Bill Arnold was fed up, and rightfully so. For four straight years, his insurance carrier had hiked the premiums that his Louisville-based moving company, A. Arnold & Son Transfer and Storage, paid for employees' health-care benefits. "With increases of 20% annually, there was no way I could stick to a budget," says the president and chief executive officer of the 79-year-old corporation.

Then Arnold heard about Humana Care Plus, a program that Humana Inc., a for-profit, $2.3-billion-a-year hospital corporation, markets to help Louisville-area businesses put a lid on the cost of medical benefits. Under the plan, Arnold could furnish his 110 employees with the same health-care coverage they had received previously but at a price that was guaranteed for four years.

"You can imagine," says Arnold, "what that meant to a small businessman like me." So he signed on.

So far, he is glad he did. In 1984, his costs match the amount he paid his insurance carrier in 1983 -- $43 each month for individual employees, $I 19 per family. And during the next three years, Humana guarantees that premiums will increase no more, on a percentage basis, than the Consumer Price Index.

How can Humana virtually freeze its premiums when many traditional insurance carriers will not? The answer is quite simple. The Kentucky-based company has organized a type of preferred provider organization (PPO) to serve the Louisville area.

A PPO works like this: Physicians and hospitals agree to provide a company's employees with services at a discount rate and, in return, are likely to receive a steady flow of new patients. Generally, when a corporation's workers use the PPO's doctors and hospitals, all or most of their costs are covered, depending on the specifics of the benefits package. But if workers seek medical treatment from a health care provider not on the prescribed PPO list, they must foot a large portion of the bill, explains Robert P. Brook of Ernst & Whinney, the accounting firm. The one exception to this rule is emergency medical care. Employees who require treatment while out of town or who are unable to be taken to a participating hospital have their medical bills paid regardless.

The PPO concept got its start about eight years ago, when the Motion Picture Health and Welfare Fund struck a deal with a group of Canoga park, Calif., chiropractors, calling for the chiropractors to provide services to fund members at a cut rate. Today, PPOs take a variety of forms. Some preferred provider organizations, such as Humana Care Plus, operate like insurance carriers and charge participating companies a flat monthly fee. Others, such as the Preferred Health Network in Los Angeles, are simply groups of health care professionals who agree to provide medical services to a company's employees at an agreed-upon rate and are paid by the corporation on a fee-for-service basis.

What hasn't changed since the early days of PPOs is health care professionals' motivation for participating: They still want to increase the number of patients they treat. For corporations like Humana, which owns and operates 90 hospitals in 23 states, England, and Switzerland, that point is key. With occupancy rates at Humana's Louisville hospitals hovering between 60% and 85%, the company needs the patients the PPO can provide to fill its empty beds.

As a rule, PPOs can be set up by health care providers, purchasers of health care services, or combinations of the two. An example of a joint effort is one being launched by Benefit Panel Services (BPS), the operator of a for-profit PPO in Los Angeles, and Fireman's Fund American Life in San Rafael, Calif. The insurance company sells a group health insurance policy that includes participation in the PPO that Benefit panel operates, creating a system like the one Humana offers.

In some respects, PPOs work like health maintenance organizations (HMOs), but there are differences between the two types of health care providers. "An HMO will take care of all of your illnesses for a fixed fee," says Dr. Gary T. McIlroy, president of Health Risk Management Inc., a consulting firm in Minneapolis. A PPO usually provides treatment on a fee-per-service basis, with the employer paying the bills as services are rendered. Also, PPOs generally offer a larger choice of physicians.

Proponents of PPOs tout the organizations as the best way so far to cap health care expenditures. Whether that is the case, no one knows -- the idea is simply too new. But with health care costs spiraling from 25% to 40% each year for private employers, it is easy to understand why some companies are willing to give the organizations a try -- and why PPOs are proliferating.

"In 1982," Dr. McIlroy explains, "there were 30 to 40 PPOs. Now, there are several hundred, and several thousand are being planned." Some of the proposed PpOs belong to Humana. "If the Louisville program is successful," says Henry J. Werronen, a senior vice-president and chief operating officer of Humana's group health division, "we'll go to the other markets we serve."

In any event, smart corporations won't be lured onto the PPO bus solely by the organizations' availability and the promise of cost containment. There are drawbacks to consider, among them, PPOs' lack of guarantees. There is, for instance, no assurance that participating physicians and hospitals are competent. And that, as Dr. McIlroy points out, is no small concern. "You don't want to go to a PpO," he says, "that charges a low price but all the patients die."

Both Dr. McIlroy and Melanie E. Frishman, a consultant in The Wyatt Co.'s Washington, D.C., office, suggest that companies check out a PPO's reputation. Begin, they say, by asking for morbidity and mortality rates, then compare the numbers with published standards.

"Coronary bypass surgery, for example, ought to have less than a 2% mortality rate," Dr. Mcllroy notes, "but I've seen rates as high as 30%. PPOs may refuse to give you such information," he adds, "but they have it."

Another weakness of PPOs is that it is difficult to know if the prices quoted are really cut-rate. "If the hospital's charges are already high," says Frishman, "the discounted price may still be higher than other hospital rates in the area." A similar point is made by Dr. Mcllroy. "Many PPOs," he notes, "will give you 10% off the standard fee, then they reserve the right to change the standard fee."

Finding out what a community's health care providers normally charge is not always easy. "If you were going out to buy a radio, you'd call up several stores to find out the range of prices. But there's no way yet to publicly compare PPOs' prices," says Dr. McIlroy. If they have the money, companies can hire consulting firms to perform detailed surveys, or they can write the Health Insurance Association of America for help. That group, a nonprofit organization based in New York, keeps tabs on health care costs and provides general information.

So what should you do?

Consultants recommend that companies proceed with caution. You may want to let the state and federal governments wrestle with the issue first. So far, PPOs have mostly escaped regulation, but chances are that situation won't last.

Also, if you decide a PPO is right for your company, be sure the organization you choose is solid. "Employers," Frishman concludes, "must be careful and understand what is motivating health care providers to offer this service. Some providers view PPO development as a quick and easy way to increase their revenues and their patient base. Setting up and selling a PPO is neither quick nor easy. Unless providers know what they are doing, PPOs may turn out to be another fad."