Preferred provider organizations (PPOs) have grown dramatically since 1983, a growth that has been spurred by the hope that they will be able to moderate the rate of growth in health care costs. This remarkable growth has taken place despite the small number of empiric studies that have been published evaluating the effectiveness of PPOs in controlling costs. The experience in the first year of operation of a PPO established by an insurance company for the employees and the dependents of a large midwestern manufacturer is reported. It shows that substantial selection effects were observed, with PPO enrollees substantially more likely to be younger, have more and younger dependents, and to be non-bargaining-unit employees. Enrollees in the PPO also tended to have substantially lower expenditures in the prior year ($596 vs. $821). The effect of the PPO on expenditures was estimated in multivariate regression models controlling for demographic and prior expenditure differences. PPO enrollees were found to have increased their expenditures substantially (P < 0.0001). Increased expenditures stemming from expansions in outpatient benefits and ineffective utilization management had swamped the effects of reductions in inpatient expenditures and of discounted fees.