they had been spending for similar levels of coverage - limited the company
insurance benefits to the EPO only (Madin,1991).
Contrary to some expectations, Rose Hills employees did not find the EPO unduly restrictive. In
contrast , to an HMO option offered to the employees, whom complained about the difficulty of changing
physicians within the HMO plan, with the EPO plan, it was quite easy to switch among physicians who
were in the network (Madin,1991)
Another cost-saving advantage of EPO's is that in most circumstances, they are subject to looser
minimum benefit requirements than HMO's and would not have to offer, for instance, mandated mental
health or pregnancy benefits. Plus, an EPO's administrative costs are much lower than the average HMO's.
Total administrative costs for an EPO are essentially whatever it takes to process claims.
The average self-funding employer, for example, can save anywhere from 8 to 10 percent right off the
top of their health care costs by switching form an HMO to an EPO, and those savings came solely from
the lower overhead costs (Madin,1991). By self-funding the EPO, an employer also avoids any state-
mandated benefits he might be subject to under insurance carrier indemnity plans or HMO plans
Another advantage to an EPO: is that it is relatively inexpensive to set up the plan itself. According to,
a Phoenix-based St. Josephs Hospital and Medical Center, they have saved 30 percent on employee benefits
by starting an Exclusive Provider Organization. A savings of about $2 million in