Preferred provider organizations (PPOs) are growing rapidly in number and enrollment as an alternative to health maintenance organizations (HMOs) and traditional indemnity plans. Through their selective contracting and patient channeling mechanisms, PPOs may become an important competitive force in the health market. Their competitive impact will depend on whether they are successful in channeling a representative cross-section of patients to selected providers. Using data from five employers who offer their employees PPOs, this report investigates (1) levels of employee participation in the PPO option; (2) selection effects in the choice of health maintenance organization (HMO) vs. indemnity plans and, among those covered by an indemnity plan PPO vs. non-PPO options; and (3) satisfaction for PPO vs. non-PPO and HMO participants. The results suggest that PPOs can achieve significant patient channeling without experiencing strong adverse or favorable selection. If they can also contain costs, they should continue to grow and affect competition among health care providers.